Oil Prices Crimp Profits for Carpet Industry

New York, NY, May 12--According to a report from Reuters a rapid surge in oil prices has pulled the rug out from under the U.S. carpet industry. The price of oil, a key component in modern carpet making, has jumped so fast that manufacturers are absorbing added costs until their own price increases kick-in. "Raw material costs are rising faster than these companies can pass them through to customers," said analyst Laura Champine of Morgan Keegan. Warren Buffett, the world's second-wealthiest man, warned earlier this month that Shaw Industries, one of the largest U.S. carpet manufacturers and a subsidiary of his holding company Berkshire Hathaway Inc., was feeling the impact of higher oil prices. The other carpet giant, Industries Inc., said it, too, had concerns. Higher oil prices, coupled with rising natural gas and commodity prices have spurred it to raise prices three times since December. Analyst John Baugh of Wachovia Securities said while first-quarter sales were strong, raw material, energy and transportation costs squeezed Mohawk's profit margins. "Margins were clearly the disappointment in the quarter," Baugh wrote in a research note. Shares of Mohawk fell $2.90, or four percent, to $70.05 on Wednesday, well off a more than six-year high of $85.79 hit in March. Oil-derived compounds typically make up 60 percent to 70 percent of a carpet maker's cost of goods. As a result, many in the industry are worried about the price of crude oil, which rose above $40 a barrel on the New York Mercantile Exchange on Tuesday to the highest price since October 1990. Worry is not a common mood for the U.S. carpet industry. Tufted carpet, which accounts for about 90 percent of all carpet made in the United States, is a stitched, usually single-colored material held in place by a latex adhesive and is made via a process involving multi-needle sewing machines. The process is virtually automatic and so simple that labor costs are minimal, which helps manufacturers keep carpet prices relatively low. Between 1965 and 2001, carpet prices rose 90 percent, according to the Carpet and Rug Institute, a Dalton, Georgia-based trade organization. The institute notes that during the same period, new car prices jumped 180 percent. Unlike the U.S. furniture industry, the low-cost, low-inflation atmosphere surrounding carpet makers has held off the threat of cheap imports. "Right now, we've been able to avoid that," said John Miller, the institute's general counsel. Miller said carpet companies flocked to Dalton over the years to tap the city's water sources. As of 2001, 80 percent of the U.S. carpet market was supplied by mills within a 65 mile radius of Dalton, according the Carpet and Rug Institute. Shipments from mills last year totaled $12.1 billion, institute data shows, with the U.S. supplying about 45 percent of the world's carpet. The industry is in good shape, but "oil prices are a significant concern right now, especially for the larger manufacturers," Miller said.

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