Rising Prices for Steel May Spur Inflation
Jun 10, 2004
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As steel prices continue to rise, appliance maker Whirlpool Corp. (Benton Harbor, MI, U.S.) has tried to fight back. It went to court and won a temporary restraining order preventing a steel supplier from raising prices above a contracted amount.

But Whirlpool had no long-term contract covering the price of stainless steel, which has also climbed, so recently the maker of refrigerators, dishwashers, and ranges raised its own prices by 1.5 to 2 percent on appliances containing stainless steel.

When the price of steel spiked earlier this year, many manufacturers were stuck absorbing the full impact. But steel prices have continued to run high, and demand is up, so the cost increases are beginning to creep toward the consumer. Makers of construction materials, kitchen appliances, heating and cooling systems, and other products with high-steel content are raising prices for their distributors. Some economists think that could be an early sign of inflation.

Shoppers have yet to see much impact, though pressure is mounting on retailers to raise prices. Atlanta, GA, U.S.-based home-improvement retailer, The Home Depot Inc., for instance, has seen prices jump on merchandise containing steel, but it "continues to use its scale and buying power to minimize price increases" for consumers, according to a statement the company sent to store managers.

As the Federal Reserve Board considers when to raise interest rates in the coming weeks, the price of steel—and how that flows through to finished goods—is likely to factor into the equation, said James Paulsen, chief investment strategist at Wells Capital Management.

"It's starting to spook the bond market, for sure, and I think it's on the Fed's discussion table,” Mr. Paulsen said.

In May, the spot price of hot-rolled steel was up 114 percent from the same month last year, according to Tom Stundza, a metal markets expert at the trade magazine Purchasing, who has surveyed steel buyers. Cold-rolled was up 74 percent, and steel plate was up 114 percent on the spot market, Mr. Stundza said. Experts expect prices to decline later this summer, but to remain at a higher level than last year.

Whirlpool competitor Maytag Corp. (Newton, IA, U.S.) recently announced a major corporate restructuring, including cutting 20 percent of its salaried work force, and blamed it on declining sales and rising steel prices. The company also has increased prices on its products because of the cost of steel, a spokeswoman said.

In the last week of May, three heating and cooling equipment suppliers—Carrier Corp., Evapco Inc. and McQuay International—announced price increases of 4 to 6 percent because of steel costs, according to the Air Conditioning, Heating & Refrigeration News online trade journal.

That was the second such increase this year for the Taneytown, MD, U.S.-based Evapco, which makes large cooling units for buildings. "That's a dramatic impact on our product because it's very much a steel-based product," Executive Vice President William Bartley said. "It's a real issue right now."

Many buyers are mystified by the prices, Mr. Stundza said, because the factors propping them up aren't as clear as they were a few months ago. "Right now it's really a mess," he said.

Earlier this year, steel prices were being pushed up by huge demand from China and by big increases in the cost of scrap metal, a major source of steel. Producers tacked surcharges onto steel shipments to cover those costs.

In the past 2 months, though, China's government has imposed a slowdown on the country's runaway industrial growth, and the price of scrap—which is easier to get and process in the warm months—has leveled off and even declined.

During that time, many steel producers have eased off on surcharges but increased base prices. They say several factors continue to keep prices high: Energy prices are up, especially natural gas. Raw materials such as coke, a coal product burned in the processing of iron ore, have been costly and in short supply. And demand for steel continues to ride high even though China has backed off a bit.

"Global demand is up significantly," said David Sutherland, president and CEO of the Canadian steel company IPSCO Inc. and chairman of the American Iron and Steel Institute trade group. Demand has boosted prices, he said, and helped U.S. steel companies post healthy earnings only a year after struggling to survive.

"The state of the industry is certainly better than it was years or months ago," Sutherland said. Strengthened by mergers, new labor agreements and the shedding of costly pension plans that have been taken over by the government, "there has been a rejuvenation of the industry," he said. (The Washington Post)

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