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.
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). |
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| 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 |