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.

01/10/2005


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 pallets1.942.40falling fastC0.241.11
Polishes & specialty cleaning preparations-0.10-0.09risingF-0.261.20
Surface active agents & related agents0.140.66risingD1.763.64
Adhesives0.641.28risingF-1.042.24
Lubricating oils & greases2.913.84risingF0.741.69
Rubber & plastic hoses & belting2.292.23stableD3.895.30
Abrasives-coated products0.630.23stableC6.447.96
Steel wire drawing1.432.94stableB0.562.11
Copper rolling, drawing & extruding0.805.01rising fastF-6.248.78
Insulated wire & cable-0.352.69risingF8.5010.23
Heating equipment1.631.83stableF0.711.98
Fabricated metal plate work0.280.07stableF10.7011.48
Bolts, nuts, screws, rivets & washers0.070.24stableF-7.088.26
Industrial valves1.451.44stableF2.634.17
Fluid power valves & hose fittings1.361.47risingF-2.634.17
Metal & plastic plumbing fixture fittings0.820.81risingF-2.634.17
Metal cloth, fence & other wire products0.320.40stableF1.482.89
Fabricated metal pipes & fittings1.491.92stableC0.582.18
Ball & roller bearings1.231.18stableF3.144.77





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