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.

01/10/2005


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.

Price/cost/demand roundup

Operating materials & supplies

Average Product Prices (1) % Change

Direct Manufacturing Costs (2) and Margins Grade

Growth in U.S. End Markets (3) % Change During 12 Months Ending

Industry

3 months ago

Current month

Costs are

Grade

3 months ago

Current month

1 Average product price changes are calculated from the producer price index for each 4-digit SIC (standard industrial classification) industry from the U.S. Bureau of Labor Statistics.
2 Analyses of each industry's direct manufacturing cost changes are from Thinking Cap Solutions, Inc.'s proprietary Industry Cost Escalation (ICE) model. The "grade" indicates that recent price/cost changes have produced record high (A+) margins to average margins (C) to record low (F-) margins for the average producer in an industry. Grades of A to A+ mean plant engineers may be able to strike a better bargain with suppliers and better control plant costs.
3 Growth in U.S. end markets data are from the ICE model and are estimates of output for the domestic end markets which purchase a given industry's products.
All data prepared and presented by Thinking Cap Solutions, Inc., Port Angeles, WA (telephone: 360-452-6159; e-mail: ebaatz@ice-alert.com).

Wood pallets

1.94

2.40

falling fast

C

0.24

1.11

Polishes & specialty cleaning preparations

-0.10

-0.09

rising

F-

0.26

1.20

Surface active agents & related agents

0.14

0.66

rising

D

1.76

3.64

Adhesives

0.64

1.28

rising

F-

1.04

2.24

Lubricating oils & greases

2.91

3.84

rising

F

0.74

1.69

Rubber & plastic hoses & belting

2.29

2.23

stable

D

3.89

5.30

Abrasives-coated products

0.63

0.23

stable

C

6.44

7.96

Steel wire drawing

1.43

2.94

stable

B

0.56

2.11

Copper rolling, drawing & extruding

0.80

5.01

rising fast

F-

6.24

8.78

Insulated wire & cable

-0.35

2.69

rising

F

8.50

10.23

Heating equipment

1.63

1.83

stable

F

0.71

1.98

Fabricated metal plate work

0.28

0.07

stable

F

10.70

11.48

Bolts, nuts, screws, rivets & washers

0.07

0.24

stable

F-

7.08

8.26

Industrial valves

1.45

1.44

stable

F

2.63

4.17

Fluid power valves & hose fittings

1.36

1.47

rising

F-

2.63

4.17

Metal & plastic plumbing fixture fittings

0.82

0.81

rising

F-

2.63

4.17

Metal cloth, fence & other wire products

0.32

0.40

stable

F

1.48

2.89

Fabricated metal pipes & fittings

1.49

1.92

stable

C

0.58

2.18

Ball & roller bearings

1.23

1.18

stable

F

3.14

4.77





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