Tuesday, June 24, 2008

The rude cause of inflation raises the specter of recession

The first real cracks in the IMC (industrial military complex), the neoconservative power base, are showing up. What is good for one industry is bad for another and Andrew Liveris, chairman and CEO of Dow Chemical, said on Tuesday will raise prices for its products again by as much as 25 percent. This is the second price hike in less than a month. Last month, the company hiked its prices by 20 percent in an effort to offset the steep jump in oil and gas. Liveris also speaks about demand destruction that is occurring in his industry by announcing a cut back on output of some products.

We are idling capacity to cover cash costs. When you can't run the plant to make policy of cash costs you just have to bring it down. Let's call it managing the assets so we don't make negative margins. We are trying to maintain our earnings.

When asked about the future outlook for prices in the industry in the event input costs would come down, Liveris sees $100 oil still as too high for his US and European assets to maintain profit margins. The only alternative in his opinion is to move assets to low cost production countries. With inflation and input costs rising dramatically in those countries as well he might be left with no other choice than permanently keeping production down. This would raise the specter of recession if commodity prices like oil do not correct significantly lower in the next 12 months.

Many of our US and European assets at these sorts of numbers even if you bring oil down to $100 are not reinvestment grade at current input costs.

It is interesting that this view on inflation contrasts with the official outlook of the Fed who thinks that a leveling-out of energy prices at current high levels could bring inflation down by year end. This might very well be a real possible outcome (if we are very very lucky) but it will have little impact on input price pressures that are being felt by the industry and the consumer.

click for video

video: Dow Chemical Raises Prices
Dow Chemical will raise prices by as much as 25% and will implement freigh surcharges, with Andrew Liveris, Dow Chemical CEO

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