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Passing the buck
By WANG YING(China Daily)
Updated: 2006-08-07 07:59

In business, only the savvy survive. So as energy bills keep rising in China, many foreign companies are turning to price hikes and increased efficiency to digest the higher costs.

Multinationals in energy-intensive sectors such as petrochemical and aluminium are realizing they have to face the facts: prices for electricity, oil, coal and gas in China are going to get a lot worse before they get better.

Take the latest price hike. There was a six to seven per cent rise in the government-controlled electricity tariff a month ago, which followed the price hikes of oil products in March and natural gas in December.

Industry analysts say the domestic energy price increase will be good for the nation's economy and for relations with major oil-importing industrial economies. But for foreign companies doing business in China, higher energy costs could mean major profit losses if they don't take action.

Germany-based Lanxess, a spin-off of chemical giant Bayer AG, says it will pass on the rising raw materials prices to consumers by increasing product prices.

"We have been doing this (raising the product prices)," Axel Claus Heitmann, the chemical firm's chairman, said last month.

Heitmann made the remarks in an interview with China Business Weekly in Weifang of East China's Shandong Province, where the company kicked off its new joint venture for the production of hydrazine hydrate an intermediate material widely used in agricultural, pharmaceutical, water treatment and plastics industries.

On the sidelines of the opening ceremony, the top company official further disclosed that they aimed to expand their new Weifang plant by as much as 20 per cent "within months," dismissing industry worries that the increasing energy costs in China would dampen foreign petrochemical makers' enthusiasm in the domestic market.

The reason? Lanxess still sees China as a way to drive their regional growth. "Asia is Lanxess' priority market globally, and China is the fastest-growing chemical market with an annual increase projected to maintain a double-digit rate in coming years," says Heitmann.

Laxness is not alone in hiking prices. Wilmington-based DuPont also raised prices across its businesses in May to address the pressure coming from limited refining capacity and the rising prices of crude oil and logistics.

Oil rose to a record US$78.40 a barrel July 14 on concern that the conflict between Israel and Hezbollah, which is backed by Syria and Iran, may spread in the Middle East, a source of about a third of the world's oil.

DuPont's total raw materials costs rose to another record high in the first quarter, up 16 per cent from a year ago and up 85 per cent since the first quarter of 2002, says Robert H. Shrouds, DuPont's corporate economist. "Even if the raw material costs decline over the remainder of 2006, they will remain well above the 2005 average level."

John H. Hodgson, senior vice president and chief marketing officer of Dupont reiterates the seriousness of surging energy costs. "The ongoing rise in raw materials and logistics costs require us to take additional pricing actions so that we can continue to meet the needs of our customers now and in the future," he says.

But passing the cost to consumers isn't the only solution. Many foreign multinationals are saying they'll enhance energy efficiency by upgrading technology and reducing waste.

Through technology upgrades and management improvements, the world's biggest aluminium company, Alcoa, plans to reduce energy intensity by 10 per cent by 2010, compared with 2005. It will also cut greenhouse gas emissions by as much as 25 per cent over the same period, says Lloyd H Jones, head of Alcoa's Asian division.

The company also announced it will quadruple spending by 2014 to expand capacity in the Chinese aluminium industry, despite government warnings of risks in making new investments in the sector.

The company's ambitious target, which sounds risky to some industry analysts, will be helped by the energy-guzzling company's efforts to cut waste and improve efficiency. That fits in with China's long-term strategy to grow its economy in a sustainable way.

"We plan to aggressively grow our operations in the next five years," Jones says. "But we will do so in a manner that aligns our values with society's values, to ensure long-term success for Alcoa and all of our stakeholders."

The rising energy prices in China are not likely to lead to serious inflation, industry analysts say. So long as companies play smart.

"The more companies can pass through cost increases by raising prices, the greater the risk of inflation," says Robert Blohm, an investment banker and energy expert. "The more companies can offset cost increases by increasing the amount of output per unit of higher-cost input, the less likely inflation is."

(China Daily 08/07/2006 page5)