Suppliers can't afford to reduce prices

Three months ago we wrote that buyers of factory operating materials and supplies had a great opportunity to argue for price cuts. Back then, among 19 industries that we studied, 16 could afford to cut average industry product prices while still maintaining reasonable margins. Now, only four industries can do so.


Three months ago we wrote that buyers of factory operating materials and supplies had a great opportunity to argue for price cuts. Back then, among 19 industries that we studied, 16 could afford to cut average industry product prices while still maintaining reasonable margins. Now, only four industries can do so. That means plant engineers will find more vendors of operating supplies standing in line with price hike demands.

Only three industries are enjoying inflation-adjusted margins that can be considered above average (as evidenced by the lack of A and B grades in the direct cost/margin column of the PLANT ENGINEERING table). The only industry with an A grade is the fabricated plate work (SIC 3443) industry.

Since SIC 3443 is one of the few suppliers that offer much room for price discounts, let's look at this in detail. Producers of fabricated plate work scored their third price increase in four months this past July. On the strength of a 7% jump in fin tube tags, average industry tags rose 0.8% in July and are now perched 2% above March '02 price levels. About three-quarters of the revenue from July's price hike is headed for the bottom line while the rest will be used to offset a 0.2% uptick in per-unit manufacturing costs.

Buyers will see additional price hikes for plate work ahead, but the gains will be smaller as the effects of import tariffs lessen. Our call: expect prices charged for fabricated plate work to rise 0.5% in Q3 and another 0.24% in the final quarter. In 2003, average plate work prices will rise 1.5%.

With current industry margins above normal, suppliers are in a position to discount. Industry prices currently can withstand a 1.7% cut. On the demand front, end markets will remain weak in Q4 and shopping around for better deals could pay off.

Price/cost/demand roundup

Average Product Prices Direct Mfg. Costs Growth in U.S. End Markets
Change, %, During 12-Mo Ending... and Margins Grade Change, %, During 12-Mo Ending...
Industry SIC Apr 02 July 02 Costs are... Grade Apr 02 July 02

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.

Wood Pallets and Skids2448-0.79-1.73risingC-5.23-4.25
Polishes and Sanitation Goods28420.970.32stableC2.041.98
Surface Active Agents28430.63-0.40risingD-2.13-0.69
Adhesives and Sealants28912.511.89risingC-3.86-0.73
Lubricating Oils and Greases29924.243.28risingC-3.98-2.79
Rubber and Plastics Hose and Belting30522.661.72risingC-3.31-1.63
Abrasive Products32910.11-0.10risingD-6.36-3.28
Steel Wire and Related Products3315-2.11-1.15stableF-0.31-2.39
Copper Rolling and Drawing3351-7.07-6.76stableF-8.42-2.87
Nonferrous Wire Drawing and Insulating3357-4.35-4.92stableF-6.39-2.15
Heating Equipment, except Electric34331.030.87stableC-0.70-2.35
Fabricated Plate Work, Boiler Shops34430.630.78stableA-6.08-6.83
Bolts, Nuts, Rivets and Washers34520.220.22stableF--0.16-2.38
Industrial Valves34911.431.31stableB-3.08-4.14
Fluid Power Valves and Hose Fittings34921.201.05stableC-3.08-4.14
Other Valves and Pipe Fittings34944.922.91stableB-3.08-4.14
Miscellaneous Fabricated Wire Products34960.07-0.05stableD-3.33-1.94
Fabricated Pipe and Fittings34980.07-0.30stableC-3.08-4.14
Ball and Roller Bearings35620.220.13risingD-4.81-4.04

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