Double trouble for those seeking operating materials
Plant engineers who need to stock up on operating materials and supplies may be facing a double whammy this spring. Two trends will be converging to push up prices. One: The majority of industries that make operating supplies appears to be under extremely tight margin pressure. Two: End-market demand for supplies has begun to grow briskly.
Consider the case of copper rollers, drawers and extruders. This industry sports an F-minus margin grade. Copper extruders currently spend $80.12, on average, to manufacture $100 of market-valued output. That’s $5.07 above spending levels held over the past five years.
On the demand side of the equation, end-markets that buy extruded copper saw their factory production grow 10.2% in October 2004. That’s up from 8.5% three months earlier. As a result, supplier pricing power is very strong and improving at an accelerating pace.
Average product prices increased at a year-over-year pace of 22.1% in September, up from 20.4% in August. In October alone, prices jumped 5%, up from a 0.8% price hike three months earlier. Thinking Cap Solutions forecast prices for rolled and drawn copper to rise 1.3% in 2004:Q4 and another 0.5% in 2005:Q1.
Cost/price escalation analysis suggests suppliers must hike prices 7.8% in order to earn a fair return on manufacturing-related spending. The entire argument for such an increase can be constructed with price/cost data from the last 12 months.
Buyers of extruded copper should be prepared to discuss primary copper costs. This is the copper extruder’s number-one inflation risk. Over the last 12 months, tags for this fickle red metal soared 51.6%. Scrap costs are also a major cost concern.
|Operating materials & 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: firstname.lastname@example.org).
|Wood pallets||1.94||2.40||falling fast||C||0.24||1.11|
|Polishes & specialty cleaning preparations||-0.10||-0.09||rising||F-||0.26||1.20|
|Surface active agents & related agents||0.14||0.66||rising||D||1.76||3.64|
|Lubricating oils & greases||2.91||3.84||rising||F||0.74||1.69|
|Rubber & plastic hoses & belting||2.29||2.23||stable||D||3.89||5.30|
|Steel wire drawing||1.43||2.94||stable||B||0.56||2.11|
|Copper rolling, drawing & extruding||0.80||5.01||rising fast||F-||6.24||8.78|
|Insulated wire & cable||-0.35||2.69||rising||F||8.50||10.23|
|Fabricated metal plate work||0.28||0.07||stable||F||10.70||11.48|
|Bolts, nuts, screws, rivets & washers||0.07||0.24||stable||F-||7.08||8.26|
|Fluid power valves & hose fittings||1.36||1.47||rising||F-||2.63||4.17|
|Metal & plastic plumbing fixture fittings||0.82||0.81||rising||F-||2.63||4.17|
|Metal cloth, fence & other wire products||0.32||0.40||stable||F||1.48||2.89|
|Fabricated metal pipes & fittings||1.49||1.92||stable||C||0.58||2.18|
|Ball & roller bearings||1.23||1.18||stable||F||3.14||4.77|