In waiting mode for high demand

The economic uncertainty that existed prior to the U.S. bombing of Iraq has dissipated. Yet, an unleashing of pent-up demand has not occurred as some pundits expected. Indeed, more than half of the industries in our construction supplies index actually faced shrinking end markets in May 2003. Moreover, all but one industry (flat glass) sport end-market growth rates that fall short of the average growth rate experienced over the past five years. Widespread demand weakness has clearly put the kibosh on aggressive pricing.

So buyers continue to have a clear advantage when it comes to using demand-related data in a negotiation setting. But plant engineers who expect their budgets to stretch farther as they reap the benefits of this economic weakness may be in for a shock. That's because falling prices and rising costs have squeezed margins so tightly that suppliers will be ready to leap with smart price hikes as soon as demand picks up in 2004.

Consider the mineral wool industry. Makers of fiberglass insulation saw their average product prices rise only 0.2% in the 12 months ending May 2003. From a year ago, prices actually fell 0.15% while the cost to manufacture fiberglass increased a wicked 4.8%. The result: fiberglass manufacturers saw their manufacturing margins fall $2.33 for every $100 of product they sold in May. To restore margins to levels held on average over the past five years would require a 5.3% average price hike.

The flat glass industry, where end-market demand has been extraordinarily strong, faces similar margin pressures. Here, despite a 9% growth rate in the end-markets that buy glass, margins shrinkage remains a problem as cost escalation continues to outpace the rate at which producers can increase their prices.