The soaring cost of stainless steel has considerably cut profit margins of flatware makers in China, forcing many to consider raising export prices. Although steel prices went down marginally in May 2005, in part due to a new policy in China aimed at regulating the steel industry, flatware makers will nonetheless increase export prices as a number of other factors have also been pushing production costs up. In the next 12 months, buyers can expect flatware prices to go up by about 10 percent.

The rise in stainless steel prices has hit flatware makers in particular since, depending on the type of flatware, the metal can account for 40 to 80 percent of a product's total cost. Over the past two years, the cost of 18/8 stainless steel has doubled while that of 18/0 has risen by 50 to 70 percent.

Early this year, the China government took a series of steps to curb rising steel prices. In an effort to discourage exports and ensure that domestic demand for steel is met, the export tax rebate for billet was abolished, and the duty drawback for steel was reduced from 13 percent to 11 percent. In addition, to regulate the cost of iron ore imported into the country, the government has reduced the number of companies that are qualified to import the material from 500 to 118. Since these companies import almost 90 percent of total iron ore shipped into the country, the sharp decline in the number of importers is not expected to affect domestic supply.

The government's regulations did have some immediate effects in that domestic steel prices were marginally down 6 percent in April 2005 when compared to the same period last year. However, the situation is still volatile and flatware makers will continue to face unpredictable prices.

Even if steel prices do decrease substantially, it is unlikely that flatware makers will reduce export prices, especially since most have been absorbing the higher material costs for more than a year now. Apart from stainless steel costs, there are other factors such as the shortage of labor and erratic power supply that have raised flatware production costs substantially.

Finding and retaining skilled workers is a major challenge faced by flatware makers in China. Many suppliers have had to increase workers' salaries, which account for approximately 10 percent of total operational expenses, to keep them from moving back to the inland provinces where economies are improving. The labor shortage is especially affecting smaller flatware makers, as most of them are unable to provide better benefits for their workers.

The labor-intensive flatware industry requires workers with technical skills for operating machines and performing manual work such as polishing. However, with the labor shortage, many suppliers are forced to hire unskilled workers, who are not as efficient as experienced ones. This can potentially result in delayed deliveries and even affect quality. Power cuts also continue to be a major concern for flatware makers, but the situation has improved marginally since last year.

In some provinces, power interruptions can still be as frequent as alternate days. To deal with the situation, many companies have installed generators at their factories. Others carry out production at night since power is usually interrupted only during the day. A few large enterprises are ensured of stable power supply by their local governments.

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