Energy costs latest woe for U.S. manufacturers

reuters.com Wed February 26, 2003 01:08 PM ET By Nichola Groom

NEW YORK, Feb 26 (Reuters) - U.S. manufacturers, already tripped up by a prolonged economic slump that has battered both share prices and business spending, face another hurdle on the road to restoring profit growth -- the rising cost of energy.

With crude oil prices hovering at a more than two-year high on fears about the possibility of a war in Iraq, several companies have already warned of the negative impact higher energy costs will have on their bottom lines this year and many more are expected to follow suit.

"I'm certain we'll see more (warnings), particularly in the basic materials group," said Chuck Hill, director of research at Thomson First Call, which tracks company earnings.

Makers of raw materials like steel, wood and chemicals are usually hit hardest by rising energy costs, Hill said, because they use large amounts of electricity and steam to power massive manufacturing facilities.

Analysts who cover those industries are worried earnings estimates for the first quarter will have to come down as the impact of higher energy costs takes shape.

"We are concerned that, in the near-term, (cardboard box makers) will be facing another round of downward estimate revisions," Deutsche Bank Securities forest products analyst Mark Wilde said in a report last week. "Moreover, it looks to us like the head winds from weak volumes and higher energy costs will be greater than expected (in the first quarter).

Indeed, some companies have already begun trimming forecasts in part because of rising energy costs.

Eastman Chemical Co. EMN.N , a big maker of plastic beverage bottles, as well as chemicals used to make adhesives, coatings and inks, said last month it's first-quarter profit would fall below Wall Street forecasts in part due to higher raw material costs.

On the same day, Lyondell Chemical Co. LYO.N also warned that first-quarter earnings would be impacted by the cost of reduced oil supplies from Venezuela, which is in the midst of an an 11-week oil strike.

HOLDING BACK BUSINESS SPENDING

Oil prices are trading at $37 a barrel -- just off a 29- month high -- on concerns a U.S.-led attack on Iraq, the world's eighth biggest exporter, may hit supplies from the Middle East, which accounts for about 40 percent of globally traded crude.

The strike in Venezuela and sustained cold weather in the United States has already run down U.S. stocks of crude oil to their lowest since 1975, strengthening concerns over a supply disruption.

On a broader scale, experts worry companies may be forced to scale back spending plans to make up for the rising costs, putting the brakes on the nation's already fragile economic recovery.

Business spending has not yet recovered from a collapse that led the U.S. economy into recession in 2001 and U.S. policymakers have said the prospect of war was playing a big role in holding it back.

"Make no mistake about it, persistently high oil prices will have a major impact on the global economy," said Hugh Johnson, chief investment officer at First Albany Corp. "The impact of high oil prices is very significant on both businesses' and consumers' ability and appetite to spend."

Included among the companies that have said recently they expect higher energy costs to hurt results this year are paper and building products maker Temple-Inland Inc. TIN.N , home improvement product maker Masco Corp. MAS.N and packaging company Smurfit-Stone Container Corp. SSCC.O