Sellers of operating materials and supplies hit rough patch
If the folks who sell you operating materials and supplies say that manufacturers are having a tough time making a buck, you better believe it. In October 2003, five industries registered record-low levels of margins. A year ago, only one, bolts, nuts, rivets and washers, sported an F-minus margin grade. Topping that off, five industries saw their margin grades fall to F and two to D in October 2003.
The reason for these money-making woes has much to do with rising costs and general difficulties in hiking prices. The PLANT ENGINEERING operating materials and supplies price index increased a meager 0.7% in the 12-month period ending October 2003. Over the same time period and for the same market basket of products, our manufacturing cost index, up 3.2%, grew nearly five times faster than prices.
That upturn in costs explains why, despite generally weakened markets, 80% of the industries that make operating materials were able to push through at least some modest improvements in pricing. In fact, that meager 0.7% average price hike for all industries contrasts sharply with the 0.7% average price decline we saw in the 12-month period ending October 2002.
Nonetheless, some not sporting F grades have managed to transform higher tags into year-to-date margin improvements. Case in point: the plumbing valves and pipe fittings (SIC 3494) industry has increased its average product prices at nearly twice the rate of manufacturing costs, thereby generating a significant bottom-line windfall. Margins gained 71 cents for every $100 worth of product sold in the first three quarters of 2003. Even with an average C grade for margins, buyers of plumbing valves and fittings have a good opportunity to push for price cuts. Thinking Cap Solutions estimates a 0.6% to 1.4% price decline is possible without dropping margins into a danger zone.
|Average Product Prices1Change, %, During 12-Mo Ending…||Direct Mfg. Costs2and Margins Grade||Growth in U.S. End Markets3Change, %, During 12-Mo Ending…|
|Industry||SIC||July 03||Oct 03||Costs are…||Grade||July 03||Oct 03|
|NC means data could not be computed.
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: email@example.com).
|Wood Pallets and Skids||2448||0.48||1.66||falling||F||-0.48||-0.69|
|Polishes and Sanitation Goods||2842||0.02||0.42||stable||F||0.37||0.07|
|Surface Active Agents||2843||-0.26||0.56||stable||D||-0.02||-0.62|
|Adhesives and Sealants||2891||0.04||0.44||stable||D||1.50||0.81|
|Lubricating Oils and Greases||2992||1.47||2.48||stable||A||0.53||0.35|
|Rubber and Plastics Hose and Belting||3052||1.66||2.04||stable||C||0.66||0.17|
|Steel Wire and Related Products||3315||1.55||1.93||rising||F||-1.15||-0.76|
|Copper Rolling and Drawing||3351||-2.30||-0.01||rising||F-||0.87||1.82|
|Nonferrous Wire Drawing and Insulating||3357||-2.24||-0.81||rising||F||8.88||9.60|
|Heating Equipment, except Electric||3433||1.09||1.36||stable||C||-1.08||-0.88|
|Fabricated Plate Work, Boiler Shops||3443||0.95||0.62||stable||F-||-2.19||-1.58|
|Bolts, Nuts, Rivets and Washers||3452||0.17||0.17||stable||F-||8.57||8.87|
|Fluid Power Valves and Hose Fittings||3492||1.20||1.27||stable||C||-1.84||-1.59|
|Other Valves and Pipe Fittings||3494||1.64||2.32||stable||C||-1.84||-1.59|
|Miscellaneous Fabricated Wire Products||3496||-0.24||-0.18||stable||F||-0.04||-0.19|
|Fabricated Pipe and Fittings||3498||0.83||1.02||stable||F-||-1.84||-1.59|
|Ball and Roller Bearings||3562||1.07||1.04||stable||F||-0.21||-0.42|