Surge in Metal Prices Squeezes Pricing and Profits
By BERNARD SIMON
February 26, 2004
(New York Times) Like many businesses that use steel, copper and other metals in their products, Mary Jane Gilbert's roofing-materials company in Phoenix is in a fix.
Ms. Gilbert, the joint owner of JB Roofing, sells to home builders, and she
has quoted firm prices for roofs on more than 500 homes that her customers
have sold but not yet built.
But in the weeks since she committed herself to those deals, Ms. Gilbert's
suppliers have notified her of price increases of 10 percent to 20 percent
on metal roofing components like valleys, edges and vents, and they say that
another increase is likely in April.
With the selling price of the house already fixed, it is too late to pass
along those increases. "We're caught in the middle," Ms. Gilbert said. "The
builder is also caught in the middle."
Though analysts do not expect the recent spurt in the prices of raw and some
processed materials to have much immediate effect on overall inflation, the
increases are a big headache for businesses like Ms. Gilbert's.
"Everybody who buys a steel part is impacted," said Charles Hageman,
executive director of the Forging Industry Association, a trade group in
Cleveland.
Ana Lopes, director of government relations at the Motor and Equipment
Manufacturers Association in Research Triangle Park, N.C., said, "This is
something that has come about very quickly, and with great force." Ms.
Lopes's group speaks for the auto parts industry, a big user of steel and
other metal.
In the home construction industry, "more homes are being sold before
materials are purchased so builders are taking a risk," said Michael
Carliner, chief economist at the National Association of Home Builders in
Washington.
That risk has become larger. The price of copper - used in electric cables,
plumbing and a variety of other industrial and construction applications -
soared to an eight-year high of nearly $3,000 a metric ton on the London
Metal Exchange last week, almost twice the level in June. Nickel, used in
stainless steel, has more than doubled in the last year.
Other commodities, like coal and iron ore used in steel making and lumber
for home construction, have also risen sharply; so has steel scrap, an
alternative material for steel making.
According to American Metal Market, a trade publication, the price of
hot-rolled steel, one of the most widely used types, has soared by more than
80 percent in the last year, and by almost half since December; it now sells
for about $480 a ton. Many steel makers have also begun to impose
surcharges, typically around $40 a ton, because of the high prices of their
raw material.
And they are becoming increasingly reluctant to quote prices for future
delivery, Mr. Hageman said, adding that with domestic demand picking up,
"this is just the wrong kind of news."
"Just when you need more steel,'' Mr. Hageman said, "the supply is cut
short."
His association and several steel manufacturers have asked the Commerce
Department to consider limiting American exports of steel scrap in hope that
increasing the amount of scrap available to domestic mills will help
moderate price increases on new steel.
Analysts ascribe the upward pressure on the price of materials to surging
demand in China, abetted by a pickup in economic growth in the United States
and by the weakness of the dollar. International metal prices are typically
set in dollars, and foreign producers must raise dollar prices to cover
their costs when the currency weakens.
In the case of some metals, notably nickel, a lack of investment in new
production capacity has also limited supplies.
The jump in metals prices is hurting some businesses and consumers more than
others. Mark Lynskey, chief executive of the American Bicycle Group in
Chattanooga, Tenn., said that retail prices of his company's bikes, made
mostly from titanium, aluminum and carbon fiber, an oil-based material, are
likely to rise by about 20 percent.
"Short term, we may have to absorb some of the increases," Mr. Lynskey said.
"But in the long term, it will have to pass through to the consumer."
Mr. Lynskey said that the recent step-up in military procurement had
increased demand for titanium to the point that his company must now wait
eight or nine months for delivery on an order instead of the usual three
months. "It's making manufacturing scheduling very difficult," he said.
By contrast, many makers of auto parts and home appliances are finding that,
like Ms. Gilbert's roofing-supply company, they have little if any ability
to compensate for higher metal costs with price increases. Ms. Lopes of the
auto parts industry group, citing intense global competition and long-term
contracts with vehicle manufacturers, said her association's members "are
almost always not able to pass on these costs."
That helps explain why analysts do not expect surging metal prices to show
up in retail inflation data, at least for now. The Consumer Price Index in
January was just 1.9 percent higher than a year earlier, and most of the
index's 0.5 percent month-to-month increase in January was attributed to
energy costs.
John Mothersole of Global Insight, an economic consulting firm in
Washington, said that the surge in commodity prices was typical of the early
stages of an economic recovery. "Very little is passed on to final
consumers,'' Mr. Mothersole said, "because producers are very cognizant of
what large price increases will do to their market."
He estimated that only about 10 percent of a movement in commodity prices
made its way into manufacturers' prices for finished goods, and less than 3
percent into retail prices. Instead, many American manufacturers find ways
to blunt the effect of rising raw-material prices, often through the
improved productivity of their workers and by holding down other costs.
Sharply rising prices also encourage producers to step up output, and users
to switch to less expensive substitutes. Recently, several copper mines in
Chile and elsewhere have reopened facilities and begun releasing metal from
stockpiles they built up when the market was in the doldrums.
Likewise, some stainless-steel makers have begun to use more chromium and
manganese and less nickel.
Craig Yarde, purchasing manager of Yarde Metals in Southington, Conn., whose
customers include aerospace and semiconductor manufacturers, said the run-up
in prices had benefited his company by increasing the market value of the 40
million pounds of metal in its inventory, mostly aluminum and stainless
steel.
Still, as Mr. Yarde and many others see the present situation, "it's not
good when it runs up this fast and this quick, because it can come down this
fast and this quick." |
