Manufacturers of all sizes are facing unprecedented price rises on steel, coal, copper, and a host of other materials. But small- and mid-sized suppliers are suffering the worst; most are holding the line only by squeezing out productivity gains where possible.
The reasons are many: In some cases, consolidation has cut supplies, as in the steel and aluminum sectors. At the same time, the weak dollar and high energy prices are forcing manufacturers to shell out more to import and process raw materials. Meanwhile, competition for industrial resources is rising, particularly because of China. Industry veterans are used to the ups and down of commodity prices, but many think this time is different. Says Karlis Kirsis, managing partner of World Steel Dynamics Inc.: "The days of cheap raw materials are gone."
Indeed, after decades of falling commodities prices, demand from China seems to be changing the rules of the game. R. Wayne Atwell, a metals analyst at Morgan Stanley (MWD
), compares China's industrialization with the long post-World War II economic boom, when the U.S., Japan, and Europe were all being built anew. China is about to hit $1,000 in gross domestic product per capita, a level when countries start making massive metal-intensive investments in roads, rail, and buildings, he adds. Meanwhile, demand from India is following a similar path, just as industrial output in the U.S., Europe, Japan, and Russia is picking up.GROWING APPETITE. Consider the effects of this growing appetite on steel and its constituents. Prices for hot-rolled steel coils -- huge multi-ton spools of metal that are processed into more useful forms -- have soared by 79% in the past year. Because it's easier to reprocess old steel than to make it from scratch, steel scrap torn from old car bodies and other waste sources, has doubled in price to nearly $300 per ton. Nickel and tin have risen 75% and 41%, respectively. Indeed, of the nearly 40-plus industrial commodities tracked by the Institute for Supply Management, just one -- caustic soda -- fell in price in last month.
Price spikes like these are absorbed mostly by producers closest to the raw commodity, rather than end users. To survive, many producers are turning to productivity-boosting tactics. "A supplier will absorb the short-term loss rather than lose the business," says James R. Sanders, an analyst at Standard & Poor's Equity Research, which like BusinessWeek is owned by The McGraw-Hill Companies (MHP
). For example, in Shelton, Conn., Latex Foam International has seen prices for the natural rubber it forms into cores for luxury mattresses nearly double in the past year. "We were able to increase our prices in the range of single-to-double-digit percentages," says Kevin Stein, LFI's marketing director. "But we've had to absorb some [price increases] ourselves." LFI is boosting productivity by going to 24/7 operations and by cutting the time raw material and finished goods sit in the factory. Ditto for Baldor Electric Co. (BEZ
) in Fort Smith, Ark., which consumes thousands of tons of fine copper wire annually to make electric motors. It raised prices by up to 3% in January, says Tracy L. Long, the company's treasurer, even though copper prices are up 83% in the past year. To cope with the cost increases, Baldor is spending more on automation equipment and avoiding new hires.
Yet after years of getting leaner, suppliers don't have a lot more fat to trim. If carmakers and other big customers resist paying more, weaker suppliers will fold or consolidate into bigger players. In steel markets, the fallout should be visible by summer, as steelmakers demand payment for shipments sold in the past two months, when prices were at their highest. Steelmakers are not only slapping on big surcharges, they're also demanding payment in 45 days instead of the customary 60. The pressure is already showing up in earning warnings at some companies. "If some of these suppliers don't recover the full price increase for steel, they're out of business," says Craig M. Fitzgerald, a partner with consulting firm Plante & Moran. Federal Forge Inc. in Lansing, Mich., has already filed for Chapter 11 protection.
For decades, prior to 2004, commodity prices moved mostly downward. It will take 18 months or more to see if they resume that march. Some markets -- such as steel scrap, which showed short-lived signs of hysterical bidding due to shortages -- are already settling down. Yet even conservative market watchers agree that the China effect will prop up prices through the next downturn. In the meantime, smaller players such as CMP are slashing travel budgets and tightening everywhere they can, hoping that their big buyers will soon help bear the burden of higher costs. By David Welch in Detroit and Adam Aston in New York