Where Will Costs Head Next?

As we are fast approaching the end of a difficult 2009, many manufacturers and suppliers will be pondering again soon the question as to whether and by how much to increase their prices at the beginning of 2010. While it will not be possible to avoid all these price hikes, a focused and methodical approach to cost management will allow you to contain the impact on your business’ bottom line – and hopefully even allowing you to release some hidden profits.

Although the depressed economic conditions during the latter part of 2008 and early 2009 have helped to keep commodity prices in check, the strong recovery of the Chinese and some of the European economies have increased demand for many raw materials. This, in turn, has led to a surge in commodity prices in recent months.

Copper $/m tonne

Brent Crude Oil $/barrel

While the price of copper has increased by some 50% over since November 2008, even the price of Oil, having fallen to below $40 late last year, is now again close to $78, an increase of some 25% over this time last year.

At the same time, unfortunately, the lacklustre performance of our own economy has kept interest rates low and has depressed the value of the Sterling against its major trading currencies, the US Dollar and the Euro.

GBP v USD

GBP v Euro

While the US Dollar is currently trading at levels similar to those seen twelve months ago, the Euro, although having recovered from the lows seen in December 2008, is still trading at levels some 12% lower than at the end of October last year.

Overall, I am afraid, this does not bode well as far as price increases at the beginning of 2010 are concerned: The rise in the cost of many raw materials will no doubt lead to price increases for many goods, irrespective whether these are manufactured in the UK, Europe or overseas.  However, for products imported from Europe, the weakness of the Sterling against the Euro will further exacerbate the situation.

Moreover, some channels also may try to take advantage of the situation and increase their prices to end users more than necessary. In particular, as far as goods manufactured in the UK are concerned, Office of National Statistics’ Producer Price data may hold some clues as to the future trend of UK produced goods. Looking at a very limited data set covering the twelve months from October 2008 to the end of September 2009 (see the adjacent graph), I notice that input prices have hit a low between December 2008 and February 2009. Since then, while showing intermittent months of decline, the trend has been for gently increasing costs as would be expected considering the commodity prices discussed above.  As far as output prices are concerned, these have been holding steady for a while, but there is a clear upward trend evolving now with regular monthly increases since May 2009. Interesting in the context of these numbers also is the fact that both input and output prices were indexed at 100 in 2005. The data compiled by the ONS in this respect maybe also tells a story about the ongoing erosion of the United Kingdom as a viable base for manufacturing.

As I said at the outset, it will not be possible to avoid all price increases. The fact that VAT is going to be restored to its original rate of 17.5% from 1 January is going to hit the voluntary and educational sector particularly hard, as most of these organisations are unable to recover VAT paid. Under the current circumstances, therefore, it is crucial that organisations proactively compare prices and hold their suppliers accountable for service levels and product quality. Expense Reduction Analysts would be happy to help you reduce your organisation’s costs – and release hidden profits.