How Caterpillar (NYSE:CAT) Will Fight Higher Steel Prices

The price of steel has been skyrocketing, and some companies, including Caterpillar (NYSE:CAT), are taking steps to mitigate the challenge as much as possible.

One major strategy of Caterpillar has been to acquire more inventory in order to offset higher prices.

Other companies with significant exposure to steel have also been doing the same, according to the Metals Service Centers Institute, which said inventory levels have risen to 27 months from 2.4 months in December.

Some say this is a risky strategy because if steel demand slows down, a company is left with too much inventory. It can also create a scenario of artificial demand, which will drive up prices.

Of course those prudent enough to acquire steel at lower prices don't have to worry about that issue, at least in the short term.

Caterpillar also said increasing sales volumes could take care of the price increases in steel, or they may ultimately have to pass on price increases to their customers.

Material costs for steel with Caterpillar account for less than 20 percent of the overall material cost to build their equipment.

Caterpillar closed Wednesday at $99.09, gaining $1.08, or 1.10 percent.