© Reuters. FILE PHOTO: Sears Kenmore washing machines are shown for sale at a Sears department store in La Jolla, California, United States, March 22, 2017. REUTERS / Mike Blake
By Rajesh Kumar Singh
CHICAGO (Reuters) – In 2018, Whirlpool Corp (NYSE 🙂 suffered a loss after a tariff-fueled rise in U.S. steel prices pushed up its raw material costs.
This year, it pays $ 1 billion for steel and other materials, but the West Michigan home appliance maker is on track to post its highest profit in decades.
The difference? Booming demand, spurred by nearly $ 6 trillion in pandemic stimulus from Washington – more than the nation’s budget during World War II – and frugal consumers.
With so much money flowing through the economy at a time when pandemic-induced disruptions have limited supplies and prevented inventory build-up, businesses are able to charge higher prices without hurting sales.
Whirlpool has raised prices by up to 12% this year in various markets to offset rising raw material costs. Many other manufacturers that make goods ranging from heavy equipment to SUVs use a similar playbook.
This helps explain why corporate profits hit their highest level in a decade, even though factories across the United States are running out of components and prices for everything from steel to oil to labor. and computer chips, are increasing.
Bank of America Corp (NYSE 🙂 analysis shows companies beat analysts’ first quarter earnings expectations with the biggest margin in history, even though “inflation” found more mentions in earnings conference calls at no time since 2011.
“We’re in this strange market where there’s a dearth of everything,” said Stephen Volkmann, analyst at Jefferies (NYSE :). “When you’re in this kind of shortage situation… you’re willing to pay more.”
The surge in prices is testing the US Federal Reserve’s jobs-oriented monetary policy, as inflation is now expected to well exceed its 2% target this year and remain slightly elevated for the next two years. The Fed, however, still attributes the price hike to “transient” factors.
A BIDDERSHIP DISAGREEMENT
A sharp correction in lumber prices raised hopes that other commodities would follow a similar path once demand and supply begin to rebalance. Commodity producers, however, say a roaring economy will keep prices relatively high.
Today’s economy is fulfilling, almost too well, the ubiquitous dream of manufacturers – a world in which supply and demand are finely balanced so that prices always remain firm and sales do not collapse.
For manufacturers serving the Big Six appliance categories – washers, dryers, dishwashers, refrigerators, freezers, and ranges and ovens – demand is highest in at least 12 years, according to data from the Association of Home Appliance Manufacturers (AHAM).
But it takes at least two to three months for appliance makers to fill new orders because steel, semiconductors and resins are scarce, said Kevin Messner, head of government relations and policy for AHAM. .
Whirlpool’s average backlog is around six to seven weeks, compared to one to two weeks normally. The company did not respond to maintenance requests. But chief executive Marc Bitzer told investors at the end of April that the order book would remain high due to “unconstrained” consumer demand and restricted access to components.
Data from Goldman Sachs (NYSE 🙂 shows the average home appliance discount around Memorial Day weekend this year was just 7%, down from 19% a year ago. Whirlpool was the least promotional, with discounts of just 2%, down from 9% a year ago, the data showed.
The price cuts are expected to be just as modest for the July 4 holiday, according to trade officials at Home deposit (NYSE 🙂 and Best Buy stores in Chicago.
“Prices have gone up and some items are out of stock,” said one of the sales managers.
The benefit to corporate profits of what amounts to a double-digit price hike is “fantastic,” said David MacGregor, president of Longbow Research LLC.
Also in the auto industry, reduced production due to semiconductor shortages has resulted in the lowest levels of unsold cars and trucks on dealership lots in years, according to consulting firm AlixPartners.
In response, vehicle price percentage discounts were reduced to less than 8% in May, from more than 12% at the start of 2020, AlixPartners said. And average prices have risen worldwide by nearly $ 1,700 per vehicle, offsetting much of the cost increases for automakers.
Tight inventory “allowed that pricing power. It allowed OEMs (automakers) to shift the mix to more profitable vehicles,” said Mark Wakefield, co-head of AlixPartners’ automotive practice.
General Motors Co (NYSE 🙂 and Ford Motor (NYSE 🙂 Co raised their earnings outlook, unlike in 2018 when rising steel prices hurt their profits.
THE CONSTRUCTION ARROW SUPPLIES THE DEMAND
In the agricultural and heavy construction machinery industry, companies say customers are already placing orders for next year to try to beat the price and delivery crisis.
Industrial sales of construction machinery in North America are expected to increase 25% this year. Sales are also expected to increase next year thanks to a vibrant housing market and higher infrastructure spending.
Stephen Roy, Sales Manager for the Americas for Volvo AB (OTC :), says the company prioritizes customer orders over orders to replenish dealer inventories. Supply bottlenecks have tripled the delivery times of its products.
The company faces intense cost pressure, but customers are willing to accept higher prices.
“They appear to be able to pass price increases on to their customers,” he told Reuters. “So far, we have not heard any concerns from our customers.”
Of course, not all companies are in a position to demonstrate their pricing power.
Take the Pennsylvania-based startup Optimus Technologies. The biodiesel engine maker struggles with higher raw material costs, but has not been able to fully pass them on to its customers.
Managing Director Colin Huwyler said his company needed to be cost competitive to increase its market share. “We have unique challenges that an OEM might not have,” he said.