Double trouble for those seeking operating materials

Plant engineers who need to stock up on operating materials and supplies may be facing a double whammy this spring. Two trends will be converging to push up prices. One: The majority of industries that make operating supplies appears to be under extremely tight margin pressure. Two: End-market demand for supplies has begun to grow briskly.

By Staff January 10, 2005

Plant engineers who need to stock up on operating materials and supplies may be facing a double whammy this spring. Two trends will be converging to push up prices. One: The majority of industries that make operating supplies appears to be under extremely tight margin pressure. Two: End-market demand for supplies has begun to grow briskly.

Consider the case of copper rollers, drawers and extruders. This industry sports an F-minus margin grade. Copper extruders currently spend $80.12, on average, to manufacture $100 of market-valued output. That’s $5.07 above spending levels held over the past five years.

On the demand side of the equation, end-markets that buy extruded copper saw their factory production grow 10.2% in October 2004. That’s up from 8.5% three months earlier. As a result, supplier pricing power is very strong and improving at an accelerating pace.

Average product prices increased at a year-over-year pace of 22.1% in September, up from 20.4% in August. In October alone, prices jumped 5%, up from a 0.8% price hike three months earlier. Thinking Cap Solutions forecast prices for rolled and drawn copper to rise 1.3% in 2004:Q4 and another 0.5% in 2005:Q1.

Cost/price escalation analysis suggests suppliers must hike prices 7.8% in order to earn a fair return on manufacturing-related spending. The entire argument for such an increase can be constructed with price/cost data from the last 12 months.

Buyers of extruded copper should be prepared to discuss primary copper costs. This is the copper extruder’s number-one inflation risk. Over the last 12 months, tags for this fickle red metal soared 51.6%. Scrap costs are also a major cost concern.

Price/cost/demand roundup

Operating materials & 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).

Wood pallets
1.94
2.40
falling fast
C
0.24
1.11

Polishes & specialty cleaning preparations
-0.10
-0.09
rising
F-
0.26
1.20

Surface active agents & related agents
0.14
0.66
rising
D
1.76
3.64

Adhesives
0.64
1.28
rising
F-
1.04
2.24

Lubricating oils & greases
2.91
3.84
rising
F
0.74
1.69

Rubber & plastic hoses & belting
2.29
2.23
stable
D
3.89
5.30

Abrasives-coated products
0.63
0.23
stable
C
6.44
7.96

Steel wire drawing
1.43
2.94
stable
B
0.56
2.11

Copper rolling, drawing & extruding
0.80
5.01
rising fast
F-
6.24
8.78

Insulated wire & cable
-0.35
2.69
rising
F
8.50
10.23

Heating equipment
1.63
1.83
stable
F
0.71
1.98

Fabricated metal plate work
0.28
0.07
stable
F
10.70
11.48

Bolts, nuts, screws, rivets & washers
0.07
0.24
stable
F-
7.08
8.26

Industrial valves
1.45
1.44
stable
F
2.63
4.17

Fluid power valves & hose fittings
1.36
1.47
rising
F-
2.63
4.17

Metal & plastic plumbing fixture fittings
0.82
0.81
rising
F-
2.63
4.17

Metal cloth, fence & other wire products
0.32
0.40
stable
F
1.48
2.89

Fabricated metal pipes & fittings
1.49
1.92
stable
C
0.58
2.18

Ball & roller bearings
1.23
1.18
stable
F
3.14
4.77