In waiting mode for high demand

The economic uncertainty that existed prior to the U.S. bombing of Iraq has dissipated. Yet, an unleashing of pent-up demand has not occurred as some pundits expected. Indeed, more than half of the industries in our construction supplies index actually faced shrinking end markets in May 2003. Moreover, all but one industry (flat glass) sport end-market growth rates that fall short of the averag...


The economic uncertainty that existed prior to the U.S. bombing of Iraq has dissipated. Yet, an unleashing of pent-up demand has not occurred as some pundits expected. Indeed, more than half of the industries in our construction supplies index actually faced shrinking end markets in May 2003. Moreover, all but one industry (flat glass) sport end-market growth rates that fall short of the average growth rate experienced over the past five years. Widespread demand weakness has clearly put the kibosh on aggressive pricing.

So buyers continue to have a clear advantage when it comes to using demand-related data in a negotiation setting. But plant engineers who expect their budgets to stretch farther as they reap the benefits of this economic weakness may be in for a shock. That's because falling prices and rising costs have squeezed margins so tightly that suppliers will be ready to leap with smart price hikes as soon as demand picks up in 2004.

Consider the mineral wool industry. Makers of fiberglass insulation saw their average product prices rise only 0.2% in the 12 months ending May 2003. From a year ago, prices actually fell 0.15% while the cost to manufacture fiberglass increased a wicked 4.8%. The result: fiberglass manufacturers saw their manufacturing margins fall $2.33 for every $100 of product they sold in May. To restore margins to levels held on average over the past five years would require a 5.3% average price hike.

The flat glass industry, where end-market demand has been extraordinarily strong, faces similar margin pressures. Here, despite a 9% growth rate in the end-markets that buy glass, margins shrinkage remains a problem as cost escalation continues to outpace the rate at which producers can increase their prices.

Price/cost/demand roundup

Average Product Prices1Change, %, During 12-Mo Ending... Direct Mfg. Costs2and Margins Grade Growth in U.S. End Markets3Change, %, During 12-Mo Ending...
Industry SIC Feb 03 May 03 Costs are... Grade Feb 03 May 03
NC means data could not be computed.
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:
General Sawmills and Planing Mills2421-1.41-2.27stableF-0.91-1.25
Hardwood Veneer and Plywood2435-0.07-0.90risingC-1.10-0.81
Softwood Veneer and Plywood2436-3.66-6.18stableD-1.10-0.81
Metal Partitions and Fixtures2542-0.81-0.42stableF-3.01-2.46
Paints and Allied Products28511.471.65stableC0.581.00
Flat Glass3211-1.76-0.61fallingD7.519.05
Other Structural Clay Products32595.236.46stableA-2.23-1.44
Gypsum Products32758.126.94stableD-3.15-2.88
Mineral Wool32960.530.20stableF-0.430.21
Steel Pipe and Tubes33176.488.98stableANCNC
Plumbing Fittings and Brass Goods34320.360.71stableF-2.55-1.76
Metal Doors, Sash and Trim34420.610.95stableC-2.95-2.33
Sheet Metal Work34441.532.05stableD3.805.30
Refrigeration and Heating Equipment35850.330.37stableF0.350.78
Current-Carrying Wiring Devices3643-0.140.38stableF1.463.02
Noncurrent-Carrying Wiring Devices36441.531.02fallingF1.463.02
Commercial Lighting Fixtures3646-0.140.70stableD-1.79-1.15
Environmental Controls38220.110.24stableF--2.01-1.67

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