Tuesday, June 24, 2008

Dow Chemical (DOW) Raising Prices for 2nd Time in 2 Months

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Wow, this is amazing... Andrew Liveris CEO of Dow Chemical (DOW) is one of my favorite CEOs - he has blasted the entire energy policy in the United States (if you call it a policy) [May 28: Bravo Dow Chemical CEO] and just 5 weeks ago instituted a price hike of 20%. Now the company is out this morning with ANOTHER 25% price hike along with fuel surcharges. Breathtaking. On top of that they are idling production (read: laying off workers) because unlike the auto companies they don't have unionized workforces, so when they cannot sell a product for more than it costs them (i.e. make a profit), they simply shut down production. Which in theory could lead to even more inflation as supply is taken off line (and can't be good for laid off workers). Frankly it's a big mess. Dow is the type of company that has products that go into almost everything in the supply chain which is why these type of companies are important to keep a track of.

Now the good news is the government reports won't show this as inflationary so nothing to worry about. Unless you live in the real world... where inflation is a tax on all things - producers and consumers.
  • Dow Chemical Co (NYSE:DOW - News), the biggest U.S. chemicals manufacturer, said on Tuesday it will boost its prices by as much as 25 percent, institute freight surcharges and cut output of some products because of soaring energy prices.
  • The price hikes come after last month's across-the-board 20 percent increase by the Midland, Michigan-based company, which makes thousands of products ranging from plastic wraps to car parts and insecticides.
  • "What we're doing is trying to protect our earnings," Chairman and Chief Executive Officer Andrew Liveris told broadcaster CNBC.
  • Dow said it is also undertaking a series of cost reduction measures on staffing, facilities and spending at its automotive unit because of the decline in North American auto sales.
  • The price increases announced on May 28 were not enough to cover the additional energy prices increases, Liveris said.
  • Liveris again called for the U.S. government to overcome political squabbling and pass energy measures that will increase supplies. "We've got to get bipartisan energy policy ... this is too important a country to take aspects of energy policy off the table," he told CNBC.
  • From August 1, Dow will implement a surcharge of $300 per shipment by truck and $600 per shipment by rail in North America for customers buying chemicals, hydrocarbons and plastics. Freight charges will be applied in other regions later this year.
  • Dow also trimmed it production of the industrial chemical ethylene oxide by 25 percent and idled 30 percent of its North American acrylic acid output. The company will idle 50 percent of its European styrene production, and has cut European polystyrene production by 15 percent.
Cutting jobs, cutting production, raising prices - all sound like good things. All things we predicted last summer/fall as Wall Streeters screamed for joy every time Uncle Ben cut rates so their stock accounts could go up 1.2% that day on "great news from the Federal Reserve". No free lunches.

If you are new to the blog in the past month, I'd encourage you to go to this post [May 30: Weekend Homework for Readers - more Dow Chemical CEO] and spend the time listening to the CEO in his last round of interviews. There appears to be more sense in this 1 man than 98% of Washington D.C. Quite a sad situation really.

Oh yes, after the Fedex (FDX) warning last week, are we surprised UPS (UPS) is also out warning? Shouldn't be - these are only bellweathers of the US economy; the only people surprised are the "2nd half recovery" pollyanas. Inflation - it's everywhere. Except government reports in the United States.
  • UPS(UPS), citing a sluggish U.S. economy and the blistering rise in fuel costs, has cut its second-quarter expectations.
  • The Atlanta-based overnight package carrier said it expects to earn 83 cents to 88 cents for the quarter. It originally anticipated earnings between 97 cents and $1.04.
  • Slow U.S. economic growth and skyrocketing fuel expenses have resulted in lower-than-expected domestic package volume and reduced use of premium air products, the company said. Additionally, it said "the anemic U.S. economy" is affecting international results. (wait, I thought the great international story was what was keeping the market holding up? Rut roh raggy)
UPS shares are now at a 5 year low ... right ahead of the '2nd half recovery'. Strange eh?

Let's not forget CNH Global (CNH), one of the big equipment makers (especially agriculture) - even they have to increase costs (albeit by a miserly 5%) to offset rising costs of all commodity inputs. We warned this is going to be a big issue but Wall Street is behind the curve. Now the evidence is mounting. It is amazing what you see when you ignore government reports and only listen to the companies themselves. 2 completely different worlds.
  • Farm equipment maker CNH Global NV (CNH) said on Monday it was slapping a 5 percent surcharge on its tractors and combines as it joined the growing list of global companies complaining of the toll rising commodity prices are taking on their profits.
  • ...the move was a "response to sharp and sustained increases in its costs for steel, energy, commodities, and transportation."
[Jun 20: Steel Nabs Another One - Lindsay Corporation]
[May 17: WSJ - Fast Rising Steel Prices Set Back Big Projects]
[May 14: Deere Earnings - Why I'm Avoiding Equipment Stocks]

Long Liveris

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