Ingersoll-Rand counts heavy cost of metals

By Steve James

NEW YORK (Reuters) - The soaring price of metals like copper and zinc is pushing up costs for manufacturing conglomerate Ingersoll-Rand Co. Ltd. (IR.N: Quote, Profile, Research, Stock Buzz), which must absorb as much as half the increase, the company's chief executive said on Monday.

"For copper, I didn't think I was going to live long enough to see something going up by these kind of numbers," Herb Henkel told the Reuters Manufacturing and Transportation Summit in New York.

"I'm used to 80 cents a pound, $1.00 a pound, and I've had to change my brain and multiply by four," he said of the red metal purchased in large quantities by the company, which makes everything from refrigeration and air-conditioning units to golf carts.

Copper's price has risen five-fold in 2-1/2 years and 40 percent in the last two months. Although there was a sell-off on markets on Monday, copper was still selling at around $3.74 per pound, compared to around 70 cents in 2003.

Zinc has nearly doubled in price since the start of the year and last week hit an all-time high of $3,620 per tonne.

Steel and aluminum are also selling well above their price three years ago as Chinese industrial expansion spurs demand for more metals. That is driving up prices and hitting companies that buy large amounts of metals, even as high energy costs are also eating away at profits.

"So far, for us, the biggest cost element of raw materials for 2006 is zinc and copper," Henkel said. Zinc is used in security systems and copper coils in refrigeration units.

Ingersoll had hedged metals prices in the past, buying on long-term contracts to guarantee certain prices, but with the current volatility of copper and zinc, it was buying mostly on the spot markets.

"I don't know if I can get drunk enough to go and lock in at $4 per pound," he joked.

Henkel said Ingersoll spent approximately $40 million for copper and zinc combined three years ago, and this year expects to pay more than $150 million. At current prices, it is buying about $500 million worth of steel.

As an indication of the effect of higher metal prices, although Ingersoll's first-quarter revenue rose to $2.7 billion from $2.5 billion, the cost of goods sold rose to $2 billion from $1.8 billion a year earlier.

"We have $40-$50 million of incremental year-over-year costs we have to absorb."

Asked how much of the added costs could be passed on to customers, Henkel said: "In general, it's usually half to three-quarters of the cost you pass on. The rest of it you have to make up as a result of productivity-type work."

And with metal prices in the stratosphere, it made financial planing difficult, he said.

"When we look at our raw material we thought copper and zinc would be somewhere around $3 per pound (this year), but it's now about $4.