Coping Strategies — Rising Cost Of Commodities

September 2006 By Dr. Joe Webb

multipage

OVER THE last couple of years, there has been much media attention given to price increases in commodities, particularly oil and other energy- related expenses, even as the economy has continued to strengthen. These increases have had an impact on the cost of doing business for just about everyone, and manufacturers, including those in the graphic communications industry, have certainly not been immune.

As a result, we have seen price increases from the manufacturers of ink, plates and other consumables that many print service providers find difficult to pass along to customers due to the highly competitive nature of the industry.

Since it seems unlikely that prices for consumables and other raw materials utilized in the manufacture of print will decline, or even stabilize in the near term, it is helpful to understand the reasons behind these rising costs, and to consider ways in which the graphic communications service provider can address their impact on margins and the overall health of the business, while still remaining competitive in the marketplace.

The Facts
Since 2000, the consumer price index (CPI)—or inflation rate—is up about 18 percent, or about 3 percent per year. During that same period, commodities prices were up by 29 percent, or about 5 percent per year. Even the core CPI, which excludes food and energy, is up about 18 percent, indicating that many of these higher commodities prices are not being fully passed along to final buyers.

The cost of materials is being driven up by rapidly growing worldwide economies and the slow rate at which new production capacity is being added to meet growing demand. In particular, there is increased new demand from Asia causing an imbalance in supply and demand. Add some geopolitical tensions to the mix, and you have a situation that is hard for many manufacturers to cope with or predict.

Keep in mind that for commodities, or raw materials, such as petroleum, silver, aluminum and others, prices are determined by the market, largely based on supply and demand. Manufacturers that use these raw materials rarely make a profit on the commodities themselves; their margin is generated by transforming the raw commodities into something businesses and people use, such as converting aluminum to a litho sheet and, ultimately, to a printing plate. How effectively those manufacturers manage their manufacturing process and its costs determines how much margin is achievable from the end product.

Meanwhile, we see the sellers of those commodities—the oil companies, for example—making what seem like huge profits as prices escalate. According to Arve Sund, senior vice president of the lithography business unit of Hydro Aluminum, the world’s largest provider of aluminum litho sheets, there is more demand than supply because of the huge growth rate in Asia. “We have an infrastructure which has been adjusted to a certain world demand that has now suddenly changed,” he says.

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