Tags: Higher Commodity Costs Put New Pressure on Manufacturers

Higher Commodity Costs Put New Pressure on Manufacturers

Wednesday, 12 January 2011 04:20 PM

Memo to Ben Bernanke: inflation creeps up two yellow cheese squares at a time.

Kraft Foods cut two slices out of its reduced fat and fat-free cheese singles packets in 2009, a move that let it subtly raise prices without most people noticing.

Not every company has that flexibility. Many may wish they did in coming months.

Companies from food and soap maker Unilever to air-conditioner manufacturer Ingersoll-Rand could give more details about how they are being hurt or helped by commodity prices and what they plan to do about it when they report results over the next few weeks.

Everyone from mining equipment makers to airlines and even consumer electronics manufacturers are entering the new year with new cost pressures, as well as new opportunities that a commodity bull market affords.

Cotton prices almost doubled last year. Corn and wheat prices jumped about 50 percent. Copper reached a record last week, after gaining more than 30 percent last year and doubling in 2009. The cost of cheddar cheese rose 19 percent. And crude oil is near its highest level in more than two years.

"We're seeing margin squeezes on virtually everybody in consumer-land right now and we're actually looking to position ourselves a little further up the supply chain, away from the consumer," said David Kolpak, managing director at Victory Capital Management.

The effect may soon be apparent in company results, as they show whether raw materials prices have hurt bottom lines. The first-quarter earnings season will help shed light on issues like pricing power and how companies are managing costs.

Kimberly-Clark Corp.'s low-priced Scott is among the brands that cut their product sizes — in this case, the size of toilet paper squares — in recent months to squelch price increases.

"Manufacturers are more inclined to keep the price the same and simply shrink the package," said Consumer Reports senior editor Tod Marks.


Commodity prices have been supported by a recovering global economy and, to some extent, by speculators chasing returns. They also reflect an insatiable appetite from developing markets like China for raw materials needed to build infrastructure and to feed and clothe growing populations.

If raw material costs have yet to translate into consumer inflation, it is partly because high unemployment in developed markets makes it hard to raise prices, said Oliver Pursche, co-manager of the GMG Defensive Beta Fund. He said stocks will react to commodity inflation beyond 2011.

It is very difficult for most companies to pass on higher prices, given still-low levels of consumer confidence, said Josh Green, chief executive of Panjiva, which provides data and analysis on overseas suppliers to manufacturers and retailers.

Few companies have the ability to charge premium prices for their products like Apple Inc. does, Green said. Most will choose to protect market share rather than try to boost margins, he predicted.

Technology, a sector that might considered relatively immune to inflationary pressures, faces headwinds of its own from potential shortages of rare earth elements, used in everything from light bulbs to iPods. But such cost pressures may still be a ways off: In recent quarters, manufacturers like Dell Inc. have benefited from falling prices for components.

The greatest uncertainty for commodity prices, especially metals and energy, is how aggressively China moves to try to cool its economy, Pursche said.

"If there's a sense China will continue to raise interest rates, raise its loan requirements and try to slow things down, you can see a pretty quick sell-off," he said.


Companies across the globe are tweaking their business models as they digest higher commodity costs.

China's biggest listed steelmaker, Baoshan Iron & Steel, just imposed another price increase because of higher costs. Japan's Asahi Breweries is among those that have slashed costs, in its case by 5 billion to 6 billion yen last year, to absorb price hikes.

Malaysia's Top Glove raised prices six times last quarter, by 4 percent to 5 percent each time. Now it is buying land in Cambodia to plant its own rubber trees and making more nitrile gloves, which use a synthetic substitute for latex.

In Europe, Nestle, Unilever and Danone have been fairly successful in raising prices to offset spikes in wheat, cocoa and other costs, but smaller food companies such as British bread maker Premier Foods have suffered more as their input prices rise.

"High spot prices do not necessarily equate to companies' supply prices, but eventually they will have an impact if prices stay high — probably a second half 2011 issue," said analyst Warren Ackerman at brokers Evolution Securities.

Apparel companies may be among the first groups this earnings season to highlight cost pressures because of the near-doubling of cotton prices last year. Still, clothing made with higher-priced cotton likely will not hit stores for six months or more, said Al Ferrara, national director of BDO Seidman's retail and consumer product practice.

Some say commodity inflation poses no imminent danger to corporate profits. Most users hedge costs and will not see price increases for months, said Lord Abbett senior economist and market strategist Milton Ezrati.

"If I heard anyone say, 'our earnings are down because of commodities,' I'd be very suspicious," Ezrati said of the current earnings season. "It would sound like an excuse."

© 2021 Thomson/Reuters. All rights reserved.

Memo to Ben Bernanke: inflation creeps up two yellow cheese squares at a time. Kraft Foods cut two slices out of its reduced fat and fat-free cheese singles packets in 2009, a move that let it subtly raise prices without most people noticing. Not every company has that...
Higher Commodity Costs Put New Pressure on Manufacturers
Wednesday, 12 January 2011 04:20 PM
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