Don't slip on lubricating oils

Plant engineers who buy operating materials and supplies need to watch two products carefully. Three months ago, the lubricating oils and greases (SIC 2992) industry and the wood pallets and skids (SIC 2448) industry were registering declines - and in the case of oils, rapid declines in their average production costs.


Plant engineers who buy operating materials and supplies need to watch two products carefully. Three months ago, the lubricating oils and greases (SIC 2992) industry and the wood pallets and skids (SIC 2448) industry were registering declines — and in the case of oils, rapid declines in their average production costs. And with prices still rising rapidly, the negotiation position favored buyers to a large degree.

Now, production cost trends have completely flipped around. In the lubricating oils industry, average costs of production rose 1.1% between December '01 and January '02. With prices falling 0.4%, the industry took an 89-cent margin loss for every $100 of product sold.

In the wood pallets industry, average costs of production increased 1.5% over the same December-to-January period while product prices for pallets dropped 0.4%. The result: for every $100 worth of pallets sold, U.S. manufacturers saw the cost/price trends nibble $1.29 from margins.

These kinds of trends mean plant engineers who are buying these products in bulk may be finding their once strong negotiation position slipping a bit. The lubricating oils industry, however, did a great job of capturing the margin enhancements from sharp drops in oil-related costs over the past few years. That means buyers can argue that cost cuts from previous years have yet to be passed along to buyers. To restore margins in the lubricating oils industry back to its 5-year average level would require a 13.6% price drop.

Buyers of wood pallets can argue that a 3.2% price cut is needed before pallet manufacturers see their margins return to 5-year average levels. Beware, however: returning margins to January '01 levels actually requires a 0.7% price hike.

Price/cost/demand roundup

Industry SIC Average Product Prices Average Product Prices Direct Mfg. Costs Direct Mfg. Costs Growth in U.S. End Markets Growth in U.S. End Markets
Wood Pallets and Skids24480.510.42risingA-4.48-5.56
Polishes and Sanitation Goods28420.950.61stableB1.961.95
Surface Active Agents28432.671.90stableB-2.91-2.81
Adhesives and Sealants28913.403.24fallingA-2.16-4.13
Lubricating Oils and Greases29927.245.75risingA-0.96-3.14
Rubber and Plastics Hose & Belting30523.203.67stableA-3.51-4.19
Abrasive Products32910.070.09stableD-3.18-6.21
Steel Wire and Related Products3315-1.47-1.92stableF1.821.58
Copper Rolling and Drawing3351-2.61-5.57risingD0.23-6.89
Nonferrous Wire Drawing & Insulating3357-0.87-3.03stableB2.53-4.28
Heating Equipment, except Electric34331.251.23stableA+0.490.64
Fabricated Plate Work, Boiler Shops34431.000.92stableA-1.90-4.20
Bolts, Nuts, Rivets and Washers34520.100.14stableC2.151.85
Industrial Valves34911.741.60stableB0.00-0.98
Fluid Power Valves and Hose Fittings34921.331.42stableA0.00-0.98
Other Valves and Pipe Fittings34943.934.39stableA0.00-0.98
Miscellaneous Fabricated Wire Prod.34960.280.27stableB-1.79-3.35
Fabricated Pipe and Fittings34981.320.66stableA0.00-0.98
Ball and Roller Bearings35620.940.43stableB-3.10-4.49

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.

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But the year started with global economic turmoil, as a slowdown in Chinese manufacturing triggered a worldwide stock hiccup that sent values plummeting. The continued plunge in world oil prices has resulted in a slowdown in exploration and, by extension, the manufacture of exploration equipment.

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