Price Factors Frustrate

Since the start of 2007 pricing has been the least fun part of this job. Prices are up across the board for products from China and they show no sign of going the other direction anytime soon. Here are the main factors impacting prices:

1. RMB exchange rates. The RMB is up 10.3% since the beginning of 2007. Back then a USD was worth 7.8RMB. Now you only get 7.0RMB per dollar. The Chinese government is giving in to international pressure to let the RMB rise (although it's been stable against the Euro over this same time) in value, and also is using monetary policy to advance their initiative to slow economic growth to control inflation.

2. Metal prices were up significantly in 2007. This actually started in 2006 and is mainly caused by increasing demand for metals as the economies of China and India rapidly expand.

3. Oil prices are up from $60 per barrel at the start of 2007 to over $100 per barrel today. This is a painful impact on transportation costs and on materials like plastics and synthetic rubber compounds.

4. Labor costs are up sharply. As Chinese workers increase their income they become less inclined to travel away from their families for 11.5 months to the factories in Guangdong province and around Shanghai. Plus, on January 1, 2008 China's new labor laws went into effect. These new laws offer needed protections for workers, but also serve to increase costs.

5. VAT refund changes took effect in 2007. Manufacturers in China pay VAT taxes on supplies and materials they purchase in China. Before the changes, manufacturers that exported could get large refunds of these taxes. In 2007 the government eliminated many of these refunds as another way to slow economic growth.

6. New regulations and cash flow requirements on importing materials took effect in 2007. In another effort to slow the economy and promote trade balance the Chinese government now requires large deposits be held by China Customs when manufacturers import raw materials. If the materials are not used up in a certain period of time, Customs keeps the deposit. This cash flow impact will require more borrowing which increases costs and prices over time.

I'm looking forward to getting back to some price stability, but we're advising our customers to expect more increases until we see some evidence to the contrary. Unfortunately I expect to post more on this going forward.