Surge in Metal Prices Squeezes Pricing and Profits
By BERNARD SIMON
Published: February 26, 2004
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."
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