- 04 March 2005 -
Finishers Bite the Bullet on Materials Price Hikes
by Greg Valero, g.valero@elsevier.com

Facing the worst of possible worlds—weak demand and high feedstock costs—raw materials suppliers say the price increases through which the industry has suffered are necessary to maintain profitability. Still stinging from recent price adjustments, job and captive shops are challenged to pass along increases to customers, several of whom are instead seeking reductions. Throw in the fact that higher raw materials pricing further limits a metal finisher's ability to compete against competitive shops operating in China—where labor and materials costs are considerably lower—and you have a prescription for disaster.

Since last fall, prices of major raw materials have posted double-digit increases across the board. Suppliers point to an unstable global economy, volatile feedstock pricing, a competitive marketplace, and unsatisfactory margins as the primary drivers of increasing prices. Producers say they have trimmed production and inventory levels in response to the demand slowdown, and are confident that sales will rebound when inventories are worked through.
While all this is happening, suppliers say they are trying to soften the blow by passing only a portion of their additional coasts downstream. Meanwhile, electroplaters and organic finishing shops are struggling under pricing pressures from large customers, such as automotive OEMs, who demand sharp price decreases.

2005 did not exactly start out with a bang, as high natural gas and crude oil prices may contribute to further raw material price hikes. Price swings could be further swayed by short-term supply shortfalls causing significant seasonal price spikes, making it difficult for metal finishers to get a read on when prices will stabilize.

It is difficult to predict how prices will fluctuate in the future. While raw material and energy costs are forecast to ease later this year, a stronger economy and subsequent increase in demand for certain products could keep the market supply/demand balance tight. Some experts say the economic climate in 2004 reflected increased demand and higher capacity utilization, which resulted in price increases accepted by the market.

Metal finishers say they are doing everything they can to nullify the impact on customer pricing, including cost-reduction initiatives and automating specific operations to reduce labor costs. They are working with customers to explore cost-effective alternatives and seeking out alternative raw materials. Some job and captive operations are turning the tables on competitors by purchasing less-expensive materials from abroad, either direct from suppliers or through a third-party.

Moving forward, suppliers and metal finishers will have to make hard choices as to whether they will continue producing or using certain materials. No doubt a big factor will be the changing dynamics of the business.