Commodities Clash with Brisk Sales

Over recent weeks many companies have made it no secret that commodity prices are sky-rocketing— with many announcing increases in retail pricing to compensate. Last month Michelin announced a 6% increase in rubber retreading prices. Although sales volumes have picked up, Michelin attributes rising operating costs, including raw materials, to its failure to enjoy bolstered margins. Instead of using

Over recent weeks many companies have made it no secret that commodity prices are sky-rocketing— with many announcing increases in retail pricing to compensate.

Last month Michelin announced a 6% increase in rubber retreading prices. Although sales volumes have picked up, Michelin attributes rising operating costs, including raw materials, to its failure to enjoy bolstered margins.

Instead of using adjectives like “improving” or “growing,” to describe these margins, Michelin opted for “stable” and “resilient” in its 2003 earning report, stating a 7.7% operating margin in 2003 compared to 7.8% in 2002. Michelin noted that there has been a 41% hike in natural rubber prices over last year.

Some companies are even considering R&D efforts that would enable them to substitute certain raw materials altogether. In March Goodyear issued a release stating it is experimenting with synthetic rubber to alleviate its dependence on rubber. If their efforts are successful, Goodyear could reduce its dependency on natural rubber by as much as 15% over the next few years.

“After just going through a very difficult economic period as an industry, we felt at Goodyear that we could ill afford to sit back and hope that relief in the form of lower natural rubber prices would come along,” said Goodyear's Gary Miller, vice president and chief procurement officer.

Wabash National Corp. echoed Michelin when it announced it was upping trailer prices by 4.5% to 6% because of rising steel prices. Reuters reported that steel prices have doubled, even tripled in some cases since October.

Diesel manufacturer Cummins Inc. is among the more upbeat manufacturers, having recently upwardly revised its original guidance for the first quarter 2004 to the range of 65 to 75 cents a share over its previous estimate of 40 to 50 cents a share, citing strong volumes. Even on that announcement Cummins notes steel prices as a major uncertainty as to whether it could maintain high profit margins.

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