Rising Raw Material Prices Hurting Corporate Profits (GT)

Rising prices of raw materials, driven mainly by demand from Asia, has cut corporate profits, hit stocks and in some cases even increased consumer goods prices. According to the Wall Street Journal, rubber prices have skyrocketed by 74% this year after a climb of 92% last year. As a result, tire manufacturers have been badly hit since rubber is a major component in the manufacturing of tires. Major tire makers like Goodyear Tire & Rubber Co. (NYSE: GT) and Bridgestone Corp. have warned investors about a potential hit to profits.

Similarly, manufacturers are worried over rise in the prices of many other raw materials. Palladium used in car exhaust systems is up by 39% this year, increasing the costs for U.S. carmakers, which have just started to recover after a slump in the auto sector. Lumber, which is a major cost for home builders, is up by nearly 59%. Analysts at Raymond James have lowered their rating on three home builders last week, citing “surging lumber costs.”

Prices of iron-ore, oil and copper have also continued to rise. On Thursday, data released by Bureau of labor statics showed how rapidly the pressure on Corporate America is rising due to raw materials. The producer price index showed that based on year-over-year basis, the prices of crude goods like iron ore , construction sand and pulp surged by 44.5%, the fastest increase since 1974. Crude goods prices along with energy and food cost rose by 33.4%.

Analysts say that emerging markets can absorb the rise in raw material prices because they are expanding at a faster pace than developed economies. It is also a reflection of changing power toward emerging economies and a shift from developed economies of the U.S. and Europe. Recently, Douglas Porter, an economist at BMO Capital Markets, wrote in a research note, “The rest of the world is simply not waiting on the U.S. and Europe to fully get their acts together.” He termed U.S. and Europe as a “plodding tugboat” and Asia as a “super charged cigarette boat.”

According to IHS Global Insight, the surge in rubber price is mainly driven by booming demand in China where car sales jumped by 56% in March compared to the same period last year. Similarly, elsewhere In Asia, growing economy has pushed up the prices of rubber. The U.S. car market has also shown signs of recovery, although sales are still down from their pre-crisis level.