Suppliers can’t afford to reduce prices

Three months ago we wrote that buyers of factory operating materials and supplies had a great opportunity to argue for price cuts. Back then, among 19 industries that we studied, 16 could afford to cut average industry product prices while still maintaining reasonable margins. Now, only four industries can do so.
By Staff October 15, 2002

Three months ago we wrote that buyers of factory operating materials and supplies had a great opportunity to argue for price cuts. Back then, among 19 industries that we studied, 16 could afford to cut average industry product prices while still maintaining reasonable margins. Now, only four industries can do so. That means plant engineers will find more vendors of operating supplies standing in line with price hike demands.

Only three industries are enjoying inflation-adjusted margins that can be considered above average (as evidenced by the lack of A and B grades in the direct cost/margin column of the PLANT ENGINEERING table). The only industry with an A grade is the fabricated plate work (SIC 3443) industry.

Since SIC 3443 is one of the few suppliers that offer much room for price discounts, let’s look at this in detail. Producers of fabricated plate work scored their third price increase in four months this past July. On the strength of a 7% jump in fin tube tags, average industry tags rose 0.8% in July and are now perched 2% above March ’02 price levels. About three-quarters of the revenue from July’s price hike is headed for the bottom line while the rest will be used to offset a 0.2% uptick in per-unit manufacturing costs.

Buyers will see additional price hikes for plate work ahead, but the gains will be smaller as the effects of import tariffs lessen. Our call: expect prices charged for fabricated plate work to rise 0.5% in Q3 and another 0.24% in the final quarter. In 2003, average plate work prices will rise 1.5%.

With current industry margins above normal, suppliers are in a position to discount. Industry prices currently can withstand a 1.7% cut. On the demand front, end markets will remain weak in Q4 and shopping around for better deals could pay off.

Price/cost/demand roundup

Average Product Prices Direct Mfg. Costs Growth in U.S. End Markets
Change, %, During 12-Mo Ending… and Margins Grade Change, %, During 12-Mo Ending…
Industry SIC Apr 02 July 02 Costs are… Grade Apr 02 July 02
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 -0.79 -1.73 rising C -5.23 -4.25
Polishes and Sanitation Goods 2842 0.97 0.32 stable C 2.04 1.98
Surface Active Agents 2843 0.63 -0.40 rising D -2.13 -0.69
Adhesives and Sealants 2891 2.51 1.89 rising C -3.86 -0.73
Lubricating Oils and Greases 2992 4.24 3.28 rising C -3.98 -2.79
Rubber and Plastics Hose and Belting 3052 2.66 1.72 rising C -3.31 -1.63
Abrasive Products 3291 0.11 -0.10 rising D -6.36 -3.28
Steel Wire and Related Products 3315 -2.11 -1.15 stable F -0.31 -2.39
Copper Rolling and Drawing 3351 -7.07 -6.76 stable F -8.42 -2.87
Nonferrous Wire Drawing and Insulating 3357 -4.35 -4.92 stable F -6.39 -2.15
Heating Equipment, except Electric 3433 1.03 0.87 stable C -0.70 -2.35
Fabricated Plate Work, Boiler Shops 3443 0.63 0.78 stable A -6.08 -6.83
Bolts, Nuts, Rivets and Washers 3452 0.22 0.22 stable F- -0.16 -2.38
Industrial Valves 3491 1.43 1.31 stable B -3.08 -4.14
Fluid Power Valves and Hose Fittings 3492 1.20 1.05 stable C -3.08 -4.14
Other Valves and Pipe Fittings 3494 4.92 2.91 stable B -3.08 -4.14
Miscellaneous Fabricated Wire Products 3496 0.07 -0.05 stable D -3.33 -1.94
Fabricated Pipe and Fittings 3498 0.07 -0.30 stable C -3.08 -4.14
Ball and Roller Bearings 3562 0.22 0.13 rising D -4.81 -4.04