There was an unpleasant message for investors about the impact of higher oil prices and inflation generally from two major industrial companies on Friday.

Building materials group, Boral, warned it had been hit by unexpected increases in energy and transportation costs (a big variable for the company, especially in its cement and ready mixed and housing related businesses), while oil refiner and marketer, Caltex revealed that the golden days of riding the oil price surge were over with a fall expected in earnings this year.

Caltex Australia says it expects first half net profit to fall by up to 40% (on its own accounting method) due to flat petrol sales, lower margins and plant shutdowns.

But its “marketing business” did well, with stronger sales of diesel and jet fuel offsetting flat sales of petrol.

It says net profit in the first six months of calendar 2008 is forecast at between $175 million to $195 million, on a replacement cost of sales operating profit (RCOP) basis, down from $294 million in the first half of 2007. That’s Caltex’s own way of looking at the impact of rising prices on its business.

But on an historical basis (the one it pays tax on and all other companies use) the fall is much less severe, down from $368 million to a range of $300 to $330 million: that’s a fall of around 8% to 19%, which is nowhere as dramatic.

“Earnings benefited from a strong performance by the Caltex Marketing business,” Caltex said in its statement.

“Total Marketing transport fuels sales volume (petrol, diesel, jet fuel) is expected to be 7.1 billion litres for the first six months of this year compared with 6.7 billion litres in the first six months of 2007.

“This increase was underpinned by the continued strong growth in diesel sales, which in the first five months of 2008 were 13.8% higher than the same period last year, and well ahead of industry growth. Caltex’s petrol sales have been flat overall but premium petrol sales grew by more than 5%.”

“On an historical cost profit basis (including inventory gains), Caltex expects an after tax profit in the range of $300 – $330 million for the first half of 2008 compared with $368 million for the first half of 2007.

“The current half year forecast includes estimated product and crude oil inventory gains of approximately $130 million compared with inventory gains of $113 million after tax for the first half of 2007.

“Caltex advises that small changes in key externalities such as the A$/US$ exchange rate, refiner margins and crude oil prices during the balance of the first half of 2008 can have material impacts on both the RCOP and historic cost results for the half year.”

Caltex said its “refiner margin in the first five months of this year averaged US$11.36 a barrel, compared with US$11.40 a barrel in the comparable period last year. Strong diesel and jet margins offset weaker margins for petrol. The stronger A$ in 2008 translated to a Caltex Refiner Margin of 7.70 cents per litre versus 8.94 cents per litre in 2007.

“As previously advised, refining profitability has been affected by unplanned maintenance which decreased first half earnings before interest and tax by $70 – 85 million. There was also increased planned maintenance in the first half of 2008 compared with the first half of 2007.

“The production of high value transport fuels is expected to be around 4.8 billion litres in the first six months of 2008 (first half 2007: 5.4 billion litres). The outlook for full year production is approximately 10.4 – 10.6 billion litres compared with 10.9 billion litres for 2007.

“Caltex has focused on good operating expense control and inventory management to offset the higher working capital cost of crude oil and petroleum product inventories. Net debt at 30 June 2008 is expected to be within the range $575 – $600 million (31 December 2007: $582 million). Caltex remains committed to a conservative balance sheet and will continue its focus on good cash management.”

The upshot of this is: sales of petrol (ordinary unleaded) are flat while sales of diesel and premium unleaded have risen (diesel because the number of diesel-powered vehicles on the road is rising rapidly) and unleaded premium because some drivers think they can get more kilometres and energy from the ‘higher quality’ petrol than ordinary unleaded.

For Caltex though it’s a sign that market prices for crude are rising faster than it can recover them through higher retail prices (which are a PR nightmare). In the US refiners are finding the same thing with the major refiner, Tesoro, seeing its share price fall as margins come under pressure. Its shares fell nearly 5% on Friday on broker estimates of lower margins and earnings.

Caltex shares finished at $12.50, down 19c after hitting a low of $11.61

But Boral’s warning, contained in a presentation by management in Brisbane, contains the bigger worry for many businesses and investors.

Boral is the country’s biggest building materials group and saw its share price down after the warning.

Boral shares ended down 8c at $5.72 after being as low as $5.55, the lowest in more than four months.

The company also revealed a series of price rises in its cement and ready-mix concrete to try and recovery the higher costs.

Chief Executive Officer Rod Pearse said in the presentation in Brisbane that: “Cost escalation is running ahead of general cost increases and prices need to increase to maintain margins.

“Energy costs are moving at unprecedented levels. In December 2007 diesel was trading at around US$100/barrel. In recent weeks it has been at highs of around US$170/barrel.

“In Boral, we use some 160 million litres of diesel a year and in concrete around 9 litres for every delivered cubic metre. Cleary we have had significant and largely unanticipated cost increases over the last six months.

“General inflation for those of us exposed to the resource sector is also impacting.

“In recent weeks, through our Sunstate Cement JV business we have announced $10/tonne price increases in Qld effective 1 September 2008 and BCSC has announced $15/tonne increases in NSW & Victoria.

“We have also announced national price increases from August in concrete and quarry products with concrete prices increasing $12.50/m3 nationally and quarry prices up $3/tonne in Qld.

“These price increases are necessary to recover the significant input cost increases (and to ensure that margins represent an adequate return for increased capital costs).”

These are the sort of comments and price rises that will have the Reserve Bank reaching for the interest lever if they are shown to be spreading throughout the wider economy.

Boral, which generates about one-fifth of its sales in the US, said last month net income will be lower than previously forecast as a slowdown in the housing market there continues to deepen.

In May Boral warned that earnings would be down this year and in the second half because of the wet weather in eastern Australia in the March quarter (which spilled over into April in Sydney) and the impact of the terrible US housing slump

Commenting on Boral’s outlook, Mr Pearse said, “The IBES range of current analyst forecasts is $234 million to $256 million with an average of $249 million. We currently expect Boral’s PAT for FY2008 to be around the bottom end of analyst forecasts.”

There’s now a hint that the rapid rise in transportation costs might put further pressure on that forecast. If Boral is feeling the pinch from the oil price surge, how then are the likes of Toll and Asicano going?

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