Steel wire industry struggles as lubricating oil shines

Inflation in operating materials and supplies has taken off, but the way that any single supplier handles the situation varies widely. Consider the vastly different outcomes in the steel wire and lubricating oil industries. Drawn steel wire prices increased 23.6% over the last 12 months, but did so without widespread support across major product lines.
By Staff October 1, 2005

Inflation in operating materials and supplies has taken off, but the way that any single supplier handles the situation varies widely. Consider the vastly different outcomes in the steel wire and lubricating oil industries.

Drawn steel wire prices increased 23.6% over the last 12 months, but did so without widespread support across major product lines. In fact, tags for key products such as ferrous wire rope, cable and strand as well as nails and spikes have actually been on the decline.

Worse yet, average industry prices failed to keep pace with manufacturing costs. Since July ’04, wire tags are up just 0.5% for each 1% rise in the cost of making a unit of output. As a result, industry margins are languishing. The typical steel wire supplier currently spends $69.75 to manufacture $100 of market-valued output. That’s $1.98 above the industry’s average spending level over the last five years and $3.64 above a year ago. Price target analysis shows average steel wire prices must increase 3% in order to generate an average return on manufacturing-related spending.

Meanwhile, prices for lubricating oils and greases currently are rising at a near-record 8.5% rate. This increase has more than offset rising manufacturing costs as tags increased 1.63% for each 1% rise in the amount spent to make a unit of output. Such a favorable pass-through ratio served to expand industry margins by $3.11 for each $100 of product sold.

This bottom-line windfall is being enhanced by a comfortable overhead position. Overhead spending sits $3.14 (per $100 of output) below average. The lubricating oil industry can afford to discount tags by 1.8% and still earn an average return on manufacturing costs. A price cut of 4.1% puts margins back to year-ago levels, which is quite a contrast from steel wire.

Price/cost/demand roundup

Operating Materials & Supplies Average Product Prices (1) % Change During 12 Months Ending Direct Manufacturing Costs (2) and Margins Grade Growth in U.S. End Markets (3) % Change During 12 Months Ending
Industry 3 months ago Current month Costs are Grade 3 months ago Current month
(1) Average product price changes are calculated from the producer price index for each 6-digit NAICS (North American Industry Classification System) 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 (email: ebaatz@ice-alert.com)
Wood pallets 3.41 3.91 falling B 2.03 2.19
Polishes & specialty cleaning preparations 0.08 0.32 rising D 2.39 2.44
Surface active agents & related agents 1.76 3.08 rising D 3.84 3.96
Adhesives 1.91 2.15 rising F 3.02 2.96
Lubricating oils & greases 3.91 8.53 rising A 2.88 2.81
Rubber & plastic hoses & belting 2.16 2.66 stable B 4.92 4.10
Abrasives-coated products -0.08 -0.13 rising B 7.80 6.96
Steel wire drawing 15.29 23.64 falling D 2.38 1.64
Copper rolling, drawing & extruding 20.39 25.03 rising D 8.20 6.60
Insulated wire & cable 10.16 13.59 rising F- 10.23 9.91
Heating equipment 2.19 2.93 stable D 3.43 3.20
Fabricated metal plate work 3.10 6.39 stable F 10.61 10.09
Bolts, nuts, screws, rivets & washers 2.34 3.86 falling B 7.27 6.62
Industrial valves 2.84 4.00 stable C 5.04 4.59
Fluid power valves & hose fittings 1.93 2.60 stable F 5.04 4.59
Metal & plastic plumbing fixture fittings 1.50 2.11 stable F 5.04 4.59
Metal cloth, fence & other wire products 5.23 8.50 falling F 3.86 3.51
Fabricated metal pipes & fittings 11.37 18.07 falling B 4.08 3.81
Ball & roller bearings 1.71 2.35 falling B 5.59 4.88