E.I. DuPont de Nemours & Co, or DuPont, (DD) reported strong earnings results on Tuesday. DuPont generated $7B in revenue, a 17% year-over-year increase for the third quarter.
DuPont has six business segments. Each one generated year-over-year revenue growth in the third quarter. Four of the six experienced positive pricing power: Electronics & Communications, Performance Chemicals, Performance Coatings, and Performance Materials. Only Safety & Protection experienced downward pricing pressure (hurting net sales gains by 1 percentage point), and Agriculture & Nutrition was (surprisingly) flat.
Pricing power was strong even in the U.S. The U.S. generated 31% of DuPont’s revenues for the quarter, 5 percentage points of the 17% increase in sales came from pricing.
As a result, DuPont is bullish about its outlook and expects its positive pricing power to continue (emphasis mine):
“The company expects full-year earnings to be about $3.10 per share, excluding significant items which will include a fourth quarter $.13 per share loss on the early extinguishment of debt. The previous guidance range was $2.90 to $3.05 per share. The increased outlook reflects strong third quarter results and expectations for sustained demand in key global markets, continued pricing momentum and benefits from ongoing productivity.”
A common theme has connected the earnings reports of most steel companies: lower prices for many steel products and higher input costs. This margin squeeze has produced poor earnings, and steel companies are providing very cautious outlooks. While pricing for steel products varies – some strong, some weak – the increasing cost pressures are near universal. Inflation is very real for these companies.
Arcelor Mittal (MT), AK Steel (AKS), and U.S. Steel (X) all reported this week. I have included some quotes from their earnings report to provide some examples of the pressures that these companies face.
“In Q3 the business performed towards the lower end of our expectations against a background of seasonally lower volumes, weakening spot prices and higher costs. Our outlook for Q4 remains cautious as the expected higher input prices continue to work through the business and demand remains muted, though with some regional differences.”
“Sales were lower during the third quarter of 2010 as compared to the second quarter of 2010 due to seasonally lower volumes (-8%), partly offset by higher average steel selling prices (+4%).”
“Sales in the Stainless Steel segment were $1.4 billion for the three months ended September 30, 2010, a decrease of 12% as compared to $1.5 billion for the three months ended June 30, 2010. Sales declined primarily due to lower steel shipments (-8%) as discussed above and lower average steel selling prices (-5%) due to a weak market environment and pressure from imports.”
“The company said its average selling price for the third quarter of 2010 was $1,075 per ton, a 2% decrease from the $1,101 per-ton price in the second quarter of 2010, and approximately 8% higher than the $994 per-ton average price realized in the third quarter of 2009.”
“2010 Iron Ore Price Increase Impacts Third Quarter:
AK Steel said that it has agreed with two of its three primary iron ore suppliers that the requirements for the establishment of the annual benchmark price of iron ore for 2010 have been met. That 2010 benchmark is an increase of 98.65% over the 2009 benchmark, and is higher than the 65% increase the company had previously estimated for the first half and for its third quarter guidance. The third primary supplier of iron ore to the company has not acknowledged yet that an annual benchmark price has been established. Instead, that supplier continues to seek a price increase in excess of the 98.65% annual benchmark price. The company does not agree that this supplier has a right under the parties’ contract to charge based on other than an annual benchmark price and, for purposes of the iron ore purchased from this supplier, the company has used an estimated benchmark price increase of 98.65% in its third quarter financial results.”
“The company’s third quarter 2010 financial results reflect the year-to-date impact of the higher iron ore price, which increased the company’s third quarter operating loss by approximately $76.0 million, or $52 per ton.”
“AK Steel said it expects shipments of approximately 1,300,000 to 1,350,000 tons for the fourth quarter, with an average selling price per ton decrease of approximately 4% from the third quarter. While the company expects fourth-quarter maintenance costs to decrease by about $20 million from the third quarter, it nonetheless expects to incur an operating loss of approximately $80 per ton for the fourth quarter of 2010, largely due to the lower shipments and selling prices combined with continued high iron ore and other raw material costs.”
(Quotes transcribed and paraphrased)
“Results declined in 3rd quarter from 2nd from lower flat-rolled average prices, higher raw material costs in flat-rolled segment and European operations: decreased shipments and production volumes, decreased average realized prices, increased costs for facility repair and maintenance (higher activity, not input costs), and consumption of higher cost coal, coke and iron ore purchased to support earlier facility restarts. Decreased spot prices more than compensated for increased contract prices.”
“In 4th quarter, expect lower average realized prices, lower spot and contract.”
“Tubular operations had higher average prices for fifth quarter in a row. Decreased costs for steel substrate. Not expecting same price performance in 4th quarter but costs should continue down.”
Disclosure: author owns X and AKS
If Google wants to provide free servants to its employees, that’s fine by me. (Hey, I’m a happy GOOG shareholder.)
But we here at Inflation Watch would be remiss if we didn’t notice that something interesting is going on in the Silicon Valley labor market.
As Gawker reports:
Tech companies in recent months have reported a shortage of programmers as they snap up more and more talent. Google and Facebook are competing so fiercely over some engineers that half-million-dollar retention bonuses are not unheard of. And they’re not the only ones vying for talent; flush with venture capital, Twitter is on a hiring spree, as are Amazon, Foursquare, Zynga and other startups.
Hiring sprees? Free servants? Half-million dollar retention bonuses? Doesn’t sound like a deflationary spiral to me.
According to the NY Times, The College Board’s annual report shows tuition costs at public and private universities outpaced inflation yet again this year:
“…four-year public universities increased their published tuition and fees almost 8 percent this year, to an average of $7,605, according to the College Board’s annual reports. When room and board are included, the average in-state student at a public university now pays $16,140 a year. At private nonprofit colleges and universities, tuition rose 4.5 percent to an average of $27,293, or $36,993 with room and board…
…Over the last decade, published tuition and fees at public four-year colleges and universities increased each year at an average of 5.6 percent beyond the rate of inflation.”
The spiraling cost of higher education has arguably been supported by generous federal assistance:
“In the last five years…average published tuition and fees increased by about 24 percent at public four-year colleges and universities, 17 percent at private nonprofit four-year institutions, and 11 percent at public two-year colleges — but in each sector, the net inflation-adjusted price, taking into account both grants and federal tax benefits, decreased over the period.”
These pricing dynamics show an increasing shift of funding for public higher education from states to the Federal government.
As the dollar weakens, Americans are likely to pay more for goods imported from other countries. Thus, it is not surprising to learn that Toyota is mulling higher prices for autos it exports to the U.S. MarketWatch:
Toyota Motor Corp. is considering raising the prices of some of its export models in the U.S. to counter the impact of the strong yen, the Yomiuri Shimbun reported in its Wednesday morning edition. The company may raise the prices of some of its 2012 export models–including the Prius hybrid, the Corolla and upscale Lexus models–which go on sale in the U.S. from next year, the report said. But to stop the move having an overly negative effect on sales, the automaker will raise prices by only a few percent, the report added.
Related: Nintendo swings to a loss, in part because of the stronger Yen.
Dow Jones Newswire reports that two apparel companies are planning to hike prices in response to higher commodity costs:
Jones Group Inc.’s (JNY) disappointing third-quarter results sparked a sell-off in the apparel sector Wednesday, as soaring raw material costs weighed on margins and sparked fears ahead of a slew of upcoming earnings reports in the group. Apparel makers and retailers had generally been optimistic about how they plan to mitigate rising raw materials costs. Cotton prices, for one, have repeatedly reset all-time highs in recent weeks as uncooperative weather in key cotton-producing regions has squeezed inventories since the beginning of the year But fears were stoked Wednesday after Jones Group’s margins contracted to 33.5% from 35.6% due to the higher costs. Cotton prices, meanwhile, hit an all-time record high of $1.305 a pound on Tuesday. Jones Group shares tumbled 22.6% to $15.10 in recent trading, dragging down other apparel stocks such as VF Corp. (VFC), Liz Claiborne Inc. (LIZ), Volcom Inc. (VLCM), Guess Inc. (GES) and Hanesbrands Inc. (HBI), all of which were down between 3.5% and 7% on higher-than-average trading volume… Jones Group Chief Executive Wesley Card said on a conference call that the company will look to offset the higher cotton costs by raising prices on its products–considered risky with continuing signs of belt-tightening among consumers. Similar concerns are haunting apparel company VF Corp. During its third-quarter earnings call last week, Chief Financial Officer Richard Shearer noted cotton prices are likely to rise to higher levels than the company envisioned, and it’s planning for selective price increases.
Jones Group has a bunch of brands I’ve never heard of. VF Corp. makes Lee and Wrangler Jeans.
Royal Dutch Shell Plc beat all analyst forecasts by reporting an 18 percent jump in third-quarter profits thanks to higher oil and gas prices, setting a trend for the sector… ConocoPhillips, the third-largest U.S. oil company, said on Wednesday that its quarterly profit more than doubled. Both companies were helped by a 12 percent rise in crude prices compared to the third quarter of 2009, while U.S. natural gas prices were 29 percent higher and British gas prices doubled.
Your Cheerios might get a bit more expensive next month. WSJ has the scoop:
General Mills Inc. said it will increase prices next month on a quarter of its breakfast cereals as a result of rising grain and other commodity prices, illustrating the pressures more companies face to pass along sharply higher costs on everything from corn to copper.
The Minneapolis food supplier said some cereals will increase by a “low single-digit” percentage rate effective Nov. 15. Kraft Foods Inc. is also raising prices, according to people familiar with the matter, although its scope wasn’t clear. A Kraft spokesman declined to comment.
As my colleague Duru pointed out to me the other day, the long bond is looking a little sickly lately. Indeed, the iShares Barclays 20+Year Treasury Bond Fund (ticker: TLT) is down nearly 10 percent since its late August 2010 highs:
The bond market is not betting on deflation–at least not in the long run.
Acuity Brands (AYI) is a $2.1B market cap company that specializes in lighting solutions for commercial real estate. In its earnings conference call earlier this month, the company expressed its concern over rising input costs and discussed the potential for passing these costs on to customers in order to maintain margins:
“We remain cautious about the potential for increases in material and component costs, and we will be as vigilant as possible in our pricing strategies to protect our margins and market position. Notwithstanding efforts to recoup higher costs, we anticipate pricing will continue to be competitive.”
AYI will be facing an unfavorable squeeze on pricing. The outcome will likely depend heavily on whether its competitors are willing to sacrifice margins to try to maintain market share.
Reliance Steel & Aluminum Company (RS) is a $3.1B market cap company that “…provides value-added metals processing services and distributes a full line of more than 100,000 metal products. These products include galvanized, hot-rolled and cold-finished steel, stainless steel, aluminum, brass, copper, titanium and alloy steel..” The company reported earnings last Thursday (click here for the transcript of the third quarter conference call) and warned that “steel prices have begun to soften again after going up briefly at the end of the third quarter.”
The company discussed a wide array of pricing dynamics. Here are a few of the more notable examples that describe pricing in the steel industry today:
“Average prices per ton sold in the 2010 third quarter were up 20% compared to the 2009 third quarter and up 1% compared to the 2010 second quarter. For the 2010 third quarter, carbon steel sales were 52% of net sales; aluminum sales were 18%; stainless steel sales were 16%; alloy sales were 8%; toll processing sales were 2%; and other miscellaneous sales were 4%.”
“Steel prices have begun to soften again after going up briefly at the end of the third quarter. Pricing on our other metals seems to be more stable to up entering the fourth quarter, which we expect to be seasonably softer from a volume perspective than the third quarter.”
“…carbon steel pricing on most all products began to decline in July. A fair amount of imports came in during the July through September time frame that was ordered when the dollar was gaining strength. Imports, along with lackluster demand, helped drive prices downward. However, to keep things in perspective, flat-roll prices today are very close to where they were in January o 2010. If domestic mills continue to align production capacity with demand and scrap goes up along with raw materials, we could be close to the bottom of the pricing cycle and stay above the $500 a ton mark.”
“Midwest spot aluminum ingot averaged, for the month of September, $1.05 a pound and has traded at a relatively healthy range all year with a low of $.94 on a monthly average basis to a high of $1.11 a pound.”
“…the base price for stainless has remained flat so far this year. Nickel surcharges, on the other hand, have continued to be volatile. Nickel average monthly surcharges peaked in June at $1.27 a pound, fell to $.93 a pound in September and closed at $1.04 a pound in November. It appears our December monthly average surcharge will be $.05 a pound or higher.”
Proactiveinvestors reports that a deficit is growing in copper supplies in “Copper climbs after WBMS Reports on Growing Supply Deficit“:
“The WBMS said that for the first eight months of this year, their was a supply deficit in the copper market of 161,000 tonnes, compared with last year’s 16,000 tonne oversupply for the first eight months of 2009.
This growing oversupply is indicative of the major issue facing the copper market; ever growing demand for the metal as the global economy recovers, and increasing demand from China and India, is failing to be met as no new major copper production or mines are coming on line. This situation looks set to continue probably into the longer term, and suggests the very fundamental premise that copper prices will continue to climb while supply fails to meet demand.”
We will be watching copper prices even more closely as the U.S. Federal Reserve gets ready to flood the U.S. economy with more money. Assuming its impact is not already priced into the market, copper prices could really take off later this year and into 2011. Copper has already reached pre-recession levels.
The Wall Street Journal’s Paul Ziobro reports that McDonald’s Corp. is planning to raise menu prices in the U.S. and Europe:
The company expects to increase prices in the U.S. and Europe amid projections that commodity costs will rise between 2% and 3% in 2011, Chief Financial Officer Peter Bensen said Thursday during a conference call after McDonald’s reported a 10% increase in third-quarter earnings and added that October sales appear strong.”
The New York Times printed a fascinating article about how South Koreans are dealing with the soaring price of their national delicacy, kimchi: “Rising Cost of Kimchi Alarms Koreans“.
South Koreans typically make kimchi from Napa cabbage, radishes, red chili peppers, garlic and salt. Unfortunately, in just the past month, the prices of several of these ingredients have soared at a rapid clip: Napa cabbage up almost 6x, radishes up almost 3x, and garlic up 2x. All this makes for a national crisis that has created a political firestorm:
“The opposition Democratic Party also has laid blame for the shortages on a large river-reclamation project, saying it destroyed farmland that would have been used for cabbages and other vegetables, a charge the government has denied.”
Despite the disruption, some apparently are going with the flow. Lee Young-ae, who runs a food stall in a large market in western Seoul offered the following observations:
“The prices will go down….Sometimes they’re high, sometimes they’re low. Easy come, easy go. That’s life.”
She should become a spokesperson for a central bank.
On Friday, Federal Reserve Chairman Ben Bernanke spoke at a conference on “Revisiting Monetary Policy in a Low-Inflation Environment” in Boston with a speech titled “Monetary Policy Objectives and Tools in a Low-Inflation Environment.” He provided some very insightful commentary regarding the Fed’s treatment of de/inflation risks.
First, no surprise, the Fed believes the outlook for inflation is very tame:
“Generally speaking, measures of underlying inflation have been trending downward. For example, so-called core PCE price inflation (which is based on the broad-based price index for personal consumption expenditures and excludes the volatile food and energy components of the overall index) has declined from approximately 2.5 percent at an annual rate in the early stages of the recession to an annual rate of about 1.1 percent over the first eight months of this year. The overall PCE price inflation rate, which includes food and energy prices, has been highly volatile in the past few years, in large part because of sharp fluctuations in oil prices. However, so far this year the overall inflation rate has been about the same as the core inflation rate.
The significant moderation in price increases has been widespread across many categories of spending, as is evident from various measures that exclude the most extreme price movements in each period. For example, the so-called trimmed mean consumer price index (CPI) has risen by only 0.9 percent over the past 12 months, and a related measure, the median CPI, has increased by only 0.5 percent over the same period.”
Moreover, the forecast for inflation remains below the Fed’s 2% target. Such a condition mandates action, but the Fed finds itself constrained with rates already at zero percent:
“The longer-run inflation projections…indicate that FOMC participants generally judge the mandate-consistent inflation rate to be about 2 percent or a bit below. In contrast, as I noted earlier, recent readings on underlying inflation have been approximately 1 percent. Thus, in effect, inflation is running at rates that are too low relative to the levels that the Committee judges to be most consistent with the Federal Reserve’s dual mandate in the longer run. In particular, at current rates of inflation, the constraint imposed by the zero lower bound on nominal interest rates is too tight (the short-term real interest rate is too high, given the state of the economy), and the risk of deflation is higher than desirable. Given that monetary policy works with a lag, the more relevant question is whether this situation is forecast to continue. In light of the recent decline in inflation, the degree of slack in the economy, and the relative stability of inflation expectations, it is reasonable to forecast that underlying inflation–setting aside the inevitable short-run volatility–will be less than the mandate-consistent inflation rate for some time.”
Notably, Bernanke did NOT directly mention the soaring costs of food and commodities, especially gold and silver, in his remarks. He did not consider whether further anti-deflationary action by the Fed will cause additional price disruptions and pressures outside the borders of the U.S. Instead, Bernanke focused on generalized and aggregate inflation expectations in the U.S.:
“The public’s expectations for inflation also importantly influence inflation dynamics. Indicators of longer-term inflation expectations have generally been stable in the wake of the financial crisis. For example, in the Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters, the median projection for the annual average inflation rate for personal consumption expenditures over the next 10 years has remained close to 2 percent. Surveys of households likewise show that longer-term inflation expectations have been relatively stable.”
Debate has raged over whether TIPS are indicating a pick-up in inflation expectations. Bernanke now weighs in, stating that TIPS are well within historical norms:
“In the financial markets, measures of inflation compensation at longer horizons (computed from the spread between yields on nominal and inflation-indexed Treasury securities) have moved down, on net, this year but remain within their historical ranges.”
Net-net, Bernanke concludes that all’s quiet on the inflation front: “With long-run inflation expectations stable and with substantial resource slack continuing to restrain cost pressures, it seems likely that inflation trends will remain subdued for some time.” And thus the Fed worries about the risks of deflation. So much so, that now Bernanke is toying with changes to the statement of monetary policy to indicate “…the Committee expects to keep the target for the federal funds rate low for longer than markets expect.”
Sounds like the Federal Reserve is getting ready to dig in its heels. Stay tuned!
The greenback isn’t looking too strong of late:
Most likely, the sinking U.S. dollar means that American consumers will soon be paying more for imported goods. It will also raise the cost of manufacturing in the U.S. to the extent that American manufacturers rely on imported inputs, such as oil.