Sonoco Products (SON) has implemented a surcharge of 8.6% to brave the challenges from soaring costs of nailed woods reels. The move will be effective July 1, 2012.

Sonoco preferred to use a surcharge over base price changes as it expects lumber costs to subside during the second half of the year. However, the company noted that it will adjust the surcharge if lumber cost soars any further.

Earlier, the company implemented price increases in response to the soaring raw material costs to produce Sonoco Reels. These reels are used by wire and cable industry for serving industries encompassing the power transmission and distribution, telecommunications, commercial and industrial building among others.

It was in March last year that Sonoco decided to increase the base price of its nailed wood reels by 23%. The customers had to bear only 4% of the increase versus the 2010 price level. The remaining 19% increase was rolled into the base price derived from the surcharge implemented in 2010.

Back in 2010, Sonoco hiked nail wood price by 19%. The price hike was implemented during the first quarter of 2010 to offset the ever-soaring lumber costs. Lumber prices shot up nearly 38% since fourth-quarter 2009.

It’s not only nail wood prices; Sonoco has hiked the prices of other raw materials, including plywood reels and uncoated recycled paperboards, among others. Recently, the company has raised the prices of plywood reels products by 9% and decided to roll the surcharge into the base prices.

Moreover, a price escalation of ThermoSafe Brands by 4%-7% was executed by the company in January this year. The decision was taken essentially to adjust the increasing cost of raw materials, labor, energy and transportation. The company had failed to offset cost escalations through lean initiatives and, therefore, was forced to increase prices of its products.

These moves are in line with Sonoco’s strategy of implementing price increases to offset the higher costs for improving its operating margin. But, its competitors including Bemis Company, Inc. (BMS) and Rock-Tenn Co. (RKT) may choose to reduce their prices with a view to expanding their market share.

Currently, Sonoco retains a short-term Zacks #3 Rank (Hold). We have a long-term Neutral recommendation on the stock.

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