Inflation mismatch could lead to higher prices

In November 2002, prices for plant construction and maintenance supplies fell 0.1%, while costs to manufacture those supplies rose 0.7%. This inflation mismatch means suppliers are facing tighter margins now and buyers could face higher prices ahead. Consider the sheet metal work (SIC 3444) industry.
By Staff February 15, 2003

In November 2002, prices for plant construction and maintenance supplies fell 0.1%, while costs to manufacture those supplies rose 0.7%. This inflation mismatch means suppliers are facing tighter margins now and buyers could face higher prices ahead.

Consider the sheet metal work (SIC 3444) industry. Higher raw materials and labor spending pushed the cost of manufacturing a unit of output in the sheet metal work industry up 0.7% in November. The rise marks the fourth increase of more than 0.5% in the last 5 months and it had a significant bottom-line impact. Since midsummer, margins in SIC 3444 have shed $1.92 per $100 of product sold.

Cost control problems in SIC 3444 stem from the imposition of steel tariffs earlier this year. Over the last 9 months, per-unit spending on raw materials has increased 5.3% while industry product prices have been limited to a gain of just 1.4%. The single biggest bottom-line squeeze has come from steel sheet and strip where per-unit costs are up a whopping 17.9%.

Meanwhile, deflation continues to hold sway over the pricing habits of sawmill operators. Here industry tags fell for the sixth time in 7 months, down 0.8% in November. Fortunately for producers, a 0.4% drop in per-unit manufacturing costs helped limit the bottom-line damage from weak prices.

Thinking Cap Solutions projects prices for products made in SIC 2421 will rise an average of 3.40% in 2003. All of this will fall to the bottom line thanks to a 0.40% dip in the cost of making a unit of industry output. By 2003:Q4, industry margins will be $4.30 (per $100 of product sold) above their 2002:Q4 level. In 2004, prices will be better behaved, gaining just 0.20%.

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
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.

General Sawmills and Planing Mills 2421 -1.80 -1.60 stable F -1.49 -0.52
Millwork 2431 1.22 0.62 stable B -2.99 -2.29
Hardwood Veneer and Plywood 2435 0.37 0.05 stable C -2.38 -1.25
Softwood Veneer and Plywood 2436 -2.40 -3.16 falling D -2.38 -1.25
Metal Partitions and Fixtures 2542 -0.59 -0.73 stable F- -1.01 -1.91
Paints and Allied Products 2851 1.64 1.59 rising C -2.14 -0.27
Flat Glass 3211 -2.37 -2.57 stable F- 1.24 4.44
Other Structural Clay Products 3259 3.96 4.12 stable A -2.89 -2.29
Gypsum Products 3275 3.49 7.53 stable D -2.72 -2.41
Mineral Wool 3296 1.40 0.85 stable D -3.58 -1.51
Steel Pipe and Tubes 3317 -0.62 2.41 rising B na na
Plumbing Fittings and Brass Goods 3432 -0.79 -0.26 stable D -3.37 -2.70
Metal Doors, Sash and Trim 3442 0.72 0.58 rising C -2.80 -2.56
Sheet Metal Work 3444 0.04 0.74 rising F -1.00 1.78
Refrigeration and Heating Equipment 3585 0.46 0.43 stable F -2.05 -0.39
Current-Carrying Wiring Devices 3643 -1.13 -0.60 stable F- -2.24 -0.27
Noncurrent-Carrying Wiring Devices 3644 1.68 1.34 stable D -2.24 -0.27
Commercial Lighting Fixtures 3646 -0.23 -0.32 stable F- -1.95 -1.62
Environmental Controls 3822 0.05 0.06 stable D -2.44 -2.01