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Steel Prices Cause Increase in Equipment Costs

Surging steel prices have translated into higher equipment costs from some manufacturers. Those that haven't raised equipment prices may soon follow, manufacturers say.

In the past several months, steel prices have shot up by 66 percent due to increased demand for steel and a weakened dollar, according to some estimates. The increased demand stems from a building boom in China.

The Bush administration lifted tariffs on imported steel in December in an effort to decrease the price of steel, but the weakened U.S. economy and dollar along with the demand for steel in the expanding economy of China caused the opposite effect.

In addition, energy costs are still high, which adds to the cost of steel since steel production is an energy-intensive process. A coal mine fire in West Virginia in 2003 may also be a contributing factor. Because of that fire, the U.S. production of coke — which is made from coal, which is used in steel manufacturing — has decreased.

Cybex announced in March a steel surcharge on some of its products. The surcharge equals 3 percent to 6 percent of the manufacturers suggested retail price, varying from product to product depending on the amount of steel necessary to manufacture each product. The surcharge went into effect April 1, 2004. Cybex buys raw sheet steel to manufacture its product designs from scratch.

“We have seen some spotty inflationary pressure, not only from our steel vendors but also from other suppliers,” John Aglialoro, chairman and CEO of Cybex, said in a press release. “Unfortunately, global tariff warfare has created continuing price disruptions…often either too low for steel producers to prosper or too high for rational customer pricing by companies such as Cybex. Here again, national governments at the expense of the consumer are creating distressing economic imbalance not a free marketplace.”

Tuff Stuff, which manufactures its commercial equipment in the United States, has increased its equipment prices by 5 percent to 10 percent depending on the steel makeup of the equipment, said Pete Asistin, vice president of sales and marketing at Tuff Stuff. The company's costs for steel have increased 3 percent to 13 percent, he said. The company's steel suppliers warned the company to anticipate surcharge increases since steel prices remain volatile with no relief in sight.

The price for steel from one supplier increased 40 percent in one week, he said.

“And the scary thought is this: not knowing when this is going to end or if we have to do it again,” said Asistin.

However, steel price fluctuations aren't new, said Kevin Grodzki, president and CEO of Life Fitness, Chicago. When the Bush administration slapped the embargoes on a year and a half ago, the first wave of steel price fluctuation came through, but Grodzki said that was mostly from U.S. steel manufacturers taking advantage of the situation.

Life Fitness, which also manufactures Hammer Strength equipment, has seen an effect on its costs but has not yet passed that onto customers. Life Fitness anticipated an increase in steel prices and has been working to mitigate the effect of the increase with certain operational efficiencies and more aggressive negotiations with its global suppliers, said Grodzki. The company is looking at cutting costs in areas such as shipping and packaging of products, as well as warehousing efficiencies. In addition, as part of the Brunswick Group, the company has some leverage, but it is not fully insulated from the price increases.

“Longer term, we may have to take more aggressive action,” said Grodzki, including increasing prices for customers. The higher prices might eventually affect equipment costs by 5 percent to 6 percent, he said.

“We are still working hard to mitigate it; we haven't mitigated all of it,” Grodzki said. “We know what helps make us succeed and that's when clubs around the world continue to grow so we want to help fuel that growth. Putting that burden on our customers isn't the best thing to do. But we also have our shareholders that we have to think about.”

Grodzki said this latest swing in steel prices could last 18 months to two years as there is an overall tightening of supply.

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