Saturday, March 6, 2004

Rising costs of metals pinching firms' profits

By John Byczkowski
The Cincinnati Enquirer

Pierre Paroz, CEO of American Micro Products in Batavia, watches as Sandy Mullins inspects a diesel fuel injector. Rising costs of metals is proving costly for firms that rely heavily on copper, nickel and aluminum.
The Cincinnati Enquirer/TONY JONES

American manufacturers are beginning to pay the price for too much of a good thing.

Just as it appears an economic rebound is taking hold and orders are growing, the cost of key metals used in anything from autos and telecommunications equipment to medical devices is rising rapidly.

Copper has almost doubled in the past 12 months, with half that increase coming since Jan. 1. Aluminum is up 25 percent since the end of September. Nickel doubled in price during 2003.

Friday, wire-maker General Cable Corp. in Highland Heights, said it will lose money in the first three months of this year "as a result of the recent and extraordinarily rapid escalation in the cost of copper and aluminum." That comes even as the company's sales are rising.

The main reason prices are up: Metals producers can't keep up with growing demand. The situation might be temporary, but the price increases come at the wrong time for many manufacturers.

American Micro Products in Batavia makes electronic components for a range of industries. CEO Pierre Paroz said his biggest automotive clients are asking him to cut prices 3 percent to 6 percent every year, and one customer asked him to cut parts prices 40 percent.

That'll be a challenge because brass - an alloy of copper and zinc - has gone from $2.02 a pound to $2.45 since Jan. 1. "When it comes to eliminating waste, we've pretty much eliminated everything that can be eliminated, just so (customers) don't go offshore" with their work, Paroz said. "There's not so much left except for the (profit) margin to look at."

And that could affect jobs - important to the manufacturing industry, which has lost almost 3 million jobs since 1999. With materials costs eating into profits, manufacturers may be hesitant to add workers.

Rising metals costs "will increase pressure to reduce labor costs," said Daniel Meckstroth, chief economist for Manufacturers Alliance/MAPI, an industry research association.

Consumers probably won't see much impact. That's because materials are a small part of the prices of most finished goods, and also because today's competitive economy means it's difficult for many producers to raise prices.

It's manufacturers who'll be squeezed, however, because rising metals prices will make it tougher to increase profits and add workers.

Cincinnati bell maker Verdin Co., for instance, is shelving plans to expand its facilities, said CEO Jim Verdin. As the world's largest supplier of bells, Verdin has little competition and has some ability to raise prices. But Jim Verdin knows that when the price of anything rises, people buy less of it.

In this environment, many producers cut costs first and add workers later, even as orders grow. "Everybody is squeezed to the point now, that a few months of good orders won't trigger hiring until you see what's going on," he said. That means his planned expansion goes on the back burner until he's sure business has improved, he said.

The fast-rising prices have blindsided metals suppliers. "I met with a supplier last week who had agreed to hold prices for us quarterly," said David FitzGibbon, CEO of Ilsco Corp. of Madisonville, which makes electrical connectors. "And he came in and said he couldn't do it. He couldn't handle the increase in copper."

One reason for the rise in prices is that supply hasn't caught up to demand, said James Steel, director of New York research for investment brokers Refco LLC. Metals producers cut back production during the recession, and since 2000, there've been several false starts in which producers geared up production believing a recovery was under way. It didn't materialize, and in 2001, that led to copper falling to its lowest price in more than a decade.

The economy now seems to be gaining momentum, but given recent history, "the industry has been slow to react to it, because they'd been burned a couple of times," Steel said.

Another reason is the fast-growing economies of China, India and many of their Asian neighbors. A growing share of China's exports are metals-based - China now produces 89 percent of the world's bicycles, for instance - and its growing infrastructure requires metal for roads and electrical generation.

"China overtook the United States as the world's largest consumer of copper two years, and she's set to overtake the United States as the largest aluminum user this year," Steel said.

He said he expects supplies will remain tight for some time, "but I don't think these price levels will last. They may already be too high."

A price correction won't come until some event triggers a correction - bad economic news out of China, perhaps. Steel said high prices also lead to improvements in refining and recycling technologies, which help moderate prices.

FitzGibbon said Ilsco, which sells into the nonresidential construction industry, has been very busy, so rising prices aren't likely to slow anybody. "As the electrical business is coming back, people need the products. They'll adjust their pricing, but they won't stop doing things," he said.


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