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20% price increase in the cost of everything?!?!?

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May 29, 2008 – Comments (5) | RELATED TICKERS: DOW , PPG , SEE

Dow Chemical (DOW), a company which I own, announced yesterday that effective June 1st it is raising prices on all of its products by as much as 20% across the board (see article: Dow Chemical hikes prices 20 pct).  Given the parabolic rise in the price of oil (other than the today's sharp pullback) this move is not all that surprising.  The company's cost of feedstocks and energy skyrocketed 42% in the first quarter. 

Even though it does not completely cover the increased costs that it has been experiencing, the price increase is basically a good thing for DOW.  I personally bought shares of the company because two-thirds of its revenue comes from outside of the United States, I like what it is doing in the agriculture area, it has a solid dividend, and it theoretically might act as a partial hedge against my massive position in oil companies (under the premise that they will go down when the price of oil drops, but DOW might go up as the price of this key input drops).  Having said this, why I own a position in the company is not the point of this post.  I have been thinking about who this price hike will hurt. 

One of two things is likely going to happen.  The companies that DOW supplies with chemicals are going to raise prices and pass the pain on down to you and I OR they will have to eat their increased costs.  I think that the most likely result is a combination of these two things where these companies will pass on some of the pain (enough for it to be annoying), but not enough to keep them from getting hurt as well.

If the companies that DOW supplies with chemicals are going to experience some pain, perhaps we can profit from their demise...or at lease earn some CAPS points.  Well, who are they?  You'd be surprised what a large number of industries use DOW products.  Here's the description listed by Yahoo! Finance:

"It serves various industries, including appliance; automotive; agricultural; building and construction; chemical processing; electronics; furniture; house wares; oil and gas; packaging; paints, coatings, and adhesives; personal care; pharmaceutical; processed foods; pulp and paper; textile and carpet; utilities; and water treatment industries. "

Ahhhh, is there anything that they aren't involved in?  Yikes, writing this is getting me scared of the implications of this move on inflation and the already strapped for cash U.S. consumer.

I think that one of the sectors that is going to get hit the hardest is the makers of plastic goods like Bemis Co. (BMS), Pactiv (PTV), and Sealed Air Corp (SEE) (NYSE:SEE - News).  Resin is by far these companies' largest input cost and Dow Chemical a major producer of many types of resin, including polyethylene and polystyrene.

I keep thinking that the increase in the price of resin that is used to make plastic stuff might hurt the ultimate plastic stuff company - Tupperware (TUP).  However, judging by its stock's performance over the past year it hasn't yet.  Perhaps the company's stock will rise as everyone purchases its plastic containers to store their increasingly valuable leftover food in (kidding...somewhat).

DOW is also a key supplier to the pain industry, so Sherwin-Williams Co. (SHW) and PPG Industries (PPG) might get hurt (PPG is likely going to suffer from the weakest market for light vehicles in the past decade anyhow).

Thus far I have come to the conclusion that none of these companies are screaming short plays, but at the very least you should be very, very careful if you are considering buying one of them.  They, as well as American consumers, could be headed for a lot of pain.  Anyone else have any thoughts on this subject, or suggestions for companies that might get hurt by it?

Deej

Long DOW, but no other company mentioned

5 Comments – Post Your Own

#1) On May 29, 2008 at 5:13 PM, GNUBEE (25.93) wrote:

To the opposite, I did look into bio plastics previously, based on the promise of Bioplastics having the potential to reduce the petroleum consumption for plastic by 15 to 20 percent in 2025 (when oil was much cheaper). and according to an industry portal (bioplastics24.com) posting from Monday, Demand projections from the US and Europe were overly optimistic. (I assume the research was done with three month old oil prices)

But guess who is also involved in bioplastics...our old friend......Monsanto...!

Still warrants more research though.

 

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#2) On May 29, 2008 at 7:31 PM, eskatonic (29.10) wrote:

hey deej I heard the same "tupperware is up because people are saving leftovers" arguement pitched on cnbc today.   looks like you are a trendsetter!

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#3) On May 29, 2008 at 8:21 PM, XMFSinchiruna (27.70) wrote:

Interesting post Deej,

Imagine if the nation had to make a similar announcement... i.e. 20% price increase in everything!  Or even just 10%.  Inflation is going to reach painful levels very soon, and these corporate experiences with price inflation are like an early warning for consumers.

GNUBEE, there is a small solar company which has patented bioplastics for the use of backing material in solar panels... very interesting IMO.  I can't name it, because it's too small.  :)

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#4) On May 29, 2008 at 10:14 PM, mandrake66 (93.24) wrote:

I keep thinking that the increase in the price of resin that is used to make plastic stuff might hurt the ultimate plastic stuff company - Tupperware (TUP).  However, judging by its stock's performance over the past year it hasn't yet.  Perhaps the company's stock will rise as everyone purchases its plastic containers to store their increasingly valuable leftover food in (kidding...somewhat).

I've been thinking about buying into Newell Rubbermaid (NWL). They've been dropping hard for about a year, and their dividend rate is up to 4.2%.They recently crossed the $20 mark I had put down as a target (went back over it slightly today). But I hate trying to catch things that are still dropping and show no signs of stopping, and price increases like this in materials have me concerned.

As to the leftover food comment, yeah I was actually thinking that too. :)

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#5) On May 29, 2008 at 10:51 PM, Tastylunch (29.22) wrote:

While I wouldn't short these two as they both are pretty cheap already I would think this is more pretty bad news for Home Depot and Lowe's. Both sell a lot of Dow products ( I believe they own DAP) and products that contain products made made by DOW...

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