Don’t slip on lubricating oils

Plant engineers who buy operating materials and supplies need to watch two products carefully. Three months ago, the lubricating oils and greases (SIC 2992) industry and the wood pallets and skids (SIC 2448) industry were registering declines - and in the case of oils, rapid declines in their average production costs.
By Staff April 15, 2002

Plant engineers who buy operating materials and supplies need to watch two products carefully. Three months ago, the lubricating oils and greases (SIC 2992) industry and the wood pallets and skids (SIC 2448) industry were registering declines — and in the case of oils, rapid declines in their average production costs. And with prices still rising rapidly, the negotiation position favored buyers to a large degree.

Now, production cost trends have completely flipped around. In the lubricating oils industry, average costs of production rose 1.1% between December ’01 and January ’02. With prices falling 0.4%, the industry took an 89-cent margin loss for every $100 of product sold.

In the wood pallets industry, average costs of production increased 1.5% over the same December-to-January period while product prices for pallets dropped 0.4%. The result: for every $100 worth of pallets sold, U.S. manufacturers saw the cost/price trends nibble $1.29 from margins.

These kinds of trends mean plant engineers who are buying these products in bulk may be finding their once strong negotiation position slipping a bit. The lubricating oils industry, however, did a great job of capturing the margin enhancements from sharp drops in oil-related costs over the past few years. That means buyers can argue that cost cuts from previous years have yet to be passed along to buyers. To restore margins in the lubricating oils industry back to its 5-year average level would require a 13.6% price drop.

Buyers of wood pallets can argue that a 3.2% price cut is needed before pallet manufacturers see their margins return to 5-year average levels. Beware, however: returning margins to January ’01 levels actually requires a 0.7% price hike.

Price/cost/demand roundup

Industry SIC Average Product Prices Average Product Prices Direct Mfg. Costs Direct Mfg. Costs Growth in U.S. End Markets Growth in U.S. End Markets
Wood Pallets and Skids 2448 0.51 0.42 rising A -4.48 -5.56
Polishes and Sanitation Goods 2842 0.95 0.61 stable B 1.96 1.95
Surface Active Agents 2843 2.67 1.90 stable B -2.91 -2.81
Adhesives and Sealants 2891 3.40 3.24 falling A -2.16 -4.13
Lubricating Oils and Greases 2992 7.24 5.75 rising A -0.96 -3.14
Rubber and Plastics Hose & Belting 3052 3.20 3.67 stable A -3.51 -4.19
Abrasive Products 3291 0.07 0.09 stable D -3.18 -6.21
Steel Wire and Related Products 3315 -1.47 -1.92 stable F 1.82 1.58
Copper Rolling and Drawing 3351 -2.61 -5.57 rising D 0.23 -6.89
Nonferrous Wire Drawing & Insulating 3357 -0.87 -3.03 stable B 2.53 -4.28
Heating Equipment, except Electric 3433 1.25 1.23 stable A+ 0.49 0.64
Fabricated Plate Work, Boiler Shops 3443 1.00 0.92 stable A -1.90 -4.20
Bolts, Nuts, Rivets and Washers 3452 0.10 0.14 stable C 2.15 1.85
Industrial Valves 3491 1.74 1.60 stable B 0.00 -0.98
Fluid Power Valves and Hose Fittings 3492 1.33 1.42 stable A 0.00 -0.98
Other Valves and Pipe Fittings 3494 3.93 4.39 stable A 0.00 -0.98
Miscellaneous Fabricated Wire Prod. 3496 0.28 0.27 stable B -1.79 -3.35
Fabricated Pipe and Fittings 3498 1.32 0.66 stable A 0.00 -0.98
Ball and Roller Bearings 3562 0.94 0.43 stable B -3.10 -4.49
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.