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.
By Staff January 10, 2004

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.

Price/cost/demand roundup

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: ebaatz@ice-alert.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
Abrasive Products 3291 0.45 0.49 stable F- 4.91 5.16
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
Industrial Valves 3491 1.40 1.40 stable C -1.84 -1.59
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