KEY POINTS:
The cost of zinc is not something the man in the street would spend much time thinking about.
But zinc is a major component in the galvanising of steel, and galvanised steel is used in a plethora of industries, from columns for commercial buildings to the construction of trailers.
The price of zinc has almost trebled in the past year.
The skyrocketing cost of food has dominated the headlines, but again the average consumer would not be aware that the price of oats has gone up 64 per cent in 12 months.
Auckland cereal maker Hubbard Foods says virtually all its raw materials have risen in price significantly, and it can pass on only a minimal part of these costs to consumers.
New Zealand businesses across the board are grappling with cost increases on this scale. Soaring raw material costs would be bad enough, except they come on top of huge increases in fuel and energy prices, rising labour and compliance costs, high interest rates and bigger insurance premiums.
"Hardly a day goes past without me talking to somebody who's telling me how much something's gone up," says John Walley, chief executive of the New Zealand Manufacturers and Exporters Association.
What Walley comments on anecdotally is proved by the figures. Statistics New Zealand's latest Producers Price Index result, out yesterday, shows although producers' output prices rose 6.1 per cent in the year to March, input prices rose faster at 7.4 per cent.
In the March quarter the biggest contributor to the rise in input prices was electricity, up 41.7 per cent.
Economic consultancy NZIER's Quarterly Survey of Business Opinion tells the same story. In the March quarter, a record net 59 per cent of firms reported their costs had risen in the preceding three months, while another record net 62 per cent expected their costs to rise in the three months to come. NZIER says the indicators follow the Producers Price Index closely over time, meaning that costs are set to keep on rising.
And business simply cannot recoup all of it from its customers. It doesn't take a rocket scientist to work out margins are being squeezed.
Because all businesses are suffering similarly, the problems compound.
One supplier of non-ferrous metals, already grappling with increases such as a 100 per cent rise in the price of copper, says rising fuel costs mean the end of free delivery.
"For large volume customers it was normal business practice to have freight covered in margins, but with increased price pressures and rising freight costs it is no longer possible to absorb these costs," the general manager says.
He says rising prices are also forcing resellers to look more and more to Asia for finished goods - so instead of buying the semi-finished metal in sheet, coil or bar form and fabricating their own as they traditionally have, they import the finished product.
Auckland's Langham Hotel is on the receiving end of the rising fuel costs. In an establishment where food accounts for 10 per cent of the running costs, the sharp rises in staples such as cheese and butter are hurting. But on top of that, financial controller Vicki Berryman says it's seeing separate freight charges where once they would have been included.
Executive chef Ofir Yudilevich says suppliers are also demanding minimum orders. "We've had to organise ourselves better to make sure our ordering is a bit more on to it."
He gets his salmon direct from Akaroa Salmon in Canterbury, and instead of getting a 20kg delivery daily, he will get a 40kg delivery every two days.
Yudilevich says basics such as butter - which rose in price by 82 per cent in the year to March - go into everything the hotel makes. But he can't just whack up the price of a main by $5.
"The economy's slowing as it is and the New Zealand public gets scared very easily when prices go up, so it's a matter of doing it slowly."
Murray Gutry, chief executive of the Hamilton-headquartered Perry Group, estimates his businesses have been able to recover only a third to half of real input costs.
Perry runs steel galvanising business Perry Metal Protection. Gutry says zinc, power and labour account for 60 to 70 per cent of the cost of producing galvanised steel, all input costs that have been sharply on the rise.
But the company must take a long-term view of its customer relationships and just because the spot price for zinc goes up does not mean it can raise its prices the next day.
"Business just wouldn't survive if we all operated like fuel companies or energy companies."
The chief executive believes this costs vice will change the face of New Zealand business, because it will focus minds on productivity.
He rightly notes that New Zealand hasn't been good at investing in areas such as plant and machinery to improve productivity.
Our productivity levels are notoriously bad compared with other developed countries - in an OECD measure for 2006 of GDP per hour worked, where the United States is given a value of 100 and every other country is ranked against it, New Zealand gets a value of just 56. Australia's value in comparison is 83.
"It is still cheaper to add labour, because of the cost of capital," Gutry says. "But I think we're going to have to weigh that up."
Manufacturers are already under pressure from the threat of work going overseas to countries rich in cheap labour. They are having to look hard at how they can do things more efficiently, Gutry says.
Perry Metal Protection is putting in place initiatives such as searching for more energy-efficient fume extraction units, and looking at running machinery on biofuels.
Hubbard's has had a focus on efficiency and productivity for the past two years, says chief executive Doug Paulin. It's taken costs out of the business by running its labour force more efficiently.
As a result the business has also saved on power, so while energy pricing has gone up Hubbard's total energy costs have actually come down. But Paulin says it's an ongoing battle.
"The struggle for us is that they were things we were doing to try and help the bottom line performance, when in reality all we've done is pretty much stay still."
And this is where an increased focus on investing in areas such as automation kicks in.
"With rising labour costs now some of those projects which you mightn't have done in the past actually now start to make sense from a payback perspective."
Hubbard's is now considering taking a couple of projects out of mothballs, he says.
It's stating the bleeding obvious in the view of NZMEA's Walley. Grinding away at productivity should not be in response to what's happening now.
"It's just what you do, you live life in terms of costs down and prices up."
Business New Zealand chief executive Phil O'Reilly believes the productivity revolution has arrived. "I'm confident that has started in the New Zealand economy, although we're not seeing evidence of it yet in the numbers."
The high dollar has helped encourage investment, as capital equipment is often denominated in US dollars. And he says on the flip side the falling dollar is the light at the end of the tunnel for exporters.
"It's not a wholly bad story."
However, those at the coalface such as the non-ferrous metals general manager, point out that while the high dollar has provided some respite on the price of imported raw materials, the falling currency will push already heady prices even higher.
What can be done to ease Kiwi businesses off the treadmill of constantly making efficiencies to cover rising input costs? Business leaders have plenty to say on the subject. Eliminate poor government spending, O'Reilly says. The Government is fuelling inflation by increasing spending at a much greater rate than the rise in GDP. It also squeezes business out.
"You're seeing government spending get in the way of private sector investment that would be fundamentally more productive. Government spending is not necessarily productive. Not as productive as letting the private sector keeping that invested in plant."
There is also needlessly heavy-handed government regulation.
O'Reilly cites the new Building Act, passed in response to the leaky homes crisis, as a case in point. It has significantly increased the cost of building a house, he says.
"My sense is that Government probably could have come up with a slightly less compliance-heavy piece of legislation and still achieved the same outcomes."
O'Reilly applauds the Government's cost calculator trial, an instrument modelled on overseas methods of calculating the cost of regulation. The idea is that it ensures regulation is fit for purpose and does not create a series of knock-on costs.
Walley believes easing New Zealand's severe stance on domestic inflation needs to be a priority.
While reducing interest rates and taking the speculative pressure out of the currency would push up the cost of imports, the theory is that New Zealand businesses would add value to products and export them at a higher price, he says.
The country needs to disengage domestic inflation and exchange rates, give exporters a level playing field of some sort, and encourage people to take their businesses to the world.
"If we don't do that," says Walley, "we're going to have to continue to live off stuff that we happen to be able to grow."
CEREAL WORRIES FOR HUBBARDS
Hubbards Foods would be pleased if the staggering 64 per cent annual increase in the price of oats was its only concern.
Rice has also gone up 42 per cent in a year, wheat went up 30 per cent in six months and then up again at the end of that period, and corn has gone up 15 per cent in six months, chief executive Doug Paulin says. "Raw material pricing is the single biggest worry."
Even though the cereal maker sources locally where it can, prices are dictated by international demand.
In order to counter rising costs, Hubbards has achieved greater productivity from its labour force by improving factory layout and shift rostering, and by making more use of casual labour to cover the slightly seasonal nature of cereal production (cereal consumption drops in winter).
It's also lead to energy savings. "We're making a couple of our bigger runs much more efficiently than what we used to so we just simply use less electricity and less gas to make them."
