Sunday, June 29, 2008

Are we on the road to ruin?


BASF had to increase its prices in North America last week on everything from its kaolin products, an ingredient in paper, to the resins used to make paint, garment hangers and toys, citing "unprecedented" and "dramatic" increases in raw materials, energy and transportation costs.

The former cassette tape company certainly isn't the only one stuck in this inflationary boat. BASF's competitor Dow Chemical announced last week its second price hike in less than a month to offset record costs for energy and raw goods. The Midland, Michigan-based firm makes propylene glycols for antifreeze and pharmaceuticals along with acrylic acid-based products for detergents and diapers.

"It's happening across the industry as a result of rising oil prices," says Rotenberg. In fact, staggering oil prices are winding their way throughout the economy and trickling down to consumers in just about every area imaginable.

Thanks to soaring prices at the pump, airlines have all jacked up their fuel surcharges, and last week Toronto's taxi industry followed suit, announcing a fare increase this summer.

And if you're still mailing it in, Canada Post also wants to squeeze more pennies from your change purse. The federal agency announced Friday that it will ask Ottawa for a six-cent increase in the price of domestic stamps over the next three years as their transportation costs climb, while the price of crude oil and gasoline is expected to cut the post office's profits in half. That request comes on the heels of recent announcements by global shipping giants FedEx Corp. and United Parcel Service Inc. that high fuel costs and a slumping U.S. economy are destroying profits.

"Everything from taxi fares to your morning bowl of cereal has been affected by the rising cost of fuel," says CIBC World Markets economist Avery Shenfeld, who pointed out that most other countries have been experiencing higher inflation for some time. But it didn't kick in for Canada until recently, due primarily to the strength of the loonie and low interest rates along with the GST cut and grocery store price wars, which kept inflation at bay.

"Other than Japan, all the G-7 economies had higher inflation than Canada," notes Shenfeld.

"It's been creeping in over the last year, but the pace of the increase is now noticeable" to consumers at the same time that the Canadian dollar slides back from par, he says.

Relief isn't expected anytime soon either. Oil leapt to a record high above $142 a barrel on Friday (27), extending gains after surging nearly 4 per cent in the previous session, as tumbling global stock markets helped to trigger a wider commodities rally.

China's largest steel maker Baosteel felt the sting of escalating oil prices last week, agreeing to the biggest price hike in more than a decade in iron-ore term contracts with Rio Tinto. Baosteel is set to pay the Australian miner up to 96.5 per cent more for its iron ore.

Meanwhile, global markets endured a sell-off last week amid increasing worries over the rising threat of inflation.

World stocks fell to a three-month low on Friday, hurt in part by the soaring oil price and feeding into inflationary fears.

"There is so much to worry about now (in the Canadian economy). There are risks on the inflation side, on the growth side as well as incredibly volatile currency and equity markets," says RBC Financial Group's chief economist Craig Wright.

"Most central banks are gauging the growth of inflation. It's a delicate balancing act how it's all going to pan out," he says.

"The big sticker price is on food and energy. Those are very visible. And it does raise the risk of spilling over into wages."

Wright does not foresee energy prices soaring ever higher though next year. He is forecasting oil to slide back to $90 by the end of next year, though he adds it likely won't translate into a significant dip in fuel prices.

"Our view (overall) is one of nervous optimism," he adds.

Confidence is also crumbling across Europe as oil-powered inflation, public worry number one, accelerated further in June, compounding the double-trouble central bankers must deal with as economic growth slows in the industrialized world.

Ahead of a meeting next week where the European Central Bank is expected to raise interest rates, Germany's statistics office said the annual inflation rate in Europe's largest economy rose to a near 15-year high of 3.3 per cent in June, from 3 per cent in May.

And in Spain, a one-time boomer hit by a housing bust, inflation in June was announced at 5.1 per cent, the highest since records began in January 1997, while Belgian inflation sat at a near 24-year high of 5.8 per cent. Politicians in Germany, France and Spain have all signalled that the second quarter of the year could look ugly in terms of gross domestic product.

Meanwhile, BASF's Rotenberg is concerned that escalating costs for her company's chemicals will result in customers turning to cheaper substitute materials.

"If you can cover your costs and make a profit you also have to make sure your customers don't look for other products."

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