Surging costs catch up with corporate America

By Scott Malone - Analysis

BOSTON (Reuters) - Manufacturers are turning to price increases as their only way to offset record-high energy bills and surging raw material costs, deciding that the risk of losing some sales is worth preserving profit margins.

The moves are a sign that companies are running out of ways to offset the rise in key costs including oil, natural gas, steel and aluminum, while betting their customers will have little choice but to accept higher prices.

Manufacturers including Navistar International (NAV.N: Quote, Profile, Research) and OshKosh Corp (OSK.N: Quote, Profile, Research) over the past week have told investors they plan to raise prices.

"Companies are definitely getting more aggressive in terms of raising prices," said Kurt Spieler, a fund manager at the Fort Collins, Colorado-based First Focus Growth Opportunities Fund, whose key industrial holdings include L-3 Communications Holdings Inc (LLL.N: Quote, Profile, Research), Joy Global (JOYG.O: Quote, Profile, Research) and Agco Corp (AG.N: Quote, Profile, Research).

"Initially they tried to manage their profitability through productivity improvements, becoming more efficient, some cost cutting. But now with the extent of the rise in raw material costs, that's just not sufficient," Spieler said. "The interesting part will be how much the prices that they're increasing will stick in a pretty tough economic environment."

The question of whether price increases will stick -- and will be phased in quickly enough -- was one that haunted investors in United Parcel Service Inc (UPS.N: Quote, Profile, Research), the world's largest package delivery company, and its main U.S. rival FedEx Corp (FDX.N: Quote, Profile, Research) last month. Both companies cut their profit forecasts, citing higher oil prices, and analysts warned the fuel surcharges the companies were imposing did not seem to be coming in fast enough to offset more expensive energy costs.

'GET IT IN PRICE'

Navistar, a maker of trucks and engines, has locked in its pricing on steel and aluminum through the rest of this year, said Chief Executive David Ustian. The company expects its energy bills to go up again next year, and to offset that, he said it will have to raise prices as well as look for ways to trim other costs. To justify higher prices to customers, Navistar will offer more fuel-efficient products that will save them money in the long run.