No matter how cost-efficiently a manufacturer is run, the price of commodities such as steel, iron and aluminum is one factor that it cannot control. Recent increases in the cost of metals have left industry suppliers with no choice but to run on smaller profit margins or to increase prices.
“I’ve been at Marmon for 39 years, and running it for 27, and I’ve never seen anything like the last 6 months,” Kelly Dier, president of Marmon Highway Technologies (MHT), told FleetOwner. “I think it’s a combination of global demand and a certain degree of speculation.”
MHT, which produces products under the Fontaine, Webb, Leland, Perfection, Triangle, Fleetline, Nuline and Hogebuilt brands, manufactures brake systems, transport trailers, fifth wheels, leaf springs, spray suppression equipment, specialty drive axles, truck modifications and clutches.
According to MHT, metal prices have increased substantially since January, with scrap prices increasing 88%, or $243 per ton, in the first quarter of 2008.
Metal prices have been going up for the past four or five years, significantly spiking in 2005 before slowly creeping up through the end of 2007, when prices skyrocketed, Dier said. Because of these rising overhead costs, Marmon has needed to increase prices to maintain profit margins.
“From our standpoint, there isn’t much we can do about it,” Dier said. “We have increased our research and development budget and are looking at alternative materials…we simply have to react now to conditions.”
The Institute for Supply Management Manufacturing’s (ISM) Inside Supply Manufacturing newsletter echoes these concerns. “This completes the weakest quarterly performance for the U.S. economy since Q2 of 2003,” said ISM manufacturing business survey committee chair Norbert Ore. “Manufacturers' order backlogs continue to erode as the New Orders Index failed to grow for the fourth consecutive month. Additionally, manufacturers continue to experience heavy cost pressures, as the prices they pay are still rising even with slower overall demand."
According to Reed Construction Data, “everything is favorable for an outsized rise in steel prices this spring that is likely to partially reverse later in the year or early next year. Steel mills are experiencing rapid cost increases which they need to pass on. But they are raising prices much more than passing on costs would justify. They are increasing their margins in a period of very strong world steel demand. And they are capitalizing on their actions in recent months to let steel inventories decline to avoid permitting customers to stock up on low cost steel.”
“On the cost side, iron ore prices are up more than 50% in the past year, coal nearly 10%, natural gas 13% and carbon steel scrap over 40%,” Reed added. “Truckload freight rates for product delivery are set to rise soon after the huge jump in diesel prices. Also, the exchange value of the U.S. dollar continues to fall, raising the price of imported steel and the raw materials for steel mills.”