Coping Strategies — Rising Cost Of Commodities
This has far-reaching effects on the cost of everything, from the manufacturing process itself to the transportation of goods to their ultimate point of use. The difficulty that manufacturers of consumables have in passing along increased costs to their customers can actually have the effect of decreasing capacity as companies strive to remain profitable.
“Although the absolute pricing level of paper hasn’t been at historic lows,” notes Greg Gibson, vice president of commercial print and imaging papers at International Paper, “margins have declined significantly because input costs—energy, chemicals and wood—have risen so dramatically. And that caused a shakeout in the paper industry, leading, in the third and fourth quarter of 2005 and into 2006, to an unprecedented amount of capacity being permanently shut down.”
Also consider that the cost to manufacture ink, as well as the polyester base used to make photographic films and printing plates, has risen with the price of petroleum.
Metal prices have skyrocketed as well, headlined by the dramatic increase in the price of gold. More relevant to our industry are aluminum and silver. Silver, a critical component of photographic products, is up 158 percent since January of 2000, almost nine times the CPI rate (as shown above). Although aluminum costs have not escalated as rapidly, they are still up 71 percent since December 2003.
Aluminum is energy-intensive to process but, unlike many other commodities, it can be virtually 100 percent reclaimed after use and recycled into new aluminum-based products. Prices for scrap aluminum have also risen, somewhat offsetting the increased cost base for companies that aggressively recycle aluminum.
Additionally, companies like Hydro Aluminum typically generate their own power for their manufacturing plants. Sund shares an interesting perspective: “At the moment, we are building a huge smelter in Qatar using gas as the energy source. To build smelters today in high energy-cost countries is not a very interesting proposition. If you manufacture in Qatar, you transform the lower-cost local gas to aluminum. It is a way of exporting energy and maintaining reasonable margins.”