Higher Prices? Thank China
China's insatiable hunger for raw goods is starting to sting U.S. consumers
The same global economic forces that have consumers paying higher prices at the gasoline pump may soon have them shelling out more money for their beds, their appliances, and even their food.
In a trend apparent at the start of the year that has accelerated in recent weeks, prices have been soaring for nearly every one of the world's major commodities--the raw materials like metals, grains, and fuels that are essential to making the familiar products of modern life. Until now, consumers remained blissfully unaware of the chaos in the commodities markets, because manufacturers have absorbed the increased cost of doing business rather than raise price tags in auto showrooms and department stores. But the strain is beginning to show, and a few companies have indicated they will ask customers to help share the burden.
Most economists doubt that the run-up in raw materials will lead to widespread inflation. The Federal Reserve clearly has debated the issue but concluded that other factors in the economy--such as relatively high unemployment--will keep the risk of spiraling prices low. Nevertheless, a few analysts see the current rumblings as the beginning of a major shift in the global economy, in which new wealth and continued population growth in Asian countries force U.S. consumers to pay more for limited world resources.
Bill O'Neill, a principal with commodities research firm LOGIC Advisors in New Jersey, can sum up the reason for the commodities upsurge in a single word: China. "The warning signs were out there that Chinese demand for industrial commodities would be strong, but I think it happened quicker than some people thought," he says. With its economy growing at an annual rate of nearly 10 percent, even while adding 11 million per year to its 1.3 billion population, China has been gobbling up raw materials. Markets are merely reflecting the fact that for the first time, the world's most populous country now has a significant number of citizens who can afford cars, meat, and better housing.
A prime example of China's pressure is what has happened to steel: The benchmark hot-rolled-sheet price has jumped 80 percent since last year to $500 a net ton, a 15-year high. "All the raw materials for steelmaking--scrap metal, iron ore, pig iron, coke and coal, lime and dolomite--are being sucked up by China," says Tom Stundza, executive editor of Purchasing magazine, which tracks steel values. "The shipping lanes are full of ships heading in one direction." Nancy Gravatt, spokeswoman for the American Iron and Steel Institute, says that China's steelmaking capacity has increased from 100 million tons annually in 2000 to 250 million tons today. "They're going through their own industrial revolution," she says.
This economic progress a hemisphere away means that U.S. consumers are going to have to start paying more for a good night's sleep. Brian Akchin, a vice president of Fraenkel Co., a home furnishings manufacturer in Baton Rouge, La., says his firm had no choice but to increase the price of its innerspring mattresses recently after swallowing higher costs for steel components for five months. Although he's been paying 20 percent more than he was in October, Akchin says he has no plans to up the retail cost beyond last month's 5 to 6 percent hike. "Business has not been that strong that we want to be raising prices," says Akchin. Sealy, the world's largest mattress manufacturer, said it is weighing a price hike, and Steelcase, the world's top office furniture maker, said last month that it would boost prices soon.
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