Margins reach lowest point since tracking began

The PLANT ENGINEERING factory equipment and tools price index increased just 2.7% from June 2003 to June 2004. Over the same time period, we estimate the costs of manufacturing among these factory tools and equipment producers jumped a collective 8.3%. This spells inflation troubles ahead for buyers of equipment and tools.

09/10/2004


The PLANT ENGINEERING factory equipment and tools price index increased just 2.7% from June 2003 to June 2004. Over the same time period, we estimate the costs of manufacturing among these factory tools and equipment producers jumped a collective 8.3%. This spells inflation troubles ahead for buyers of equipment and tools.

A quick glance at our roundup table shows where the problems lie. Alas, the problems are all over the place. Among 19 industries in our market basket, nine sport an F-minus margin grade, and four earned straight Fs.

This means, for the F-minus crowd, manufacturing margins now stand at the lowest level ever since we began tracking these statistics 10 years ago.

How are these industries going to get out of their margin fix? By raising prices, of course.

Consider the conveyor equipment industry. Over the past six months, conveyor manufacturers hiked tags 6.1%, but at the same time, costs to make a unit of output soared 9.3%. So the industry remains saddled with below-normal margins.

Even as per-unit manufacturing costs start to cool down, tags will continue to be under pressure to keep moving on up.

Plant engineers who are planning conveyor purchases can expect suppliers to be well armed with supporting data when they arrive at the negotiation table asking for a price hike.

Target analysis from Thinking Cap Solutions economic cost model suggests reasonable suppliers could push for a 4.05% price hike. Higher costs for steel mill shapes will serve as the supplier's primary justification, and buyers will be hard-pressed to fight back.

Price/cost/demand roundup

Construction & Maintenance Supplies

Average Product Prices % Change During 12 Months Ending

Direct Manufacturing Costs and Margins Grade

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

Industry

Mar 04

June 04

Costs are

Grade

Mar 04

June 04

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).

Hand & edge tools (except saws)

0.02

0.04

rising

F-

-0.36

0.51

Saw blades & handsaws

1.50

1.12

rising

F-

-0.63

0.18

Metal hardware

0.36

0.39

stable

F

-0.38

1.44

Mechanical power transmission equip.

1.27

1.28

rising

F-

1.57

5.89

Conveyors & conveying equipment

0.72

0.87

rising

D

2.73

4.76

Cranes, hoists & monorail systems

1.26

1.33

rising

F-

-1.51

0.14

Industrial trucks (forklifts) & stackers

0.63

0.86

rising

F-

-1.36

-0.24

Metal cutting machine tools

-1.21

-1.29

rising

F-

3.06

5.50

Cutting & machine tool accessories

0.04

0.26

rising

F-

3.77

6.38

Power-driven handtools

0.01

0.14

stable

F

1.05

2.32

Welding & soldering equipment

0.47

0.60

rising

F-

1.72

3.78

Pumps & pumping equipment

4.35

4.91

rising

B

1.38

2.88

Air & gas compressors

0.87

0.74

rising

F

2.45

4.30

Speed changers, drives & gears

1.72

1.80

rising

D

1.57

5.89

Power & specialty transformers

-0.89

-0.22

rising

F-

0.10

2.43

Motors & generators

0.34

0.38

rising

D

3.27

5.34

Industrial process controls & equip.

1.94

2.12

rising

A

10.68

13.85

Fluid registering & counting devices

1.79

2.30

stable

B

1.08

2.81

Instruments for electrical testing

0.55

0.34

rising

A

4.49

6.83





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