Coping Strategies — Rising Cost Of Commodities
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.
“In order for the infrastructure to adjust to the new demand, you have to build new capacity, and that takes time. That means that we have to live with higher prices but, at the same time, make investments in new capacity.” Sund points out that higher profit levels are generated when the market drives prices up, yet the infrastructure costs are based on a lower historical market price.
Other parts of the supply chain are not faring as well, especially in our industry. Suppliers to the industry have been unable to pass along all of their cost increases to their customers, reflected in less robust financial performance.
Energy products have been leading the way in commodity price increases. While the CPI is up by 18 percent, energy prices are up as much as about 10 times that rate. Liquefied petroleum gas is up 168 percent since 2000, and refined petroleum products are up 187 percent for the same period, as reflected in the table to the right.