Minnesota companies are being forced to adjust to the new reality of costly energy because of the rise in crude oil prices to nearly $100 a barrel.
For much of the '90s and the early part of this decade, commodities prices were a nonfactor or even provided a boost to profits at many companies, as the price of oil and other materials held steady or fell. This year, commodity inflation is back at a pace not seen since the '70s, forcing Minnesota firms to put resource management at the top of their concerns. Some are finding ways to pass along costs to customers. Others can only tighten their belts. In both cases, Minnesotans are paying the price for the higher costs. Here is a look at how a number of industries in the state are reacting to the changed environment.
Fuel is the No. 1 expense for Northwest Airlines, so the Eagan-based carrier has been raising fares to cope with some of the cost of rising oil prices.
Northwest recently raised many domestic round-trip prices $20.
If oil prices persist at record levels, Northwest is vulnerable because it has hedged only 10 percent of its fuel supply in the first quarter.
"We are very, very conscious about our fuel usage," said Tim Rainey, Northwest's senior vice president of flight operations. "We encourage our dispatchers and pilots that they carry the right amount of fuel, not a gallon too much."
During the fourth quarter, Northwest is operating a domestic schedule that is 6 to 7 percent smaller than a year ago, so that decision is allowing the carrier to save fuel. If fuel prices remain high and consumer demand falls in response to fare increases, Northwest could park some of the DC-9s it owns outright.
At Sun Country Airlines, the carrier recently paid $2.75 a gallon for jet fuel, including taxes, up from $1.95 a gallon in January.
"We have done some fare increases, similar to the big guys," said Steve Spellman, chief financial officer.
3M Co. has seen its material costs jump 2 percent this year as oil-based ingredients and other chemical prices jumped.
The company is working with suppliers, using its own energy-saving window films in its buildings and retooling AC and heating systems to slash its costs, spokeswoman Jackie Berry said.
Ecolab Inc., the St. Paul-based producer of cleaning products, saw oil-based and other chemical costs jump 10 percent in 2005 and 5 percent in 2006. In an attempt to hold the line on those costs this year, Ecolab has dropped some slower-selling soaps, reined in color choices on some products, altered a few costly formulas to use less expensive chemical substitutes and raised some prices, spokesman Mike Monahan said.
"Clearly raw materials have risen significantly for all companies and for us as well ... and so we are doing a combination of things," he said.
At Minneapolis paint and coatings firm Valspar Corp., the company has focused on factory efficiencies while pushing a more profitable product mix and making selective price increases.
For the first nine months of its fiscal year, Valspar's cost of goods jumped 11 percent from $1.5 billion to $1.67 billion, while net income rose just .17 percent to $123.3 million, excluding a $15 million stock accrual redemption.
Vadnais Heights paint and adhesives maker H.B. Fuller Co. has been passing rising material costs onto customers through price increases. They have been doing this for "11 straight quarters," said Deutsche Bank research analyst David Begleiter in a recent report. He noted that Fuller's costs will continue to rise.
Graco Inc., which makes pumps and paint sprayers in Minneapolis, also has been hard hit by rising supply costs, but refuses to surcharge customers.