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.
By Staff January 10, 2005

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.

Price/cost/demand roundup

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: ebaatz@ice-alert.com).
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
Adhesives 0.64 1.28 rising F- 1.04 2.24
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
Abrasives-coated products 0.63 0.23 stable C 6.44 7.96
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
Heating equipment 1.63 1.83 stable F 0.71 1.98
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
Industrial valves 1.45 1.44 stable F 2.63 4.17
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