Will These Upticks Stick?Bruce Hager
In the war over prices, buyers have won nearly all the battles lately. Even before the recession was officially under way, manufacturers were cutting prices. The few brave souls who tried to push up prices and get their profit margins back to respectable levels usually bowed to customer resistance.
The tide may finally be beginning to turn. So far, makers of paper products, steel, chemicals, fibers, and tires have sought to push prices higher over the past couple of weeks. And the big three domestic automobile makers have each suggested sticker-price increases ranging from 1.4% to 3.5% for 1992 models. "This is a slight quickening of the heartbeat of the economy," says David M. Jones, chief economist at Aubrey G. Lanston & Co. in New York.
Still, it's going to be a long, tough slog. Economists and industry executives agree that it's too early to tell whether any of the initial attempts will last more than a couple of weeks. Most vulnerable are loss-plagued industries that are raising prices despite weak demand. But there are a couple of cases where a real uptick in orders is spurring price increases.
SIGNS OF HOPE. Leading the pack are paper-products manufacturers such as International Paper, Georgia-Pacific, and Weyerhaeuser. Since June, the industry has announced three separate hikes in spot prices for uncoated paper--the type used in copy machines--for a total increase of 24%, to $820 a ton. That's off the peak price of $972 a ton back in 1989, but the increases appear to be sticking.
That's not the only paper product whose price is rising. After a weak first half, demand for cardboard boxes has picked up an average 4.5%. Cardboard boxes are used for packaging a wide array of products, so demand for the linerboard used to make boxes is considered a key signal of the overall economy's direction. "It's an indication that things have bottomed out," says Robert C. Butler, chief financial officer at International Paper Co. In September, manufacturers responded by raising linerboard prices by 9%, to $360 a ton. Sales of linerboard and related grades make up 32% of the paper industry's revenues, compared with 15% for uncoated paper.
The good news for manufacturers may not last long. The recent surge in demand could just represent "an inventory adjustment that will die out shortly," says a big Chicago purchaser of business forms.
Stronger signs of hope are emerging from the housing industry, which has firmed with the decline in interest rates. Since new homes need to be furnished, synthetic-fiber makers are raising prices on continuous nylon filament, used in carpets. Monsanto Co. and Du Pont Co. recently announced an 8% to 10% price increase, to about $1.50 a pound. "We're on a pretty good track right now," says Thomas G. Iversen, who heads Monsanto's nylon unit.
Not every price hike follows improved demand. Tire factories have hardly been running flat out--they're under 80% of capacity. Undaunted, General Tire, Goodyear Tire & Rubber, Bridgestone/Firestone, and others have separately announced that price increases ranging from 2% to 8% for replacement tires will take effect around Oct. 1. Replacement tires, as distinct from tires on new cars, represent three-quarters of the car-tire market.
HEAVY LOSSES. Industry executives confess that they're attempting to stem heavy losses and bolster weak balance sheets. The demand "doesn't warrant a price increase," admits Thomas J. Reese, executive vice-president for sales and marketing at General Tire Inc., a unit of Germany's Continental. However, "if we waited for the industry to get to 100% capacity, we would self-destruct." With tire prices about where they were in 1982, most big tiremakers are in the red or close to it. So top industry executives say they won't budge from the increases. "They probably can make this price increase hold," says Gerald A. Montgomery, president of Entire Auto Care Inc., a Goodyear dealership located in Covington, Ky.
Similarly, although steel orders have picked up, mills are still running at only about 78% of capacity. Nonetheless, all major steelmakers including Bethlehem Steel, USX, and LTV have pushed through a 4% increase in the price of short-term contracts and spot-steel purchases, effective Sept. 29. This hike applies to flat-rolled steel used in cars, appliances, and buildings. Prices on average have been at $300 a ton, off 25% from 1988, and steelmakers are expected to lose $950 million this year, says John E. Jacobson of AUS Consultants in Philadelphia.
The hikes may be short-lived. The Steel Service Center Institute in Cleveland reports that inventories are down about 19% from February, to 5.7 million tons. But purchasers aren't throwing in the towel. "There are no underlying market signs on the horizon that tell me the steel-price increase will stick," says Jimmy B. Anderson, corporate manager of materials at Butler Manufacturing Co., a Kansas City (Mo.) maker of steel utility buildings.
So the tug-of-war continues. Right now, the manufacturers seem to be gaining ground, but in inches, not feet.
A SAMPLING OF INDUSTRY PRICE HIKES Industry Price increase Effective date CHEMICALS 15 % Sept. 1 Low-density polyethylene PAPER 9 Sept. 1 Linerboard STEEL 4 Sept. 29 Flat-rolled steel FIBERS 8-10 Oct. 1 Nylon TIRES 2-8 Oct. 1 Replacement DATA: BW
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