Wood-related industries chop prices

At last, some construction costs are coming down. Running full throttle, as we wrote three months ago, higher prices have flattened many a factory repair and maintenance budget. This month, finally, we see five industries in the PLANT ENGINEERING construction index that are reporting declines in manufacturing costs.
By Staff February 10, 2005

At last, some construction costs are coming down. Running full throttle, as we wrote three months ago, higher prices have flattened many a factory repair and maintenance budget. This month, finally, we see five industries in the PLANT ENGINEERING construction index that are reporting declines in manufacturing costs.

Unfortunately, these cost cuts were limited to wood and wood-related industries only. Looking at all 22 industries in our construction index, the overall numbers seem dismal. Eleven industries sport F or D grades in our analysis of industry margins. That means suppliers in those industries are well justified in requesting more price hikes.

Even industries flush with profits have market dynamics in their favor. Demand trends tend to favor suppliers, not buyers. End-market demand is growing in each and every industry in our index. Not only is demand growing, but the speed of that growth is increasing too.

That means suppliers have the market behind any aggressive pricing actions. Indeed, 20 out of 22 industries in our construction index increased their average product prices over the past 12 months. And 14 of the 20 pushed their price hikes up even higher in November than they did three months earlier.

Thanks to falling costs, cost/price escalation analysis heavily favors buyers of wood products. To bring current margins back in line with long-run norms, we calculate that prices in the softwood plywood, other millwork, and particleboard industries would have to be cut by 13%, 6.6%, and 1.1%, respectively. Persuading your supplier to share some of its cost savings is another story entirely. Until Alan Greenspan’s anti-inflation policies can make headway against Iraq war-induced shortages, that task won’t be easy.

Price/cost/demand roundup

Construction & maintenance supplies Average Product Prices (1) % Change 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 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).
Sawmill products 1.42 4.78 falling C 2.92 3.72
Wood windows & doors 0.51 0.76 falling C 0.65 2.01
Other millwork (excl. windows & doors) 1.01 3.62 falling A+ 0.98 2.41
Hardwood plywood -2.58 -2.32 falling B 1.93 2.99
Softwood plywood 17.14 30.66 falling B 1.93 2.99
Shelving & fixtures 0.25 1.22 stable B 1.39 2.07
Paint 1.97 2.44 rising F 3.13 4.07
Flat glass 0.50 0.17 rising F 6.96 8.06
Sewer pipe & other structural clay prod. 3.83 2.63 rising F -0.49 1.71
Gypsum products 1.32 2.63 rising B 0.50 2.18
Fiberglass & other mineral wool 0.23 0.22 rising B 1.58 3.18
Iron & steel pipes & tubes 6.34 6.79 rising A 5.13 6.88
Metal & plastic plumbing fixture fittings 0.42 0.53 rising F- 3.66 4.37
Metal windows & doors 0.84 0.86 stable F- 3.11 4.42
Sheet metal work 1.15 1.20 rising F 0.64 2.29
HVAC equipment 1.09 1.47 stable F 6.43 7.02
Current-carrying wiring devices 0.22 0.07 stable F 1.96 2.63
Noncurrent-carrying wiring devices -0.47 -0.55 rising F- 5.91 6.30
Nonresidential electric lighting fixtures -0.54 1.81 rising B 5.91 6.30
Automatic environmental controls 1.96 1.43 rising D 0.03 1.32