Cost of warm, stocked house surges

Household goods' raw materials scarcer

Katrina's Wake

September 03, 2005|By Paul Adams | Paul Adams,SUN STAFF

It's in everything from sandwich bags, microwaves and stereos to DVDs, cars and computers. Even the adhesive on shampoo labels and the caulking around bathtubs across America depends on it.

Oil and natural gas are the base materials for chemicals and raw materials that show up in more than 90 percent of the consumer goods and packaging Americans take home from the mall. And just like the gas fueling American cars, those fossil fuel-based raw materials have gotten more expensive and harder to get in the wake of Hurricane Katrina as a result of the temporary loss of dozens of key chemical plants along the Gulf Coast.

Depending on how long the energy crisis in the gulf lasts, Americans could soon find themselves paying more for just about everything they buy. Along with soaring transportation costs, that's what has economists and corporate chieftains across America working their calculators and coming up with some new assumptions about the U.S. economy in the year ahead.

Ultimately those rising costs will drag down the economy, slow growth, potentially increase unemployment and send the federal deficit even higher.

"It's a real problem if businesses all over start to put it into the price of their goods," Joel Naroff, chief economist for Naroff Economic Advisors in Holland, Pa., said yesterday. "That's inflation. You've got the 1970s staring at you."

DAP Products Inc. is among the companies feeling the pinch. The Baltimore-based maker of caulking, spackling compound and other building and home improvement products has seen costs double for many of the chemicals it uses. Gas and oil form the basis for both the products it makes and the plastic used to package them.

"Chemicals have been on a horrific uphill run for better than two years," said John McLaughlin, DAP's president and chief executive. He blames it in part on rising demand from Asia and a lack of new production plants being built.

McLaughlin counted some 51 chemical plants in the gulf region that were at least temporarily shut down by Katrina.

"From our standpoint, the question becomes when does the supply become so tight that we can't get it," he said. "All of the refineries there are shut down and I know one of our bigger plastics suppliers said yesterday they are in fear of running out of propylene to make plastic cartridges" for packaging.

Expect more rises

As costs rise, McLaughlin said, the company has little choice but to pass the increase on to retailers and wholesalers, who then pass it on to consumers.

Jarrett Leeb, president of Jarrett Industries in Owings Mills, said he is facing the same decision. His company supplies plastic bags, foam and moldings used in packaging. Vendors have told Leeb to expect a series of price increases between now and year's end.

"The bottom line is everybody is going to have to bite the bullet," he said.

The majority of the plastics and fossil fuel derivatives that find their way into American goods comes from natural gas, which has historically been cheap and abundant thanks to Gulf Coast producers.

"The chemical industry here grew up along the Gulf Coast because of that abundance of natural gas," said Kevin Swift, chief economist for the American Chemistry Council.

That has changed in recent years as more businesses and electric power plants began to use natural gas as a fuel, while production remained stagnant. Before Katrina, the price of natural gas had doubled in the past few years, and more than tripled from prices seen a decade ago. They went up about 45 percent in August as Katrina halted about a third of U.S. production, sending prices soaring.

At the same time, the chemical industry has suffered from the same lack of investment that has left the United States with too few gasoline refineries to keep up with demand, analysts said. Few, if any, plants have been built in a decade, and some have closed down even as demand from burgeoning economies in Asia has eaten up supplies.

"That affects raw materials cost," Swift said. "Economic theory tells you that that will eventually be borne by the consumer."

The Institute for Supply Management, which issues a monthly report on the U.S. industrial sector, reported this week that prices manufacturers are paying for goods surged in August. Rising energy costs pushed a key index measuring prices to 62.5 from July's 48.5.

"Manufacturing profitability is really getting hit hard," said David Huether, chief economist for the National Association of Manufacturers. "At the same time, you do see manufacturers paying more for product now, and a lot of that is due to energy prices."

Heuther lowered his forecast of manufacturing growth for the rest of 2005 and predicts 200,000 fewer jobs will be created as a result of the rising costs.

Road, ship tie-ups

Economists say Katrina also is disrupting the manufacturing supply chain because it has wiped out a key east-west highway and the port of New Orleans, which is a major artery for grain from the Midwest as well as imported steel, coffee and a host of other products. Railroads also were affected.

The price of building materials such as cement, lumber and roofing will also rise along with demand for construction material to rebuild. Many such materials are made with petroleum-based resins, adding to the supply crunch and rising costs.

"It will [trigger inflation]," said Robert J. Trent, associate professor of management at Lehigh University. "What will matter is how long the oil prices stay up. We're paying a fear premium right now."

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