from Canada's Globe/Mail today:
Energy costs spur commodities
By PATRICK BRETHOUR
With files from Reuters
CALGARY — Soaring energy costs are speeding the rise of a wide range of commodity prices, threatening to squeeze consumers' pocketbooks, portfolios -- or even their paycheques.The soaring price of crude oil -- at its highest closing level in 13 years on Wednesday -- and of natural gas is helping to drive up prices of agricultural commodities such as corn and soybeans, as well as plastics and metals, adding to the upward pressure from the surging demand of the Chinese economy.
Higher prices for oil and gas push up the cost of producing commodities, both by increasing the bill for energy use as well as raising the price for items such as fertilizers and plastics, both of which use the fossil fuels as building blocks. Soybean prices on the Chicago Board of Trade, for instance, have soared more than 45 per cent in the past year, while corn prices have jumped more than 25 per cent.
The increase in commodity prices is stellar news for mining and agriculture companies, for example, but leaves much of the economy with two equally unpalatable alternatives, economists say.
The increased supply cost might be passed on to consumers, driving up the price of food, plastic goods and other manufactured items, thereby increasing inflationary pressures. "Gradually over the next year, we are going to see higher prices generally," said Patricia Mohr, vice-president of economics at Bank of Nova Scotia.
Other economists believe that companies will try to absorb the increased costs themselves, cutting into already anemic profit margins and putting downward pressure on their stock valuations. In that second scenario, plant closings and layoffs are likely, particularly among smaller companies that will see their larger customers demanding that they absorb the hit from higher commodity costs, according to Jay Myers, vice-president and chief economist at Canadian Manufacturers and Exporters. "Consumers will pay, not necessarily through higher prices, but through job losses."
There is also the danger that consumers will cut back on major expenditures as pump prices rise, noted Marc Lévesque, senior economist at Toronto-Dominion Bank.
Oil prices continued their march upward Friday, reaching their highest level since last March, just before U.S. troops invaded Iraq. Much of that rise comes from the determination of the Organization of Petroleum Exporting Countries.
Rising energy prices are generally believed to be a wash for the Canadian economy, with the pain of consumers and of manufacturers in Eastern Canada being balanced by the gains of the oil patch in the West. But a period of persistently high energy prices that seeps through the economy would unbalance that equation, particularly if it sparks a price spiral.
The fallout of rising commodity prices is already starting to accumulate. On Friday, General Mills Inc., a mainstay of the consumer goods sector, pointed to the rising cost of raw materials such as wheat, packaging and energy as a culprit for the company falling short of profit targets in its third quarter. The link between the cost of producing Wheaties, a General Mills product, and energy prices may not be immediately obvious, but natural gas is a major component of fertilizers used in agriculture.
Rising commodity costs will be particularly painful for Canadian companies, already under pressure from the rising value of the dollar, Mr. Myers said.
"These guys are caught in a real cost squeeze."
However, some companies, such as steel products manufacturer Samuel Manu-Tech Inc., said that they have been able to raise their prices to make up for rising commodities costs.
John Amodeo, Samuel's chief financial officer, said that steel prices, for instance, have doubled in the past five months, with rising natural gas costs adding to the burden on his firm. Of each additional dollar in costs, he estimated, Samuel is able to make up for at least half through raising the prices for its products, including steel strapping used for shipping and shaped steel used in the construction and automotive sectors. (Productivity improvements balance out about a quarter to a third of the increased cost, with the remainder leading to tighter profit margins, he added.)
Mr. Amodeo said his customers are, in turn, boosting their own selling prices, although he said he believes that they too are absorbing part of the cost of pricier commodities. "To some extent, they're passing them on," he said.
At Nova Chemicals Corp., the cost of natural gas and crude oil used as feedstock is rising faster than the price for the resulting plastics and petrochemicals over the past six months to a year, says Val Mirosh, vice-president, and president of the firm's feedstocks and olefins group.
But that won't remain true for long, he said. "The market will ultimately have to face the fact that input costs are increasing dramatically. And that will show up on store shelves, he added. "Ultimately, the consumer is where the rubber hits the road -- or plastic, if you will." |
