Factors Affecting Product Cost

Staff -- Purchasing, 11/4/2004

• There is plenty of fuel oil in storage for heating due to full-throttle refinery output, but buyers can expect energy bills to be sharply higher this winter. "We don't expect a supply crunch," says Guy Caruso, head of the U.S. Energy Information Administration, "but distillate prices are up and that will translate into higher heating bills." EIA predicts the average cost of heating oil will rise 12.4% while natural gas costs will rise 17%.
• Declining U.S. natural gas production and concerns about output cuts in the Gulf of Mexico after this year's hurricanes should keep prices near record highs in early winter. While inventories will probably start the peak-demand winter heating season 7% above normal and provide a buffer to heat homes and businesses, traders are worried about new-gas production rates. That's why late-winter gas futures prices currently top $8 per million Btu, or about 50% higher than the same year-ago period. U.S. natgas prices, which for the first nine months of the year averaged about $5.80, are easily on track to eclipse last year's record annual average of $5.43.
• Engine maker Cummins expects higher prices of commodity raw materials, particularly steel, to continue. The elevated prices, along with operating inefficiencies caused by a sharp ramp up in demand, are raising costs and lowering potential profits in the second half for the Columbus, Ind., firm.
• Bayer has agreed to plead guilty and pay a $33 million fine to settle criminal price-fixing charges. The Justice Department says Bayer conspired from 1998 to 2002 with others in the chemicals industry to suppress and eliminate competition in the U.S. for aliphatic polyester polyols made from adipic acid. Under the plea agreement, Bayer has agreed to assist the government in its ongoing investigation of price-fixing.
• South African ferrochrome producers are rolling over prices for fourth quarter deliveries after resistance from stainless steel producers. Ferrochrome is used to make stainless steel to prevent corrosion. Prices have risen nearly 50% this year to just above 70¢/lb because of tight supply. But pockets of oversupply have appeared in the third quarter from India and Russia, dampening the pricing power of South African firms.
• Recent 11% to 21% dumping duties imposed on imports of Russian magnesium and magnesium alloy shouldn't prevent entry of that metal into the U.S., traders say. However, the merchants reckon the hefty 178% margins assessed on Chinese magnesium alloy could spell an end to those imports.