Passing Price Increases: To Be or Not To Be, That is the Question

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Though Hamlet found himself in extremely dire circumstances, manufacturers throughout the world have faced a similar question, to raise prices or not? Certainly a few years ago, the answer to that question, in the automotive industry, was a resounding “no”. In other words, an OEM would never accept a price increase from his supplier, even if the supplier documented the cost increases from its suppliers. That began to change when steel surcharges really bit into supplier margins (and perhaps explains why so many automotive suppliers are no longer here today). We have personally seen many companies (both large and small) successfully implement price increases in rising commodity markets.

Reuters hosted a manufacturing summit in Chicago at the end of February. The summit featured the CEOs of many top manufacturing firms. They each spoke on various topics. We were most intrigued by the comments made about raw materials. In this audio file, Timken CEO Jim Griffith talks about how they finally did pass down cost increases to their automotive customers in the neighborhood of 10-20%. Griffith continued by saying that they live on both sides of the same coin, their company is profitable because of rising steel prices. But, they have not been getting adequate pricing for their products from automotive customers. If they don’t, “it’s the end of the road.”

Unfortunately, many other CEO’s echoed Griffith’s comments. John Stropki, chief executive of welding equipment maker Lincoln Electric Holdings Inc acknowledged that their firm was going to be passing costs down to customers, despite any weakening economy. “Steel prices are at historical highs,” according to Stropki. While several CEO’s spoke about all-time-high steel prices, few gave more than a quick mention to what they were doing to mitigate price increases. Glen Tellock, CEO of Manitowoc Crane discussed engineering design changes and locking in prices in advance, according to this Reuters article. My personal favorite bellweather company, Caterpillar, is passing cost increases to its customers…anywhere from half to one percent over announced price increases.

Forward buying, and hedging, which just came on stream last week (and hot rolled sheet and plate to come on stream later this year), bidding out the value-add portion, price escalator/de-escalator clauses are all means of obtaining some cost avoidance and possibly cost savings.

Try the MetalSaver quiz if you are looking for some additional ways to mitigate price increases.

–Lisa Reisman

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