Double trouble for those seeking operating materials

Plant engineers who need to stock up on operating materials and supplies may be facing a double whammy this spring. Two trends will be converging to push up prices. One: The majority of industries that make operating supplies appears to be under extremely tight margin pressure. Two: End-market demand for supplies has begun to grow briskly.

Consider the case of copper rollers, drawers and extruders. This industry sports an F-minus margin grade. Copper extruders currently spend $80.12, on average, to manufacture $100 of market-valued output. That's $5.07 above spending levels held over the past five years.

On the demand side of the equation, end-markets that buy extruded copper saw their factory production grow 10.2% in October 2004. That's up from 8.5% three months earlier. As a result, supplier pricing power is very strong and improving at an accelerating pace.

Average product prices increased at a year-over-year pace of 22.1% in September, up from 20.4% in August. In October alone, prices jumped 5%, up from a 0.8% price hike three months earlier. Thinking Cap Solutions forecast prices for rolled and drawn copper to rise 1.3% in 2004:Q4 and another 0.5% in 2005:Q1.

Cost/price escalation analysis suggests suppliers must hike prices 7.8% in order to earn a fair return on manufacturing-related spending. The entire argument for such an increase can be constructed with price/cost data from the last 12 months.

Buyers of extruded copper should be prepared to discuss primary copper costs. This is the copper extruder's number-one inflation risk. Over the last 12 months, tags for this fickle red metal soared 51.6%. Scrap costs are also a major cost concern.