Price Increases Don't Appear to Be Going Away Anytime Soon

If the latest earnings releases for the first quarter are any indication, distributors will continue to face price increases through the end of this year thanks to ongoing volatility in raw material costs.

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Many suppliers instituted raw material surcharges and/or price increases to offset the cost jumps in the first quarter. Some noted that they continue to improve efficiencies internally to improve profitability, as well.

In March, wholesale prices had risen 0.7 percent, according to the Producer Price Index from the Bureau of Labor Statistics. The increase followed price hikes in January and February. One contributor to the spike: the price of crude oil due to uncertainty in the Mideast. Rubber products, for one, have seen double-digit increases, according to some distributors. Distributors continue to look for ways to offset the price increases they are seeing from their supplier.

Concerns are broad-based among manufacturers and many say they plan to continue increasing prices to offset raw material increases. In one survey of CFOs and senior comptrollers by Grant Thornton LLP, manufacturing respondents said that while they are optimistic about the U.S. economy, they are worried about inflation. Half said they planned to raise prices for their goods, up from 31 percent half a year ago. Just a quarter said the same a year ago.

Manufacturers commented on the impact of cost increases in their recent earnings releases and calls. Wausau Paper, a manufacturer of specialty papers for industrial, commercial and consumer end markets, said input costs had accelerated more rapidly than anticipated. Electrical manufacturer Hubbell Inc. reported "commodity cost headwinds" in the quarter, reducing operating margins by about 1 percentage point. The manufacturer announced broad price increases in the first quarter to offset these costs.

Raw material prices have been "chipping away" at 3M's margins, according to CEO George Buckley in 3M's first-quarter 2011 earnings call. Gross margins declined by 1 point year-on-year, according to 3M CFO David Meline in the same call: "Selling prices rose slightly in the first quarter, but importantly, they improved each month during the quarter as our businesses have stepped up aggressively to help to offset raw material headwinds."

In the latest MDM/Baird benchmarking survey (read results), distributors and manufacturers noted "significant price inflation" in many sectors. One industrial respondent said: "This year we are seeing more double-digit price increases trying to go through than ever before."

A gases/hardgoods respondent said he expected "substantial price increases" effective in April. Hardgoods price increases were frequent, one wrote, especially on filler metals. In building products, a respondent said it was difficult to pass through the cost inflation the company was seeing.

It appears that the price increases expected by many survey respondents in the fourth quarter came to fruition in the first quarter. At that time, many respondents said they had planned to pass on the price increases, or pass part of the increase on. But others planned to just eat the extra costs. Read more about strategies distributors are employing and tips for dealing with price increases: Distributors Grapple with Price Increases.

What are you experiencing in the realm of price increases? Comment below.