Predictable price increases are expected

Three months ago we said that plant engineers wouldn't have to worry too much about higher prices ahead. Despite the fact that wholesale prices across the entire economy are rising, we stand by that prognostication. Indeed, we expect industry prices will increase, but will do so at rather sedate and predictable rates.
By Staff June 10, 2004

Three months ago we said that plant engineers wouldn’t have to worry too much about higher prices ahead. Despite the fact that wholesale prices across the entire economy are rising, we stand by that prognostication.

Indeed, we expect industry prices will increase, but will do so at rather sedate and predictable rates. Consider, for example, the industry that makes pumps and pumping equipment. Here, prices are expected to rise 2.15% in 2004. The pumps industry will push through the highest average product price hike of any industry in our factory equipment and tools market basket.

Despite that fact, price hikes will be held at 2.15% or below. Cost pressures on pump manufacturers and others will continue to grow. The pumps industry saw its production labor costs increase 2% in 2003 while energy costs grew 9.86%.

Evidence suggests that labor and especially energy costs will exert significant inflationary pressures on manufacturers over the next six months. That’s bad news: the handsaws industry suffered the largest energy cost hike in 2003 (up 18.58%), and the process control instruments industry saw the smallest cost spike (up 5.85%). As crude oil prices extend to $40 per barrel and higher, cost pressures will be rising.

In some cases, higher energy and fuel costs will make a terrible margin situation even worse. Low-tech industries that make handsaws and high-tech transformers manufacturers will both endure the most challenging pricing environments. To restore manufacturing margins to average levels held over the last five years, handsaw makers and transformer producers need to increase average prices by 4.1% and 5.3%, respectively. Alas, we forecast prices in 2004 to rise only 1.7% for handsaws and 1.2% for transformers.

Price/cost/demand roundup

Major Components of Manufacturing Costs Annual % Change in 2003 Average Product Prices Annual % Change
Industry SIC Domestic materials Imported materials Production labor Energy 2004 2005
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).
Other Hand and Edge Tools 3423 1.67 4.69 -0.49 10.25 1.85 1.10
Hand Saws and Saw Blades 3425 1.69 3.83 -0.49 18.58 1.70 0.95
Other Hardware 3429 1.28 2.65 1.48 10.73 1.45 1.40
Other Power Transmission Equipment 3568 1.66 2.24 0.23 11.69 1.70 1.60
Conveyors and Conveying Equipment 3535 0.94 1.31 2.35 11.73 1.20 1.15
Hoists, Cranes and Monorails 3536 1.53 3.64 2.34 9.16 1.20 1.00
Industrial Trucks and Tractors 3537 0.70 1.69 2.83 8.82 0.85 0.70
Metal-Cutting Machine Tools 3541 0.73 2.93 1.38 6.84 0.90 1.25
Machine Tool Accessories 3545 0.85 1.00 3.83 6.63 1.45 1.20
Power Driven Hand Tools 3546 1.67 2.92 2.30 10.89 0.95 0.95
Welding Apparatus 3548 0.85 1.34 0.16 8.20 1.70 1.80
Pumps and Pumping Equipment 3561 0.84 1.34 2.01 9.86 2.15 1.50
Air and Gas Compressors 3563 1.27 1.68 1.02 9.70 1.35 1.70
Speed Changers, Drives and Gears 3566 1.28 1.68 3.28 8.63 1.45 1.60
Transformers 3612 1.66 2.42 3.15 11.67 1.20 0.80
Motors and Generators 3621 1.44 1.82 3.00 9.75 0.25 0.40
Process Control Instruments 3823 0.44 0.65 2.29 5.85 0.80 1.15
Fluid Meters and Counting Devices 3824 0.37 0.65 1.80 7.09 0.75 0.90
Instruments to Measure Electricity 3825 -0.45 0.56 -2.60 7.14 0.77 0.93