Metals' cost pinches factories, customers

Higher raw materials prices squeeze companies' profit margins

August 25, 2006|By Allison Connolly | Allison Connolly,Sun reporter

At the New Arts Foundry in Hampden, workers still follow the centuries-old process of casting bronze sculptures from molds of wax, rubber and ceramic.

But owner Gary Siegel fears the business has irrevocably changed in a matter of months.

Last year at this time, Siegel said, he was paying $1.60 a pound for the bronze alloy he uses, which is 95 percent copper. By May, it was $4.50 a pound - nearly triple what he had been paying.

Metals prices have soared in the past year, and it's not only affecting foundries that make bronze sculptures, but manufacturers of products from power tools to tap shoes.

Nickel soared 89 percent between the end of 2005 and July, and this week hit a 19-year high. Copper shot up 71 percent; zinc, 62 percent; aluminum, 21 percent.

In some cases, that will mean higher prices for consumers. It has also put a squeeze on profit margins for manufacturers. Manufacturers say they are trying to strike a balance between the increases their suppliers are charging them and what they think consumers will stomach - all the while hoping that metals prices would retreat.

At first, Siegel tried to absorb the increases at his foundry, thinking the cost of metal would level off or go back down. He even reduced the thickness of the copper walls of his sculptures as much as he could without affecting the integrity of the pieces.

Finally, he was forced to add a surcharge to each order that is adjusted to the market price for copper and bronze.

"It's got to balance out," Siegel said. "I can't be losing money on every project."

It's the first time in the foundry's 28 years in which such a charge has been imposed. Prices have long been flat, Siegel said. Ten years ago, he said, he was actually paying less for the alloy than he did in the 1980s.

"It's gone crazy," said Charlie Tinley, sales manager for Caldwell Casting Co. in Cambridge, a small die caster that makes aluminum and zinc products to order, from the aluminum tap on Gregory Hines' Signature Tap Shoe to the zinc alloy fuse on a military grenade.

Tinley said the small, 55-year-old company had no choice but to raise prices to customers. Last August, the zinc alloy he buys was 65 cents a pound; at the end of May, it was $1.97 a pound. Last week it had dropped a little, to $1.70 a pound, he said - but that was still more than two and a half times the price a year ago.

Began in 2003

Customers weren't happy about having to pay more, he said, but they understood.

"It's a battle," he said. "They're starting to understand it's the way it goes."

Metal prices started creeping up in 2003, when China launched a major building and industrial boom in anticipation of the Olympic Games coming to Beijing in 2008. The country bought up all kinds of raw materials, particularly steel, said Tom Stundza, executive editor of Newton, Mass.-based Purchasing Magazine. Prices rose along with demand.

World events drove the recent larger surge in pricing. With war in the Middle East and record high oil prices, Stundza said, investors went looking for more stable places to sock their money. Speculators, investment fund managers and other investors not only sought out futures and options on precious metals, such as gold, platinum and silver, but other metals as well. That's something they don't typically do, he said, and the increasing demand is driving up prices.

Stundza said there's no telling when the prices will stabilize or return to more normal levels, though many metal prices showed a slight decline this month. Gold is at a 26-year high, Stundza said, up 40 percent from the beginning of the year.

Cut into profits

"There's no continuity in the market right now," he said.

Towson-based Black & Decker Corp. said it would be raising prices on some items this year - it hasn't yet announced which products or how much prices will go up - to offset a sharp rise in the cost of the copper, zinc and steel that goes into its power tools.

During a second-quarter conference call with analysts, Black & Decker Chief Financial Officer Michael D. Mangan said rising costs of raw materials will cut 2006 profit by $95 million. That's $30 million more than Mangan predicted as recently as April.

Last year, according to the company, the increased cost of raw materials reduced profit by $70 million, to $532.1 million; in 2004, the impact was $30 million, cutting net income to $456.0 million.

"Some of these inflationary things that we're seeing in our business, from copper and zinc and steel, I'm confident our competitors are seeing as well," Mangan said during the July 26 call.

Suppliers who don't pass on the price increases will be in trouble.

Last week, Linthicum-based Wise Metals Group LLC, which makes aluminum sheet for beverage can manufacturers, lost most of the business from its second-biggest customer, Crown Cork & Seal Co. Inc., after the two failed to renegotiate their contract to compensate for higher aluminum prices.

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