Australia may be benefiting mightily from surging commodity prices, but we, along with other developed countries, are about to be hit with higher prices for many of our imported consumer goods.

The share price of the Nike Inc, the giant sporting clothing and footwear group, suffered its biggest drop in more than two years yesterday after the company warned that its profit margins were likely to be come under pressure in coming months.

In a conference call after the US market closed on Tuesday, Nike’s chief executive, Mark Parker, told analysts that “as supply and demand find a new normal in the recovering economy, our industry is going to experience margin pressure due to rising input costs.”

He signalled that costs for commodities such as cotton, as well as labour and transportation costs, had increased in recent months and would soon impact Nike’s bottom line.

Shares in other sporting apparel companies also lost ground, as investors worried about the triple whammy of higher cotton prices, rising combined with rising labour costs in China and higher transportation costs.

Cotton prices have soared to record highs in recent months due to heavy buying from China, the world’s largest importer, at the same time that Pakistan’s cotton crop was devastated by the worst flooding in the country’s history.

The higher cotton price is causing shudders through the textile industry. Analysts said that some manufacturers, such as Nike, were choosing to absorb most of these higher costs, rather than passing them on in the form of higher prices to consumers.

But they estimated that manufacturers and importers of lower-priced goods such as T-shirts and underwear would have little choice but to increase prices.

At the same time, many multinational companies that have relied on China as a source of abundant, cheap labour have found their wage bills have risen sharply this year.

In response to a spate of suicides at its sprawling factory complex in southern China, the giant electronics contractor, Foxconn — which manufactures products for companies such as Apple, Dell and Hewlett-Packard — offered a 30% wage rise to its 800,000 workers.

Industrial disputes also stopped production at a range of major Chinese plants, including those of Honda and Toyota, and workers won sizeable pay rises. As a result, labour costs in China’s major coastal manufacturing hubs have soared by between 20%-25% this year, which has increased the cost of Chinese-made products.

The third factor hitting multinationals is the increased cost of transportation. These pressures show little sign of abating, with crude oil futures rising above the key level of $US90 a barrel overnight. Many analysts believe that oil prices could rise above $US100 a barrel next year, due to declining global inventories and growing demand in the US and China.

Some analysts argue that if this combination of soaring commodity prices, combined with rising Chinese labour costs continues next year, the price of some Chinese-made products could rise by 10%-20% next year.

Undoubtedly, several companies will chose to absorb these cost increases, and shield their customers from higher prices. But other companies — particularly those making lower margin consumer staples — will not be able to absorb these higher costs, and will pass them through to consumers. And a sharp rise in the prices of low-end consumer goods is likely to result in a severe erosion in the purchasing power of Western consumers.

This article was originally published on Business Spectator.

Peter Fray

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