Industry margins fall below average

Inflationary pressures for manufacturers of factory operating materials and supplies are on the rise. The problem is that costs are high while the ability to hike prices has been weak. End result: industry margins for 70% of the industries in our marketbasket are below average.

Consider the industry that makes metal fasteners like bolts, nuts, rivets, and washers. Here manufacturing-related margins are at an all-time record low; the margin grade for SIC 3452 is F-. Overall, in October 2002, the industry hiked average product prices by 0.6% from year ago levels. That price hike was pushed by a 0.16% price increase for nonthreaded fasteners, 1.5% for aircraft and aerospace fasteners, and 2% for other formed fasteners.

Unfortunately, price increases will fail to cover a 2.5% manufacturing cost increase in the third quarter of 2002 or a 4.1% anticipated cost hike in the final quarter of 2002. Looking ahead to 2003, price and cost escalation will come back into parity, but the margin damage from 2001 and 2002 will still linger. Upshot: plant engineers will continue to find their fastener suppliers hankering for price relief.

The snapshot of prices, costs, and margins that we take every quarter doesn't show the negotiation opportunities that loom in the future. For example, plant engineers may want to dig deeper for deals when buying ball and roller bearings over the next couple of years. This industry currently suffers from below-average margins, plus costs are rising. But the situation will be changing. In 2002, average prices in SIC 3562 are forecast to rise 0.4% while costs of manufacturing increase 1.8%. That environment favors suppliers at the negotiation table. But in 2003, costs are forecast to rise just 0.7% while average industry prices will rise 1.6%. And in 2004, the table completely turns to favor buyers as costs fall 0.2% and prices continue rising 1.5%.