Producers justify price increases

Rising oil, production costs are major reasons behind companies' pricing move

Song Aixia stands in front of shelves of cleaning and household products at Wumart, a local supermarket in Beijing, holding two big bottles of shampoo and three bags of washing powder.

"The price of everything is going up. I don't think detergent and shampoo will be exceptions, so I'd better get prepared for that," says the 56-year-old, a retiree who lives off a pension of 3,200 yuan (345 euros) a month, 800 yuan less than Beijing's average per capita income.

"When clothes and shoes get more expensive, I don't have to buy new ones, because the old ones can be worn for years. But these things are daily necessities and will be used up quickly," Song says.

Song's worry is common among many Chinese consumers suffering from high consumer prices, which grew 5.4 percent in March to hit a 32-month high.

Although the National Development and Reform Commission, China's top economic planner and pricing watchdog, recently requested major consumer giants refrain from raising prices of their products, industry experts and analysts say that an increase in prices of personal and household care products is just a matter of time.

Zheng Wuhong, director of the China Cleaning Industry Association, says price increases are inevitable because of the rising costs of raw materials.

"The raw materials of the cleaning and household products are mainly crude oil and fats. Most of the materials have seen a more than 40 percent rise in price, and some have even increased 100 percent since 2008," Zheng says.

"In the cleaning and household industry, costs of raw materials account for 70 to 80 percent of production costs. With the rise of raw materials, production costs are 25 percent higher," Zheng says.

Xi Jinghan, head of research of Beijing's Zhengdian International consulting company, agrees with Zheng.

"When we look at the elements of the profit margin of this industry, 10 to 20 percent of that depends on the raw materials. The continuous rise of the prices of crude oil and fats will put pressure on production," Xi says.

Earlier this year, Zeng Xiwen, vice-president of Unilever's Greater China Region, said rising prices of raw materials had an impact on the company.

"The production costs of this industry have increased compared with last year. The price of crude oil, for example, has doubled. Seed oil costs 50 to 60 percent more and the figure is 40 to 50 percent for inorganic salt," Zeng says.

Apart from the rising costs of raw materials, the costs of labor and transportation are also becoming higher.

"The prices of key elements in the production process are all rising," says Xi, adding that product price increases are unavoidable.

"The only questions is how much it will be, since the National Development and Reform Commission has taken measures to control the situation," Xi says.

Zheng says although rising prices cannot be avoided, consumers don't need to be too worried that their daily lives might be severely affected.

"Even if prices rise by 20 percent, the impact on people's daily lives might not be that much," Zheng says.

"Each family might have to pay several yuan more each month, and that is affordable for most families in China.

"For example, at present, one ton of washing powder costs 8,000 yuan in average. If the price goes 20 percent higher, it will be 9,600 yuan a ton. Normally, washing powder is sold in a package of 500 grams, so each package of it will see a 0.8 yuan rise in price."

In late March, news that key cleaning and household producers, both domestic and foreign, were planning to raise the prices of their products on April 1 aroused panic among Chinese consumers.

According to the reports, four main companies in the sector - P&G, Unilever, Liby Group and Nice Group - decided to raise products prices by 5 to 15 percent, and some supermarkets and retailers had already received the notification to raise the prices.

The panic was temporarily calmed after the National Development and Reform Commission talked with heads of the major industry companies, and Unilever released an official announcement to halt its planned increase.

As for some people's questions whether key players in the industry are monopolizing prices, Zheng says it is not likely.

"This industry is highly competitive, and raising the price is the last choice companies will resort to."

According to the National Bureau of Statistics, the sales revenue of the industry saw a 15 percent year-on-year increase from January to November in 2010 to 241 billion yuan, but 15 percent of the more than 1,800 companies in the industry registered a loss.

Zeng of Unilever also denied the accusation on his micro blog. "We are competitors, and there is no way for us to cooperate, let alone to monopolize the prices together. Also, our company has strict rules against any kind of communication with competitors."

P&G, Liby and Nice, which together with Unilever account for more than 70 percent of personal care and household care markets, all refused to comment on the matter.