Higher costs already showing impact

Factory managers who need to tighten their budgets for operating supplies will find the going gets tougher in 2003. That's because the margin cushion that suppliers built this past year has been rapidly disappearing. Increases in the costs of raw materials, specifically steel and petroleum-related products, are squeezing producers.

Thanks to tariff disputes, average prices for steel mill products increased 2% in March and gained another 0.5% in April. For all of the third quarter of 2002, steel mill product prices are expected to rise 3.4%. Copper and aluminum prices will likewise rise 5.5% and 5.2%, respectively, in the third quarter.

The impact of higher costs can already be seen in the margin grades for the industries in our operating materials and supplies index. Three months ago we reported that nine industries enjoyed an A or A+ margin grade. Now, not a single industry sports any grade above B. Six have seen margins fall to the below-average D or F range, and eight sport average C grades.

Consider the ball and roller bearings industry. Here, per-unit production costs are forecast to rise 0.8% in the third quarter of 2002 and 0.5% in the fourth. Producers will offset some of the bottom-line damage by hiking prices 0.4% and 0.3% over the same two-quarter period. Then in 2003 Q1, ball and roller bearings will attempt to recoup the rest of their falling margins by hiking prices 0.7%. Factory managers who buy steel wire and related products should also keep an eye on the price outlook. In this industry, higher production costs have not been offset by higher prices. As a result, to return industry operating margins back to average levels held over the past five years, steel wire producers would have to increase prices by 3.6%. A price increase that strong is unlikely, but the pressure on suppliers is already there.