Gypsumboard makers could cut prices sharply

Producers of construction supplies have pushed through some solid price hikes. These price hikes in 2005 contrast sharply with price cuts and modest price increases that populated the buying environment last year. For example, in the 12 months ending August 2004, tags for gypsum products and Fiberglass increased by a meager 1.

11/01/2005


Producers of construction supplies have pushed through some solid price hikes. These price hikes in 2005 contrast sharply with price cuts and modest price increases that populated the buying environment last year. For example, in the 12 months ending August 2004, tags for gypsum products and Fiberglass increased by a meager 1.3% and 0.2%, respectively. A year later, gypsum prices have soared 15.8% while average prices for Fiberglass have grown 7.5%.

Should plant engineers just accept these price hikes going forward? The answer depends on each supplying industry's margin situation. Here, a mixed bag prevails. Taking into account not just prices charged but also the cost of manufacturing, we see that margins improved in seven industries, worsened in eight, and was unchanged in the final six among the 21 industries that make up PLANT ENGINEERING'S construction supplies indices.

The gypsum and fiberglass industries illustrate two distinct negotiation environments. In gypsum products, the margin grade swung from a B last year to A+ now.

Any industry that moves to an A+ margin grade signals that buyers have an opportunity to push for price discounts. For wallboard and other gypsum products, average prices escalated nearly three times faster than the total cost to manufacture. As a result, for every $100 worth gypsum products sold the average wallboard maker saw manufacturing margins grow by $3.91 compared to a year earlier. Adding in overhead costs, we see that total margins grew $6 (per $100 of product sold) above last year's invoice surplus.

This means gypsum suppliers are under less pressure to raise prices. Indeed, in order to earn the same return on manufacturing as that earned on average over the past five years, gypsum manufacturers have room to discount tags by a whopping 17%.

Price/cost/demand roundup

Construction & Maintenance supplies

Average Product Prices (1) % Change During 12 Months Ending

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 6-digit NAICS (North American Industry Classification System) 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 (email: ebaatz@ice-alert.com)

Sawmill products

9.64

3.21

stable

C

2.84

1.37

Wood windows & doors

2.90

2.10

falling

D

3.94

3.62

Other millwork (excl. windows & doors)

10.47

5.97

stable

B

4.46

4.15

Hardwood plywood

4.62

3.76

stable

A

3.46

2.96

Softwood plywood

-5.39

-12.56

stable

B

3.46

2.96

Shelving & fixtures

13.70

11.30

falling

A+

2.97

3.00

Paint

4.98

6.08

stable

C

4.42

4.02

Flat glass

0.01

1.74

rising

F-

8.50

8.04

Sewer pipe & other structural clay prod.

3.72

4.91

rising

F

3.02

2.27

Gypsum products

18.34

15.79

stable

A+

4.21

4.03

Fiberglass & other mineral wool

9.63

7.45

stable

C

5.66

4.47

Iron & steel pipes & tubes

51.58

31.20

falling

B

5.60

3.89

Metal & plastic plumbing fixture fittings

1.74

2.07

stable

F

5.11

4.97

Metal windows & doors

3.35

3.55

stable

F

4.95

4.59

Sheet metal work

5.05

5.33

stable

F

4.10

3.93

HVAC equipment

11.35

8.49

falling

F

7.67

7.53

Current-carrying wiring devices

3.43

4.28

stable

D

3.11

3.04

Noncurrent-carrying wiring devices

3.71

4.04

falling

F

6.22

5.67

Nonresidential electric lighting fixtures

24.79

13.55

stable

B

6.22

5.67

Automatic environmental controls

2.87

3.61

stable

D

3.17

3.36





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