It looks as if plenty will be back for seconds. The Big Three auto makers may be getting full, but heavy equipment makers such as Caterpillar Inc. (CAT
) and Deere & Co. (DE
) plan to step up production in 2005. Ditto for truck manufacturers like Navistar International Corp. Despite government slowdown efforts, China's commodity-gobbling economy is on track for another banner year, with low-cost economies elsewhere in Asia and in Latin America not far behind. Moreover, the civilian-aircraft industry and nonresidential construction in the U.S. show hints of snapping out of multiyear downturns, broadening the rise in capital spending and consumption of basic materials. "What you're seeing," says Alexander M. Cutler, chairman and chief executive of industrial goods outfit Eaton Corp., (ETN
) "is a demand-driven escalation in metals prices."
And it's not just metals that are hot. With its orders climbing and plants running near capacity, Dow Chemical Co. (DOW
) raised prices throughout 2004, more than making up for an estimated $4.3 billion rise in its own energy and feedstock bill. One example is plastics: Polyethylene has gone up 34% in the past year, according to price trackers at Purchasing magazine. And Dow has announced further hikes for 2005. "When I talk to customers, price isn't their main concern; it's getting enough product," says CEO Andrew N. Liveris. "It's across the board and across all geographies." The American Chemistry Council predicts industry revenues will surge 5.9%, to $535.5 billion, in the new year.
Higher prices weren't surprising last year, given the tight markets. But inventories have been restocked, which will slake demand somewhat in 2005. General Motors Corp. (GM
) and Ford Motor Co. (F
), for instance, are slowing production to work off inventories at overstocked dealer lots. China, whose red-hot economy has been scarfing up basic materials faster than it could make them, has also throttled its construction industry.CRAVINGS
On the supply side, steel companies and others have added capacity in the U.S. through targeted upgrades of factories. Capacity in China is also growing at an unheard-of clip. The result: Prices of many industrial metals, which hit 20-year highs in some cases last autumn, have slipped. Commodity-grade sheet steel, which is used in everything from big-box buildings to vehicle undercarriages, is off 13% from a recent high of $750 a ton to $650 a ton on the spot market at yearend.
By and large, though, economists and industry executives say demand is likely to outpace capacity growth in 2005 as business investment grows. Daniel J. Meckstroth, chief economist at Manufacturers Alliance/MAPI, predicts U.S. capital spending on equipment will increase 9.3%, adjusted for inflation, or more than twice as fast as the overall economy. Moreover, the weakened U.S. dollar should shift more orders to domestic producers. Taken together, that should support growth this year in 23 of the 24 industries that Manufacturers Alliance/MAPI monitors. Industrial machinery will expand by 8%, on top of 2004's 11% rise, Meckstroth adds, while metalworking machinery output should jump by 11% in 2005, more than double its 5% growth in 2004.
Few are enjoying the world's craving for commodities more than steelmakers. Nucor Corp. (NUE
) began the year with 70% of its flat-rolled steel output for all of 2005 already sold. And it has been able to levy surcharges on customers to cover higher raw material costs. A year earlier, by comparison, it had locked up just 25% of flat-rolled capacity.
U.S. Steel Corp. (X
) is also profiting from rising demand. The company earned an estimated $845 million last year, after losing $540 million from 1999 through 2003 when a worldwide glut of supplies swamped prices. CEO John P. Surma Jr. concedes that '05 will be off to a slower start, in part because of a drop in vehicle production. Still, even after slipping recently, steel prices have doubled in a year. And with industry output expected to rise 6%, he says 2005 could turn out to be as profitable as 2004. "Anybody who's making steel is making all they can," he notes. "The fundamentals are looking pretty good."
The high price of industrial metals hurts customers, even as it helps suppliers. Eaton's Cutler calculates that his company paid $140 million more for steel and other metals in 2004 than in the prior year, cutting earnings by $70 million. Caterpillar Chairman and CEO James W. Owens complains that profits were crimped not only by higher steel prices but also by shortages, as components suppliers struggled to keep up with demand. With Caterpillar's production scheduled to increase as much as 10% in 2005, Owens is not expecting much relief on raw material costs. Likewise, Maytag Corp. (MYG
) foresees steel prices slicing a further $60 million, or 33%, from its net income in 2005, says CFO George C. Moore.
These industrial consumers aren't helpless, though. Taking advantage of surging demand for its machinery and engines, Caterpillar hiked its prices twice in 2004, by 5.5% all together. And it scheduled another across-the-board increase of 3% for Jan. 1. To recover at least some of its higher raw material expenses, Maytag also raised prices of its big-ticket appliances by 5% to 8% on New Year's Day. Eventually, manufacturers will lose their appetite again, and storerooms will be filled with unwanted coils of steel and ingots of aluminum. But the heavy metal diet looks as if it'll be popular at least another year. By Michael Arndt in Chicago