Manufacturers hope to pass on raw materials costs

CHICAGO Wed Feb 27, 2008 6:46pm EST

Lincoln Electric Chief Executive Officer John Stropki speaks during the Reuters Manufacturing Summit in Chicago February 25, 2008. REUTERS/John Gress

Lincoln Electric Chief Executive Officer John Stropki speaks during the Reuters Manufacturing Summit in Chicago February 25, 2008.

Credit: Reuters/John Gress

CHICAGO (Reuters) - Raw materials like steel, copper and plastics are likely to remain expensive this year due to the voracious appetite of such emerging markets as China, but several prominent manufacturing executives hope customers cover any increased costs.

And don't think a weakening U.S. economy will give companies any kind of break, top executives said this week at the Reuters Manufacturing Summit in Chicago.

"Steel prices are escalating to all-time highs," John Stropki, chief executive of welding equipment maker Lincoln Electric Holdings Inc (LECO.O), said at the summit.

"We have to pass that on to the customers and we are going to," he added. "We will pass on our costs as well as try to capture as much if not all of the margin as possible."

Stropki said the steel industry in Japan and Korea just settled on a 65 percent price increase for iron ore, while the cost of coking coal is projected to double. That translates to a $200 increase in the cost of producing a ton of steel.

In addition, U.S. crude oil has surged to an all-time high above $100 a barrel, while COMEX copper futures recently touched a life-of-contract peak of almost $3.88 a pound. Throw in that the price for resins used in plastics has risen steadily since 2002, and times look tough for manufacturers.

"In spite of the fact that there's weakening demand in North America, we're still seeing prices go up," Illinois Tool Works Inc (ITW.N) CEO David Speer said of steel prices. "Commodity prices are going to continue to press upward."

He said the maker of fasteners, food-service and welding equipment, countertop materials and other products expects a 7 to 10 percent increase this year for the raw materials used in plastics and chemicals. Steel, plastics and chemicals account for almost 70 percent of ITW's input costs.

Companies have tried various strategies to cope with high prices, including locking in prices over several months and redesigning products to lessen the amount of metals used.

"We're looking at adding suppliers," Manitowoc Co Inc (MTW.N) CEO Glen Tellock said. "We're looking at different materials. We're looking at engineering changes. So there's a lot of things we've been doing over the past three, four years, knowing that steel is just going to continue to be a squeeze because of emerging markets."

Tellock said the diversified manufacturer locked in steel prices for the first six months of 2007 in its crane business, the furthest out its suppliers would extend contracts.

Manitowoc has done the same this year, but any price increases in the latter half of the year could pressure the bottom line, he said.

A 'HONEY' OF A RUN

Honeywell International Inc (HON.N) CEO Dave Cote said the run-up in prices between 2003 and 2007 on such raw materials as zinc, copper, aluminum and nickel was as much as 500 percent, and in many cases companies simply swallowed those costs. The increase in prices for those raw materials seems to have moderated for the time being, he said.

However, Martin Richenhagen, CEO of farm equipment maker Agco Corp (AG.N), sees commodity prices rising 30 percent over the next five years.

Executives said the large increases across raw materials have been driven by increasing demand from emerging markets.

"China is taking so much of the world capacity, the world availability of these materials for their own development, and now India is coming on line," said Enrique Santacana, CEO of Swiss engineering firm ABB's (ABBN.VX) North American business.

Of course, any higher costs that manufacturers experience likely means higher prices for customers, executives said.

"We've been able to get price increases at least somewhere between a half point and a point above material cost increases over the last five years," Caterpillar Inc (CAT.N) CEO Jim Owens said. The world's largest maker of construction and mining equipment spends $20 billion a year on supplies, including raw materials.

However, companies cannot get too greedy.

"Pigs get fed and hogs get slaughtered," Manitowoc's Tellock said. "You've got to remember we're in a pretty cyclical business."

That's not to say that all manufacturers are bemoaning the run-up as the underlying demand benefits many, especially those serving the highly profitable energy sector.

"Anything around $50 to $60 a barrel, people are investing in the businesses," Tellock said. "At $100 a barrel, it's music to your ears."

The oil and gas, and mining sectors are now in a "boom market," said James Griffith, CEO of bearings and specialty steel maker Timken Co (TKR.N).

"The profitability of Timken right now is driven by rising commodity prices, period," he said.

(For summit blog: summitnotebook.reuters.com/)

(Editing by Phil Berlowitz)

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