Manufacturers Lift Prices

After years of market constraints, manufacturers of products as diverse as earthmoving equipment and plastic resins are lifting prices.

At General Electric Co., oil-based resins used to make liquid-crystal television screens, compact discs and surgical equipment are up 9.5% over 2003. Caterpillar Inc. has bumped up prices twice this year on its big earthmovers.

“We haven’t been able to raise prices at all during the past five years,” says Caterpillar Chief Financial Officer Lynn McPheeters. Peoria, Ill.-based Caterpillar has a third markup on the way in January, he says.

Global demand has pushed up the costs these companies pay for basic building blocks such as oil, natural gas and metals. Now, orders for such diverse manufactured goods as turbines and plastic bags have begun to rise as well, especially in China. That means more manufacturers can pass on cost increases to their customers.

“We are getting pricing for the first time in the appliance business, in the industrial business,” General Electric Chief Executive Jeffrey Immelt told investors last month on a conference call. “Lots of the equipment-management businesses are way up over last year.”

GE Consumer & Industrial, a unit of Fairfield, Conn.-based General Electric, makes appliances, lighting, factory-automation controls, circuit breakers and electric motors.

Not every user of metals, oil and scrap steel can pass along costs. Some are suffering, including those supplying automakers such as General Motors Corp. and Ford Motor Co., which are losing U.S. market share to Asian carmakers. Toledo, Ohio-based Dana Corp., which uses hot-rolled sheet steel to produce frames for Ford’s F-150 pickup, says higher steel costs reduced net income by $22 million in the third quarter. It wasn’t able to pass on those costs.

Companies selling to countries where power and transportation needs are growing stand the best chance of sustaining higher prices, according to Nicholas Heymann, an analyst at Prudential Equity Group in New York. General Electric, the world’s biggest maker of power-plant turbines and locomotives, in October repeated its projection that sales from China would reach at least $5 billion in 2005, almost double 2003 revenue.

Commodities are soaring. Prices on copper futures contracts have risen 44% in the last year. Aluminum futures are up 21%. Contracts for oil have climbed 64%, touching a record high of $55.65 a barrel on Oct. 27. Natural gas futures are up 62%. A ton of hot-rolled sheet steel more than doubled to $680 in October from $300 a year earlier, according to American Metal Market, a trade publication.

Polyethylene is in such demand that Midland, Mich.-based Dow Chemical Co. said it began limiting sales in October to prevent customers from hoarding. The world’s most widely used plastic is derived in the U.S. primarily from natural gas.

“Certainly the pricing environment has improved” at U.S. chemical manufacturers, says Joe Morrison, a credit analyst at ABN Amro Inc. in New York. “They’re doing better than expected, although raw materials costs are a factor.”

The price increases from companies such as General Electric and Dow Chemical may already be “leaking” into the overall inflation rate, says Chris Varvares, an economist who is president of St. Louis-based Macroeconomic Advisers. Still, they aren’t likely to have a big effect on consumer prices for at least a year, he says.

The U.S. government’s producer price index for crude materials was up 14% at the end of September from a year earlier. The index for intermediate materials was up 8.4%. The index for finished goods was up 3.3%. By comparison, the consumer price index was up 2.5% in September compared with a year earlier.

Durable goods such as appliances account for 11% of the CPI, and appliance makers, while raising prices, may have difficulty sustaining them.

John Gourville, who studies pricing trends as an associate professor at Harvard Business School in Cambridge, Mass., says, “You’ll see the Wal-Marts of the world keeping prices down.”