Passing the Buck
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| Guy Ramsey |
December 1, 2004—When JLG announced record revenues for its first quarter of the new fiscal year, few could have imagined that those sales would have translated into a net loss. But there it was. Despite revenues of $306.7 million for its fiscal first quarter ended October 31, 2004, an increase of 44% from the same period last year, the bottom line showed a net loss of $8.7 million. The sharp rise in the price of steel and steel components has made its impact.
Raw steel can account for as much as 60% of the material costs so you can see the effect this will have on the overall cost of the finished product. One must assume that if this problem is hitting JLG's bottom line this hard, it will continue to have a similar impact on other manufacturers. Certainly, the likes of Terex,
Now further compounding the problem is the falling value of the dollar. Much of the steel used in domestically produced products comes from outside the
Ron DeFeo, President and CEO of Terex Corp., recently commented about the rise in raw material costs. “We are behind the curve in certain businesses from a pricing perspective, but we have aggressive plans to catch up.”
Meanwhile, DeFeo's counterpart at JLG, Bill Lasky, made an even more detailed declaration about his company's immediate plans. “We are compelled to pass through additional price increases to our customers to offset these rising costs. We expect to achieve an effective 6% price increase in January in the form of an increased steel surcharge, base price increases, and reductions in customer discounts. Every shipment after December 31, 2004, will be subject to the new pricing, including orders currently in the backlog.”
And Manitowoc Crane's Chairman and CEO Terry Growcock had this to say about his company's latest performance numbers. “We will also continue our emphasis on offsetting increases in raw material prices through a combination of product pricing, material substitutions, design changes, and sourcing initiatives.”
Right now we are looking at 3% here and 3% there, but it won't take long for price increases and surcharges to account for as much as 10% to 20% increases in the cost of that new machine you want to buy. Manufacturers have been slow to respond to the sharp rise in steel costs and they must now make substantial moves to shore up their bottom lines. Although they can all become more efficient producers to hold off a few percentage points here and there, nothing will offset steel's massive cost increases. In the end, raw material costs will “steel” profits from both the manufacturer and the equipment buyer.
