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issue: January 2005 APPLIANCE Magazine

Materials Forecast 2005
The Big Squeeze

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by David Simpson, Contributing Editor

Companies supplying the appliance industry are feeling the pressure of high commodity and energy prices and are passing those costs onto appliance OEMs.

In a hyper-competitive appliance industry with relentless cost pressures, the last couple of years have been challenging, to say the least. Commodities—those raw materials that are ultimately turned into appliances—have trended significantly upward in price. At the same time, availability has sometimes been an issue. Part of this is tied to a lack of enough commodity processing plants in some regions, tight transportation availability, and high shipping costs. For commodities traded in U.S. dollars, the weakness of that currency has made the raw materials appear more expensive, and price increases more extreme.

China’s voracious commodities appetite has been a major factor in the cost and availability equation, and that country continues to ramp up production for both domestic and foreign markets. Energy prices are also playing an important role in the big squeeze, as oil breached the U.S. $50 per barrel level for the first time in late 2004. Oil and natural gas, of course, are also key components in plastics, organic coatings, insulation, and other appliance materials.

While industry suppliers in the past have sometimes absorbed commodity and energy price increases, their recent magnitude has forced many companies’ hands. Across the board, most suppliers have been passing on the higher costs to their customers.

Needless to say, this has affected appliance producers. Whirlpool Corporation (Benton Harbor, MI, U.S.) reported a drop in third-quarter earnings and cut its profit forecast for 2004, citing rising steel and oil costs. Sweden-based Electrolux and other top industry players did the same. In response, OEMs have been announcing price increases and in Whirlpool’s case, accelerating product introductions.

Based on APPLIANCE conversations with industry suppliers, it looks like commodities price pressures will continue through 2005. However, expectations are that any increases will generally be less than those of the last 2 years. Predications were based on a continued moderate level of market growth worldwide. Longer term, there is hope for some price moderation as commodities production and shipping adjust to the realities of the day, including the shift in demand to Asia.

Steel prices experienced a significant jump during 2004. Here, an automated guided vehicle delivers a plastic-wrapped coil of flat-rolled steel to the automated storage and recovery system at I/N Tek, one of Ispat Inland Inc.’s joint ventures with Nippon Steel Corporation of Japan. The New Carlisle, IN, U.S. facility supplies the appliance and automotive industries.

It’s a tough world out there for those involved in purchasing materials or components for appliance production. Unfortunately, appliance companies in the short term can expect more of the same, with their suppliers continuing to pass on at least some of their added costs. Longer term, there may be some relief, as suppliers gear up production to meet the demand, or as economic conditions cool. In the meantime, appliance companies will have to work hard to keep rising materials costs from squeezing profits too much.

Materials Forecast 2005


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