PHILADELPHIA — Surging prices for a range of raw materials, including steel, rubber, fuel, plastics, and other petroleum-based products, are cutting the profits of Philadelphia-area manufacturers that are increasingly passing on their higher costs to customers, executives said.
Efforts to absorb the costs through internal efficiencies have not always succeeded in maintaining profit margins, and some companies that have so far avoided increasing their prices are now saying it’s only a matter of time until they do.
“We are at the busting point,” said Joe Pro, president of Pennsylvania Machine Works Inc., an Aston, Pa.-based maker of high-pressure pipe fittings for oil refineries and other industries.
After cutting internal costs, adopting lean-production techniques, and utilizing “every ounce” of capacity in an effort to keep prices steady, Pro said he’s now at the point where his customers will have to share the pain.
“We just can’t go any further,” he said. “My expectation is that in July or August we will be passing it on.”
One of the sharpest increases has been seen in carbon steel, which is now about three times the price it was three years ago and continues to rise, Pro said.
In an environment of sharply rising costs, Pro fears the Federal Reserve will be forced to raise interest rates, putting further pressure on manufacturers who are already squeezed by higher costs and faltering demand.
“I think they are going to have to do it,” he said. “There is nowhere to go but up.”
The only consolation for Pro and other executives who think they will have no choice but to pass on the higher costs is that they believe most of their customers accept the inevitability of the increases. Many contracts now have escalation clauses in contracts to allow for the higher costs, and budgets are being challenged by the frequent rises, he said.
The Philadelphia Federal Reserve’s May Business Outlook Survey found 61% of manufacturers in the district reported higher input prices, up from 55% in April, while 43% reported price increases for their own goods, up from 38% in April. This month, the bank is including a special question on prices in its survey of about 100 manufacturing companies.
— Market News International