Heavy Industries Joining Stampede to Raise Prices Posco and Dow Chemical Follow ‘Global Trend’

By David Jolly

The world economy faces a new round of price increases as some of the world’s largest industrial companies on Tuesday accelerated the pace of passing higher raw materials costs on to customers.

Dow Chemical, the biggest U.S. chemical maker, said it would raise prices by 25 percent in July – the largest increase in its history – as energy and food costs surged more quickly than the company anticipated. Global prices for steel, a basic building commodity, also jumped after Posco of South Korea, one of the world’s largest steel producers, said Tuesday that it was raising prices by more than 20 percent after the global miner Rio Tinto Group agreed with the biggest Chinese steel maker, Baosteel, to raise its prices by as much as 97 percent for Australian iron ore.

The pressure on industry to pass through sharp price increases comes as policy makers around the world search for ways to rein in surging inflation. The Federal Reserve on Tuesday began a two-day policy meeting at which accelerating prices and concerns about inflation expectations were expected to take center stage. The Fed was widely expected to leave its benchmark interest rate target unchanged at 2 percent before considering whether to raise borrowing costs later in the year. The European Central Bank has signaled it will raise its benchmark rate by a quarter-point as early as next week to tame rising prices.

“It’s clearly a global trend that the higher costs of raw materials are being passed on along the production chain,” said Holger Schmieding, chief European economist at the London office of Bank of America. “Companies have no alternative but to pass that along to their customers.”

The price increase in Dow Chemical’s history, which comes less than a month after Dow announced it needed to raise prices by 20 percent as energy costs surged, was “extremely unwelcome, but entirely unavoidable,” said Andrew Liveris, Dow’s chairman and chief executive. The company’s energy and raw material costs rose 40 percent in the first half of 2008 from a year earlier, he said. “Even since our last announcement, the cost of hydrocarbons has continued to rise, and that trajectory shows no sign of changing,” Liveris said.

Producer prices in the United States rose 7.2 percent in May from a year earlier, while comparable euro zone prices rose 6.1 percent in April, the latest month for which data are available. Chinese producer prices are rising at nearly a 12 percent annual rate. Inflation, though rising, is more restrained in Japan, the biggest Asian economy.

Schmieding said it was not clear how much of the inflation would be passed along to consumers. The critical variable is how workers react to eroding purchasing power, he said. So far, among the major economies, wage costs seem to be rising only in the euro zone, as cost-of-living adjustments take effect.

David Thurtell, a metals analyst in London for BNP Paribas, said that iron ore prices would remain strong over the next year. “Demand from China is solid,” he said, including for rebuilding after a major earthquake.

The rise in prices also partially reflects the weakness of the dollar, as producers outside the United States demand more of the currency for their goods as its buying power declines. In addition, a feedback loop has been created in which the rise in crude oil costs has carried over into other sectors.

“The commodity boom is itself a part of the demand for steel,” Thurtell said. “Demand for steel to build Mideast refineries is astounding.”

The sharp rise in iron ore prices continued to ripple through Asia on Tuesday. Nippon Steel denied a Japanese press report that said it had agreed to pay BHP double the amount in its previous contract.

ArcelorMittal, the world’s largest steel maker, in May said it was raising prices in Europe as production costs had risen by as much as $500 a ton. The company, which is aiming to control costs by obtaining control over the majority of its iron ore production, signed a deal in April with the Brazilian miner Vale under which it would pay 87 percent more for iron ore from that company.

ArcelorMittal said the price of coking coal had risen 550 percent since 2005, while iron ore prices had climbed 360 percent, even as market prices for steel rose less than 200 percent. Prices for scrap iron have risen 220 percent, putting the cost of the raw material above the price of finished steel in some contracts. That development puts great pressure on steel producers to renegotiate existing contracts to a level at which they can at least break even.

Originally published by The New York Times Media Group.

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