Margins continue to shrink in valve market
Increasing production costs continue to put extreme pressure on suppliers of operating materials and supplies. Luckily for the plant engineering budget, suppliers won't enjoy the big price hikes they want. Manufacturers of valves illustrate the situation. Over the last 12 months, the cost to manufacture one unit of industry output increased by 12.
Increasing production costs continue to put extreme pressure on suppliers of operating materials and supplies. Luckily for the plant engineering budget, suppliers won't enjoy the big price hikes they want.
Manufacturers of valves illustrate the situation. Over the last 12 months, the cost to manufacture one unit of industry output increased by 12.1% and 13%, respectively, for the industrial valves and fluid power valves industries. Higher costs for raw materials like basic steel mill shapes and ferrous foundry products, have accounted for much of the damage.
Meanwhile, over the 12-month period ending January 2005, average product prices for valves increased less than 2%. This cost/price escalation mismatch has resulted in F-minus margin grades.
In the industrial valves industry, margins sit now at their lowest point since December 1995 and are exerting significant inflationary pressure. To bring margins back in line with 5-year average levels would require a price increase of 4.8%. Restoring margins to year-ago levels would mean a 6% jump.
As for the fluid power valves industry, suppliers currently spend $57.30 to make $100 of market-valued output. Average spending over the last 60 months has been $52.99. To close the $4.31 gap would mean an 8.2% price hike, if costs were held constant.
In 2005 suppliers will work hard at making bottom-line repairs. Average tags for valves will gain less than 2.5% between 2004:Q4 and 2005:Q4. Though small, this increase will have a significant bottom-line impact. While tags will be increasing, per-unit manufacturing costs will be falling 2.7% for industrial valves and 3.4% for fluid power valves. In the fluid power valves industry, that cost drop combined with modest price hikes will boost margins $3.28 for each $100 of product sold.
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Average Product Prices (1) % Change
Direct Manufacturing Costs (2) and Margins Grade
Growth in U.S. End Markets (3) % Change During 12 Months Ending
3 months ago
3 months ago
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.
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Before the calendar turned, 2016 already had the makings of a pivotal year for manufacturing, and for the world.
There were the big events for the year, including the United States as Partner Country at Hannover Messe in April and the 2016 International Manufacturing Technology Show in Chicago in September. There's also the matter of the U.S. presidential elections in November, which promise to shape policy in manufacturing for years to come.
But the year started with global economic turmoil, as a slowdown in Chinese manufacturing triggered a worldwide stock hiccup that sent values plummeting. The continued plunge in world oil prices has resulted in a slowdown in exploration and, by extension, the manufacture of exploration equipment.
Read more: 2015 Salary Survey