Raw materials going up

Global economists worry about the theft last year of almost half of Beijing's 600,000 manhole covers. So should North American truck carriers. Thieves sold the 65-lb. covers to scrap dealers to feed the country's almost insatiable appetite for raw materials as its economy expanded 9.7% last year. This desperate action was an indicator of a permanent change in the world's economy that is affecting

Global economists worry about the theft last year of almost half of Beijing's 600,000 manhole covers. So should North American truck carriers.

Thieves sold the 65-lb. covers to scrap dealers to feed the country's almost insatiable appetite for raw materials as its economy expanded 9.7% last year. This desperate action was an indicator of a permanent change in the world's economy that is affecting everyone especially trucking firms.

“We're seeing an increase in 15 to 20% for trailers, 2 to 3 % in tractors and tire makers tell us that the rising cost of raw materials is adding 3 to 5% to their price,” says Steve Duley, vp-purchasing at Schneider National.

In addition, the trucking industry is suffering a lack of replacement parts. “Back orders are up, there are more outages and longer lead times,” he says. The result is that trucks are down longer, but so far the company has had no trouble getting new trucks delivered.

Schneider brass had an economist come in recently to educate them about price hikes in commodities and explain why this time it's really different. Previous commodity shortages, such as the gas crises of the 1980s and '90s, were the result of supply shocks. Eventually, supply and demand reached equilibrium as consumers cut back on consumption and OPEC pumped more crude.

This time, however, demand is steadily growing and coming from new and permanent sources — developing countries, which together last year expanded 6.6% worldwide.

China, the largest developing nation, is expected to cool slightly — high single digits still are expected — but consider this: China already consumes 37% of the world's cement, 24% of the world's steel and 31% of its iron ore, according to the World Bank. True, China only consumes 7% of the world's oil, but during the first quarter of this year it used 900,000 barrels daily, an 18% jump over 2004.

One effect is that oil topped $53 a barrel in April, and the International Monetary Fund expects oil to stay mostly above $50, with occasional spikes to $100 a barrel through 2030.

“As an industry, we spent $10 billion more on diesel last year than we did in 2003,” says Bob Costello, chief economist at the American Trucking Assns. “Based on first quarter usage, we're on track to spend $16 billion more this year.”

Schneider's Duley says that fuel surcharges help, and it behooves companies to place an emphasis on establishing a sound surcharge process.

Commodity prices hit trucking two ways, directly and indirectly. Fuel costs and raw materials to build trucks are direct pings to profitability, but indirect effects are more difficult to quantify and forecast. “When commodities prices rise, it often results in higher inflation. This usually slows economic growth. Consumers buy fewer goods, and this impacts trucking,” says Costello.

Whether we suffer mild or severe inflation hinges on how skillfully the Federal Reserve hikes interest rates to control the money supply. “We forecast [U.S.] GDP growth at 3.9% next year,” says Jason Schenker, an economist at Wachovia Bank in Charlotte, NC. “We're calling for higher inflation, but how much depends upon what the Fed does.”

There is one more wild card, though. The huge U.S. debt, which itself is nudging up worldwide interest rates as the country sucks up funds to service the debt. Conventional economic theory suggests that increased interest rates will slow global growth, which then puts supply and demand of raw commodities back into balance as economies cool. Others suggest it could lead to worldwide recession and everyone suffers.

Still others say that with developing countries' new and unknown role in the world economy we just don't know what will happen next. Says Uri Dadush, World Bank Director, Development and Prospects Group: “History has shown that financial crises often take markets and policymakers by surprise.”

As for Beijing's manhole covers, utilities companies are testing new, non-metal models with no recycling value. No word yet on what economists think of this move.

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