Sellers of operating materials and supplies hit rough patch

If the folks who sell you operating materials and supplies say that manufacturers are having a tough time making a buck, you better believe it. In October 2003, five industries registered record-low levels of margins. A year ago, only one, bolts, nuts, rivets and washers, sported an F-minus margin grade.

01/10/2004


If the folks who sell you operating materials and supplies say that manufacturers are having a tough time making a buck, you better believe it. In October 2003, five industries registered record-low levels of margins. A year ago, only one, bolts, nuts, rivets and washers, sported an F-minus margin grade. Topping that off, five industries saw their margin grades fall to F and two to D in October 2003.

The reason for these money-making woes has much to do with rising costs and general difficulties in hiking prices. The PLANT ENGINEERING operating materials and supplies price index increased a meager 0.7% in the 12-month period ending October 2003. Over the same time period and for the same market basket of products, our manufacturing cost index, up 3.2%, grew nearly five times faster than prices.

That upturn in costs explains why, despite generally weakened markets, 80% of the industries that make operating materials were able to push through at least some modest improvements in pricing. In fact, that meager 0.7% average price hike for all industries contrasts sharply with the 0.7% average price decline we saw in the 12-month period ending October 2002.

Nonetheless, some not sporting F grades have managed to transform higher tags into year-to-date margin improvements. Case in point: the plumbing valves and pipe fittings (SIC 3494) industry has increased its average product prices at nearly twice the rate of manufacturing costs, thereby generating a significant bottom-line windfall. Margins gained 71 cents for every $100 worth of product sold in the first three quarters of 2003. Even with an average C grade for margins, buyers of plumbing valves and fittings have a good opportunity to push for price cuts. Thinking Cap Solutions estimates a 0.6% to 1.4% price decline is possible without dropping margins into a danger zone.

Price/cost/demand roundup

Average Product Prices1Change, %, During 12-Mo Ending...

Direct Mfg. Costs2and Margins Grade

Growth in U.S. End Markets3Change, %, During 12-Mo Ending...

Industry

SIC

July 03

Oct 03

Costs are...

Grade

July 03

Oct 03

NC means data could not be computed.
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 and Skids

2448

0.48

1.66

falling

F

-0.48

-0.69

Polishes and Sanitation Goods

2842

0.02

0.42

stable

F

0.37

0.07

Surface Active Agents

2843

-0.26

0.56

stable

D

-0.02

-0.62

Adhesives and Sealants

2891

0.04

0.44

stable

D

1.50

0.81

Lubricating Oils and Greases

2992

1.47

2.48

stable

A

0.53

0.35

Rubber and Plastics Hose and Belting

3052

1.66

2.04

stable

C

0.66

0.17

Abrasive Products

3291

0.45

0.49

stable

F-

4.91

5.16

Steel Wire and Related Products

3315

1.55

1.93

rising

F

-1.15

-0.76

Copper Rolling and Drawing

3351

-2.30

-0.01

rising

F-

0.87

1.82

Nonferrous Wire Drawing and Insulating

3357

-2.24

-0.81

rising

F

8.88

9.60

Heating Equipment, except Electric

3433

1.09

1.36

stable

C

-1.08

-0.88

Fabricated Plate Work, Boiler Shops

3443

0.95

0.62

stable

F-

-2.19

-1.58

Bolts, Nuts, Rivets and Washers

3452

0.17

0.17

stable

F-

8.57

8.87

Industrial Valves

3491

1.40

1.40

stable

C

-1.84

-1.59

Fluid Power Valves and Hose Fittings

3492

1.20

1.27

stable

C

-1.84

-1.59

Other Valves and Pipe Fittings

3494

1.64

2.32

stable

C

-1.84

-1.59

Miscellaneous Fabricated Wire Products

3496

-0.24

-0.18

stable

F

-0.04

-0.19

Fabricated Pipe and Fittings

3498

0.83

1.02

stable

F-

-1.84

-1.59

Ball and Roller Bearings

3562

1.07

1.04

stable

F

-0.21

-0.42





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