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Metal prices increasing

Vendors reaching absorption point

IF IT'S metal, it's a challenge.
     Among manufacturers and importers who rely on wrought iron and cast aluminum to make outdoor furnishings,

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the capacity for absorbing cost increases for labor and material is running out, prompting an increasing - and in some cases an immediate - need to raise prices.
     The conditions in the marketplace have been several years in the making. Observers say many in the business were willing to absorb some price increases at a time of decreased demand to shore up inventories, so they'd be in a position to take advantage of an expected economic recovery. But in some instances, the rising costs have begun to cut too far into profit margins before revenues arrived to offset them. That means that many are looking at cost reductions by sourcing work to other suppliers or raising prices.
     Some are predicting that price increases could come within months, including industry veteran Rory Rehmert, vice president of sales and marketing at Pride Family Brands and chairman of the International Casual Furnishings Association. Rehmert noted all commodities used in manufacturing, including steel and aluminum, have increased in price recently. But because such materials, have a global marketplace, you can't run down the street to get an immediate and significant saving.
     "All of us will digest some margin erosion or loss, but only to a point," Rehmert said. "Everybody is holding out as long as they can, but in March or April you will start to see them."
     Mark Fillhouer, chief operating officer of Homecrest Outdoor Living, agreed.
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     "All of our metal sources are going up - there is no question that steel and aluminum are seeing price increases this year," he said. "We've absorbed it, and we're close to getting to the point where we can't continue to do that."
     Fillhouer said part of the difference is that the design costs more. A classic wrought iron chair, for example, is 90% wrought iron, while a chair that uses extruded aluminum as a frame supporting a sling would use much less metal.
     "If you're a company that just does wrought iron, then you are in a tight spot," Fillhouer said.
     Fillhouer predicted a price increase for 2012 is a virtual certainty, given all the forecasts that say steel prices will continue to rise. Some, he said, will likely raise prices midseason, which he acknowledged is not good timing.
     "Budgets are set, prices have been published and for dealers to implement price increases right now is not the right thing to do from a sales standpoint," he said. "As long as our margin will support it, we will hold back. But if it continues to go the way it has been going, we won't be able to hold that price next year."
     Gene Crouch, general manager of Meadowcraft, said wrought iron continues to be a bright spot in the casual furnishings industry because of its weight and comfort. He said that increases in steel prices and in coatings
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prompted a price increase, but he advised a longer view. Crouch pointed out that prices increase and decrease during the cycle of supply and demand, but that they never go back to the low point where they were years ago.
     He also said that the casual furniture business may be both hurt and helped by the economy. A rebound in the auto industry, for example, would increase demand for steel and raise prices. But at the same time, more Americans - including those in the market for outdoor furniture - will be employed and better able to spend money. Crouch said the good news is he's already seeing signs of life.
     "We are forecasting a good year this year with early buys, and we are seeing more calls early in the year," Crouch said. "Hopefully, the demand will be stronger this year than we were last year. Time will tell on volume, but we are seeing stuff earlier this year."
     At O.W. Lee, Terri Lee Rogers, vice president of sales and marketing, said both wrought iron and wrought aluminum remain popular - and prices are still going up,
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aluminum more so than steel. Rogers said that increased costs and other factors are prompting her firm to move production to domestic facilities rather than overseas.
     "It doesn't make sense to do it in China, especially for us," Rogers said. "We are not buying in some of the bulk quantities that others are buying in. And whatever price break that you are getting from the labor is becoming less and less advantageous."
     Rogers said that it's about having more control over pricing, over quality and over when - and how much - of the product is being received.
     "It seems not as advantageous for our business model as it has been in the past," Rogers said. "We have started losing control of our inventories. If we can't count on it, we end up making it here anyway. We are rethinking and re-strategizing on how we are bringing in new materials and new designs."
     Lamar Thompson, president of Thompson and Elm, agreed that steel and aluminum costs are indeed rising, but said the real story is the increased cost of labor. Thompson said overseas minimum wages have increased by 40% in less than a year, with more wage hikes expected.
     "Both the manufacturers and the importers like us have had to absorb a lot of costs because of weak demand, but
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something has to give, particularly with manufacturers more so than importers," Thompson said. "I certainly see a price adjustment in the coming year. I don't see any letup, because the labor cost itself will drive the production cost up even if the raw materials flatten out."
     Thompson pointed out that furniture manufacturers won't be alone, given that labor is going up across the board in China - and a lot of consumer goods sold in the U.S. is made there, from home décor to clothing to virtually everything in the gift industry.
     "We are fortunate in that there is a little demand right now, perhaps, to carry it," Thompson said. "We have to hope that price increases won't be seen as too bad. Price adjustments are coming, and we hope the consumer will start to adjust to it as they have done in the past."
     Jon McGraw, owner of Alloy Casting Co. in Dallas, said some furniture manufacturers who are facing challenges with overseas suppliers sometimes contact him, not necessarily because of price but because of quality and availability, especially on re-orders. One firm gives his company duplicate tooling so that if an order is running late from overseas, the customer can order enough stock to replenish inventory at least temporarily. McGraw gave one example of an order his firm filled in two weeks when an estimate said it would be at least eight weeks until it was delivered - if then.
     "Those containers keep coming and the order time is so long that you may have a bunch of containers on the
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ocean, and if sales fall off, you've got to eat those containers," McGraw said. "Cash flow management is a big factor in sourcing with such long lead times."
     For some in outdoor furnishings, the product offerings reflect the balance sheet. Peter Macaluso, president of Melissa Lighting, said that a lot of what he does is tied to new construction, which is all but at a standstill.
     "We thought we saw things coming back in November and December," Macaluso said. "At this point, I am not seeing the same increase and I don't know why this is."
     Claire H. Woodsum, vice president of merchandising at Foreside Home & Garden, has a unique perspective in that her company just relaunched. She said that sales volume has led to better margins, even with increasing costs in the metal markets.
     Even so, Woodsum says she is also considering a move to source her furniture elsewhere. Part of her reason is that China's policies to limit birth rates to one child per family 25 years ago now means that factory workers are becoming scarcer. Another reason is Woodsum wants to seek out green suppliers, because it fits in well with both customer demand and her brand.
     "We are looking around with the whole green movement and the eco-industrial movement," Woodsum said. "We really have to take this trend seriously. We have an industrial furniture line right now and it is selling beautifully."

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