Steel costs starting to pinch U.S. companies

By James B. Kelleher - Analysis

CHICAGO (Reuters) - U.S. manufacturers, which had shrugged off the domestic economic downturn and reported consistently strong profits thanks to overseas demand, are starting to look vulnerable as the price of key materials like steel continue to rise.

Global steel prices are up 40 percent since the beginning of the year and the pressure is showing up in a number of top U.S. companies' results, including construction and mining equipment maker Caterpillar Inc (CAT.N: Quote, Profile, Research, Stock Buzz) and motorcycle maker Harley-Davidson Inc (HOG.N: Quote, Profile, Research, Stock Buzz).

Even oil and gas producers' record-setting recent profits are feeling some of the heat as costs for drills and other equipment have spiked.

Then this week, farm equipment leader Deere & Co (DE.N: Quote, Profile, Research, Stock Buzz), which had posted a string of record results, forecast disappointing full-year earnings, blaming raw material and freight costs.

Deere Chief Financial Officer Michael Mack, conceded steel prices were "racing ahead ... well beyond what we anticipated." Investors took note and the company's shares fell nearly 10 percent.

"Raw materials are now expected to hit them almost twice as hard," said Matt Collins, an analyst at Edward Jones.

"Up until now, Deere had been able to avoid some of the margin pressures that most of its competitors had seen ... It looks like it caught up with them this quarter."

Michael Locker, who runs a steel industry consulting firm, Locker Associates, in New York, said rising steel prices are unlikely to ease off much in the near term.