Higher prices making Wall Street, Main Street shudder
Tom Stundza -- Purchasing, 6/3/2004 2:00:00 AM
Higher prices for everything from gasoline and groceries to freight rates and industrial commodities have left little doubt on Wall Street and Main Street that inflation is on its way back. "The general economy obviously is moving up," says a paper company vice president of procurement in Massachusetts. "There are price increases on every commodity." The purchasing manager for an auto parts supplier in Michigan adds: "There are initial signs on industrial recovery, but it's happening very slowly. And there is continued cost-reduction pressure from OEMs even though suppliers are boosting commodity prices."
A modest rise in inflation is a necessary part of the economic recovery, and not necessarily something to fear. But it's another story when crude oil passes $40/barrel, natural gas prices explode and steel and nonferrous metals undergo double-digit increases. So, with the Federal Reserve Board contemplating when and how much to raise interest rates, inflation is an increasingly worrisome factor for stock market investors and business lenders. "A couple percentage points of inflation is not that big a deal. It just shows the economy is growing," said Mitch Zacks, director of research at Zacks Investment Research in Chicago. "Generally, as the economy grows, prices start to rise. It's times of hyper-inflation when things break down."
Buyers surveyed in May experienced notable price increases for an extensive list of carbon and stainless steel, copper and copper products, and aluminum mill products. In fact, 43% of all the buyers surveyed reported higher basis and/or surcharge prices for numerous forms of steel mill products. Buyers also reported higher prices for fuel oil and natural gas; such chemicals as propylene and styrene; such plastic resins as acetal, nylon, polyethylene, polypropylene and polycarbonate; paper and paperboard products; corrugated boxes and plastic packaging materials, industrial textiles Also mentioned were wire and cable, bearings, metal machinery parts and various electronic components as well as lumber, plywood, particleboard, pallets and building materials.
Not only are certain commodities rising in price, but their availability is in question. Allocations are impacting deliveries of such polymers as methyl methacrylate and butyl acrylate; methyl ethyl ketone and monoethanolamine chemicals; calcium carbonate, fumed silica and silicone fluid plus additives for plastics; high temperature alloys and such specialty metals as nickel, zirconium and molybdenum as well as certain electronic components, such as SRAM, flash and other memory chips, discrete parts and certain servers.
The purchasing manager for a producer of interconnect devices in New Jersey says that "power cords and power supply prices are up 40%, due largely to extreme copper pricing increases and significant plastics increases." The purchasing manager of an industrial supply house in Texas says that "everyone is jumping on the price-increase bandwagon, even though they really don't need the increases as high as they have initiated. All this will cause the interest rates to increase and the economy to slow down." He also believes the steel industries will see several lawsuits to justify their increases. "The slowing down of output by the steel mills to cause short supplies and, therefore, price increases, should be stopped," he says.
Just a few months ago, the Fed was concerned about deflation, which happens when prices fall too quickly. Not anymore. "Prices for our raw materials—steel, aluminum and copper—are up 35% to 60% of what we were paying last year," says a purchasing manager in a specialty packaging company in Kentucky. Steep price hikes also have affected numerous raw and intermediate materials. So, the core inflation rate now hovers between 1% and 2%, and is likely to rise further as the central bank tightens rates, perhaps as early as this summer. Economists say this kind of inflation is a healthy side effect of growth, and far different from the damaging pricing pressures of the 1970s and 1980s, when inflation was measured in double digits, and mortgage rates were as high as 15%.
"The market loves inflation of about 2% to 3%," says Alfred E. Goldman, chief market strategist with A.G. Edwards & Sons Inc. in St. Louis. "It means the economy is growing, and corporate America can raise the price of its products, and earnings can rise." He notes that when inflation gets above 5%, it tends to be unsettling to markets, and more difficult for policy makers to control. "Price increases have reached 'bandwagon' epidemic proportions," says a purchasing agent for a consumer electronics firm in St. Louis. " We see vendors trying to pass on unrealistic increases."
After 10 quarters of steady corporate growth, and with almost a million jobs created since October, most analysts agree the economy is doing fine. But inflationary pressures have put many on their guard. "Anything made from metal has risen, whether it be steel, aluminum, or copper," says the buyer for a motions control maker in Virginia. And the problem is that buyers are reporting very high increases monthly. "We have seen increases in anything that uses metal," says the purchasing manager for an equipment maker in Indiana. "In May alone, copper materials have increased 10% to 20% and steel increases have varied from 5% to 12%; stainless steel is up from 10% to 25%.
Looking ahead, 76% of the buyers polled see even higher energy prices through August. About the time of the survey, crude oil had just topped $40/barrel for the first time in 14 years. Most of the buyers (72%) also foresaw transportation charges and the cost of steel products rising in coming weeks. Also projecting higher prices ahead were 67% of the buyers of copper and brass products and fabricated metals. Further inflation was projected for aluminum products (64%) and corrugated box products (58%).
Pricing pressure is reflected in other measures as well. Data collected by the Labor Department in March shows producer prices have been rising across a broad range of sectors. And there are a multitude of other factors contributing to inflationary worries—including uncertainty over the situation in Iraq, concerns about global events, the potential for terrorist threats and the upcoming presidential race. "Let's face it, this is a market, an economy, that is coming from out of the cellar," says Chris Johnson, manager of quantitative analysis at Schaeffer's Investment Research in Cincinnati. "We're just starting to really emerge from a recession, and there are still a lot of unknowns."
Buyers' price expectations, 90 days
(those in May projecting inflation ahead)
| SOURCE: PURCHASINGDATA.COM |
|
| 76% | Energy |
| 72% | Transportation |
| 72% | Steel products |
| 67% | Copper & brass |
| 67% | Fabricated metals |
| 64% | Aluminum products |
| 58% | Corrugated products |
| 57% | Paper products |
| 49% | Tooling |
| 48% | Molded plastics |
| 48% | Industrial Machinery |
| 47% | Plastic resins |
| 43% | Organic chemicals |
| 40% | Inorganic chemicals |
| 39% | Semiconductors |
| 39% | Passive electronic components |
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