Prices have room to fall

Buyers of factory operating materials and supplies have a near universal opportunity these days to argue for price cuts. Among 19 industries that we studied, 16 can stand to cut average industry product prices while still maintaining reasonable margins. The lubricating oils and greases (SIC 2992) industry provides the most dramatic example.

By Staff October 1, 2001

Buyers of factory operating materials and supplies have a near universal opportunity these days to argue for price cuts. Among 19 industries that we studied, 16 can stand to cut average industry product prices while still maintaining reasonable margins. The lubricating oils and greases (SIC 2992) industry provides the most dramatic example. Here, thanks to the fact that costs of manufacturing are falling fast, the industry can afford a whopping 10.2% price cut without pushing margins below July 2000 levels. To restore margins to average levels held over the past five years, prices in SIC 2992 still can fall 2%.

The fact of the matter is, many industries that make factory operating supplies enjoyed pumped up margins thanks to a combination of falling costs and steady or slightly inflated prices for the products sold. So looking at the margin grade in the accompanying table will tell only part of the story. Certainly, any industry with an A or A+ grade enjoys higher than average margins, so prices have room to fall. Some industries with a C grade (like lubricating oils and greases) also have leeway to drop prices. But buyers will have to proceed cautiously.

For example, to bring margins back to year-ago levels, producers of adhesives and sealants can afford a 5.9% price decline. But to set margins back to their five-year average level, adhesives and sealants prices must rise 0.4%.

Meanwhile, not all industries enjoy the opportunity to lower prices. The industries that make surfactants (SIC 2843), abrasive products (SIC 3291) and steel wire and related products (SIC 3315) are under pressure. To restore margins to the average levels held over the past five years, these three industries would have to hike average industry prices by 2.7%, 4.2% and 2.3%, respectively.

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.

Wood pallets and skids 2448 0.31 0.54 Falling A -0.01 -1.94
Polishes and sanitation goods 2842 0.85 0.94 Falling D 2.38 2.05
Surface active agents 2843 2.57 2.78 Falling D -1.45 -3.19
Adhesives and sealants 2891 2.57 3.06 Falling C 11.04 7.11
Lubricating oils and greases 2992 8.53 7.63 Falling Fast C 7.74 5.04
Rubber and plastics hose and belting 3052 1.40 2.31 Stable C 3.42 1.20
Abrasive products 3291 -0.19 -0.07 Stable F 12.49 7.87
Steel wire and related products 3315 -0.41 -1.13 Falling F 3.14 3.17
Copper rolling and drawing 3351 3.40 1.44 Falling B 32.94 22.75
Nonferrous wire drawing and insulating 3357 4.22 1.84 Falling C 32.64 23.66
Heating equipment, except electric 3433 1.27 1.24 Stable A 1.38 1.43
Fabricated plate work, boiler shops 3443 1.20 1.07 Stable A 4.59 2.94
Bolts, nuts, rivets and washers 3452 -0.07 0.02 Stable C 3.35 3.44
Industrial valves 3491 1.54 1.73 Stable A 2.02 1.43
Fluid power valves and hose fittings 3492 1.50 1.49 Stable B 2.02 1.43
Other valves and pipe fittings 3494 1.18 2.77 Falling A 2.02 1.43
Miscellaneous fabricated wire products 3496 0.01 0.12 Stable C 8.31 5.37
Fabricated pipe and fittings 3498 2.54 1.89 Falling A+ 2.02 1.43
Ball and roller bearings 3562 1.58 1.58 Stable A 5.74 2.95