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.

04/01/2005


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.

Price/cost/demand roundup

Construction & maintenance 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

2.40

2.83

rising

C

1.16

1.78

Polishes & specialty cleaning preparations

-0.09

-0.05

rising

F

1.26

1.96

Metal hardware

0.66

1.14

rising

D

1.73

2.23

Adhesives

1.28

1.60

rising

F

2.08

2.79

Lubricating oils & greases

3.84

4.10

rising

C

1.91

2.54

Rubber & plastic hoses & belting

2.23

2.12

rising

F

5.09

5.54

Abrasives-coated products

0.23

0.11

rising

B

6.69

7.67

Steel wire drawing

2.94

7.63

stable

D

1.75

2.41

Copper rolling, drawing & extruding

5.01

13.48

stable

F

7.05

8.92

Insulated wire & cable

2.69

6.85

rising

F

8.09

9.50

Heating equipment

1.83

1.88

stable

F

1.82

3.04

Fabricated metal plate work

0.07

0.80

stable

F-

9.14

10.20

Bolts, nuts, screws, rivets & washers

0.24

1.03

stable

F

7.14

7.63

Industrial valves

1.44

1.85

rising

F-

3.68

4.74

Fluid power valves & hose fittings

1.47

1.47

rising

F-

3.68

4.74

Metal & plastic plumbing fixture fittings

0.81

1.02

rising

F

3.68

4.74

Metal cloth, fence & other wire products

0.40

2.17

stable

F-

3.33

4.04

Fabricated metal pipes & fittings

1.92

5.45

rising

D

1.87

3.29

Ball & roller bearings

1.18

1.27

stable

D

4.95

5.56





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