Chips and beer may herald return of pricing power
Written on September 5, 2009
Memory chips and beer don’t have a lot in common but recent prices rises for both might just be a harbinger of returning corporate pricing power.
While companies overall aren’t having much luck pushing up prices, they could start to regain the whip hand as the worst recession in decades shows signs of coming to an end.
Shrinking inventories and a massive loss of capacity means some sectors are already seeing a supply squeeze, while companies whose competitors have fallen by the wayside are flexing their pricing muscles.
The question of when companies win back pricing power is key both to equity investors, looking for a revival in profit margins, and to bondholders and policymakers worried about inflation.
So chips and beer may carry a message.
Despite the general environment of falling prices in the technology sector, the price of DRAM memory chips, used mainly in PCs, is already firmly on the rise.
“Demand is getting slightly better,” said Richard Windsor, global technology specialist at Nomura. “You’ve seen the DRAM price go up significantly. Capacity is coming back on stream. Samsung’s memory business is now clearly profitable.”
Prices for PC screens are also increasing. South Korea’s LG Display said last month it expected more price rises in the third quarter, after a 10 percent gain in July free business cards.
Although such fluctuations are normal to the technology industry’s inherent cyclicality, a coincidence of scarce capacity and an upturn in demand could see hardware firms enjoying a rare period of real pricing power.
LITTLE CHEER
The two largest U.S. brewers, meanwhile, both plan to charge drinkers more this autumn, despite flat beer volumes — a sign of confidence from Anheuser-Busch InBev and MillerCoors, which were formed by recent mergers.
For the vast majority of companies, though, the pricing picture remains tough.
Still in the drinks sector, the world’s biggest spirits group Diageo expects price rises of just 1 percent in the year to June 2010, down from 4 percent last year.
In consumer goods, both Nestle and Unilever say sales growth will be volume-led in the second half of 2009, with less help from higher prices.
That’s in contrast to 2008, when a spike in global commodity markets led to steep rises. The recent commodities rally is modest by comparison.
Filed in: term.