How we see 2003 economy & prices

Another round of inventory replenishment will boost economic growth rates in 2003.

Staff -- Purchasing, 1/16/2003 2:00:00 AM

There's no refuting the fact that economic growth prospects dropped dramatically in the latter months of 2002. Factory output fell as automaking swooned in the aftermath of one of the industry's biggest fire sales ever. Consumer confidence crashed as oil prices started to rise, terrorism warnings grew increasingly dire, and the U.S. edged closer to war with Iraq. Leading economic indicators dropped precipitously as stock prices remained weak and employment failed to recover. U.S. businesses dug deeper into their bunkers, keeping a tight lid on employee headcounts, production schedules and spending.

Economic forecasters, for their part, shaved their macroeconomic growth forecasts for 2003. Morgan Stanley cut its 2003 forecast for inflation-adjusted (real) Gross Domestic Product (GDP) from 3% in September to 2.7% in December. Global Insight (formerly DRI-WEFA) went from 3.3% to 2.6%. Even the optimistic Merrill Lynch went from 3.7% in September to 3.0% in December. The overall consensus forecast (Blue Chip) fell from 3.2 in September to 2.8 in December.

For the most part, these downward revisions reflect lower estimates for growth in the final quarter of 2002, leaving a lower base from which to grow in 2003. 'Real GDP growth wil average 3% during the first half of the year and 3.5% in the second half, very near its presumed trend rate of growth,' according to Blue Chip.

At +3.4%, PURCHASING's forecast for 2003 is a bit more optimistic than the consensus and has economic growth hitting its trend growth rate as early as Q1, then exceeding the trend somewhat in the later quarters. The forecast by quarter (expressed as seasonally adjusted annual rates, SAAR s) goes: +3.6% in quarter one, +4.4% in quarters two and three, and +4.8% in Q4. By contrast, the Blue Chip consensus forecast puts the GDP quarterly SAAR s at: +2.7% in quarter one, +3.2% in quarter two, +3.5% in quarter three, and +3.7% in Q4.

While PURCHASING is more optimistic than the consensus for 2003, there are others who are even more sanguine. Among the forecasting houses reporting to Blue Chip, Genet-ski.com has the highest real GDP outlook for 2003 at +4.4%. Two forecasting houses come in higher than PURCHASING, while two are the same, and 50 are lower.

Primary reason for PURCHASING's relative optimism is a view that business inventories have become far too thin and staffing levels far too skeletal to support even the meager demand levels of Q3 and Q4 2002. Evidence for this is PURCHASING's Leadtime Index, which tracks average supplier delivery speeds for more than 150 common industrial items. The index started rising quickly in late summer even as manufacturing demand took its dramatic turn for the worse. Industrial buyers complained that manufacturers weren't making enough and distributors weren't stocking enough of the right products to meet their demand. Job layoffs also took a big bite out of customer service levels, leaving many buyers feeling disgruntled with their existing suppliers.

If leadtimes are stretching and customer service is suffering, it means that demand from buyers, however meager, is exceeding sellers' abilities to deliver effectively. PURCHASING expects aggressive sellers, looking for bigger pieces of their market pies, to get wise to this phenomenon. Once they have exhausted marginal capacity, which appears to be happening right now, they will have little choice left but to rebuild inventories, rehire workers, add more work shifts, and, finally, restart idled production lines and facilities. Meantime, the more supply troubles that buyers encounter, the more safety they will build into their inventory and buying plans. Less hand-to-mouth buying and longer purchase commitments will embolden producers to put more capacity online. And, so, a sustainable manufacturing recovery will be born.

Augmenting the manufacturing recovery in 2003 will be the fact that U.S. companies have spent the last 12-18 months scrubbing their balance sheets, getting rid of debt (or at least taking on very little new debt) and cutting costs dramatically. Sooner or later, the resulting cash liquidity will turn into investment-in R+D, new product development, much needed IT hardware upgrades, more productivity-enhancing software, and more networking and communications gear to support the long-term trend toward integration of information systems. PURCHASING is betting the investment recovery is going to start happening sooner rather than later in 2003.

Greatest risk to the forecast is U.S. consumers, who, despite continued job losses, minimal income growth, and huge hits to their investment portfolios, have been single handedly responsible for keeping the economy out of negative growth territory.

There is talk among the economics cognoscenti that automakers, with their zero-percent financing and/or huge rebate deals in 2002, borrowed too heavily against future demand for cars while, at the same time, seriously compromising their profitability and, perhaps, conditioning car buyers to expect massive discounts and interest-free financing. Time will tell if this is true, but the latest consensus auto sales forecast for 2003 stands at a respectable 16.5 million units, so it's a problem to be contemplated for 2004 or beyond.

Home prices are another imagined bogeyman lurking in the shadows, waiting to attack consumers' sensibilities. Fear is that home prices, which have continued to rise rapidly throughout the down economy, are being driven up, not just by low mortgage rates (which make it easier for people to afford more expensive homes), but also by investors speculating on huge returns. Economists say the arrival of speculators in the housing market signifies a push into 'bubble' territory, the bursting of which would be disastrous for an already fragile economy.

Even it it's possible, however, there are few that fear any impact from a sudden home price deflation in 2003.

David Seiders, chief economist for the National Association of Home Builders (NAHB), for one, dismisses the idea that a home price bubble will damage the economy in 2003. 'In an analysis of house prices nationally and by major regions of the country, it is difficult, if not impossible, to find prices that look out of alignment with underlying economic fundamentals,' said Seiders during a recent teleconference. 'With the economy and job market in the process of recovering and an interest rate structure that promises to remain historically low, it is highly unlikely we will be hearing any sizable price bubbles bursting this year or in 2003.'

One factor keeping upward pressure on home prices, according to Seiders, is the rising cost of producing new housing units. 'We've been looking at spreading land use controls and slow- and no-growth initiatives and their impact upon the availability and costs of lots for housing.' Another factor, he says, is demographics. 'We have seen persistent demand coming from population and household growth, including a strong immigration component. We got through the recession in very good condition, partly because of a sizable flow of people from rental apartments into the single-family market.'

A big positive for the economy is the fact that consumers continue to refinance their mortgages at a rapid pace and are pulling out piles of cash in the process. What they do with the money-save it, spend it, or use it to pay off debts-hardly matters. What does matter is the fact that the cash freed up by refinancing leaves consumers in a position of financial strength from which to formulate spending plans for the next 12 months.

On the inflation side, the recent rise in oil prices bodes poorly for consumers' discretionary spending-the more they pay to heat homes and fill gas tanks, the less they'll have to shell out for other things. Any Mideast military action is bound to make matters worse on the oil-price front. However, consumers are seeing very little else in the way of price inflation to dent their discretionary outlays. What's more, incredibly low interest rates are putting more consumers-even people with static incomes-in range for more expensive big-ticket buys like better houses, cars, furniture and appliances.

The Blue Chip consensus forecast for consumer price inflation (Consumer Price Index, all urban) stands at +2.2% for all of 2003 after a mere 1.6% (estimated) erosion in purchasing power for 2002 all told. PURCHASING's forecast, given its stronger outlook for GDP, stands at +2.6% for 2003, up from an estimated 1.5% in 2002.

HR Sheet Steel

Even though prices rose 45% last year, hot-rolled prices peaked in July and have been dropping steadily since. Supply of this benchmark flat-rolled mill product was tight in summer; it dropped 10% for the year. Now, domestic and offshore steel supply is increasing. The demand outlook for 2003 has been revised downwards. So, prices will slip 4-5%.

CR Sheet Steel

The most optimistic view for 2003 cold-rolled sheet demand is that it's uncertain-since appliance and general manufacturing may stay healthy even if automotive assembly drops. Pricing is dependent on a pickup in capital spending, the level of stocks held by service centers and the amount of imports. Without a buying surge, mills won't be able to prop prices up.

HD Galavized Steel

The market remains oversupplied. Prices rose sharply (33%) last year only because 'coated sheet product' was included in the Section 201 tariffs. A lot of the protection has disappeared, though. So, some financially strapped producers are pushing cut-rate metal to service centers and end users. With end-use demand blah, annual average prices will be driven down 9-10%.

HR Coiled Plate

Demand has slowed considerably over the past several years-and no sudden surge is anticipated in 2003. Market prices slipped 3% last year. Supply has been rising from new domestic mills in large-volume production and service centers choking on domestic and foreign plate. Plate tags are projected to rise 5% this year, but not without a rise in capital spending.

HR Steel Bar

Motor vehicle makers have been buying hot-rolled bar, but demand elsewhere is stagnant. Although several bar makers are reorganizing or have exited the market, supply is high, and growing output by remaining domestic mills has triggered discounts to customers. Demand shows little sign of any immediate improvement and some additional price-cutting could take place in early 2003.

CF Steel Bar

The beginnings of supplier consolidation boosted tags 7% last year-despite less-than-stellar demand growth. Buyers should watch for an erratic 4% rise this year, but only if demand truly expands from the anticipated second-half pickup in automotive and durable goods manufacturing. However, residential construction is starting to slow while commercial and industrial construction remains in doldrums.

Structural Beams

There is excessive inventory throughout the supply chain so prices have been sliding. New mills will put downward pressure on structural steel product pricing. The nonresidential construction sector, the most important driver for beams and other structural shapes, can best be described as mediocre-falling 11% last year and rebounding by no more than 4% this year.

Wire Rod

Business is slow and rod mill production schedules aren't full. Dumping duty margins of up to 360% and subsidy duties of up to 18% were imposed in October against wire rod imports from Brazil, Canada, Indonesia, Mexico, Moldova, Trinidad and Tobago, Turkey and Ukraine. Nations unaffected by the duties are picking up the slack with imports under $300/ton.

Mechanical tubing

Mechanical steel tubing shipments to OEMs and service centers have dropped by double-digit averages for two years now. Mills have lots of capacity (even after some recent shutdowns and some mothballing underway this quarter) as they continue to await the bounce back in demand that didn't happen in 2002. Outlook: No buying or pricing activity until late in 2003.

Stainless 304 Sheet

Collapsed stainless cold-rolled sheet transaction prices may have touched bottom. Average annual spot tags dropped 24% in 2001 and another 7% in 2002-due to continued soft demand from durable goods makers. However, real recovery prospects continue to remain poor for at least another six months for stainless steel because of weak key markets.

Stainless 316 Sheet

Stainless steel plate has been stuck at $1935/net ton for two consecutive years now. Demand softened in 2001 and no significant buying activity existed in 2002 either. Producers, meanwhile, kept pushing each other for market share by concentrating on low prices. With no real pickup in capital spending seen in early 2003, the plate outlook is weak buying-and pricing-trends.

Ferrous Scrap

Market insiders report that prices again are looking vulnerable because there is 'little upside confidence being expressed' about demand from steelmakers for 2003. No pressure is coming from scrap alternatives, where demand is steady-to-low and costs are more expensive than ferrous scrap. After a 15% annual average increase in 2002, look for a 5% decline in 2003.

Primary Aluminum

World supply is growing at an annual rate of 3.6% despite cutbacks in Pacific Northwest smelting capacity at the start of the decade. China has gone from being an importer to being an exporter. So, although global demand rose 3.4% last year, the world glut grew to four million metric tons. Ingot prices continued to slide and averaged 12% less than 2000. Inflation will be delayed until 2004.

Aluminum Sheet

Spot-market prices for common alloy sheet fell 15% in 2001 and recovered just 6% last year, so producers are standing by price increases scheduled for the new year. A projected 6% increase may be pressured lower by the flagging economy. Leading indicators point to only a modest recovery in the aluminum economy in 2003-especially for canstock and aerospace-grade sheet.

Aluminum Extrusions

Extrusion buying by car and truck manufacturers has been severely depressed; it has fallen by double-digit rates for three years now. But the price slide must be considered over, since only a 4% drop in 2002 followed double-digit drops in 2000 and 2001. Slightly stronger buying trends this year will allow salestags to rise maybe 4%.

Primary Copper

After rising just 2% worldwide in 2002, purchasing is projected to rise 4% this year. However, world supply is expected to stay in the 8.5-9.5-week range of the previous two years, keeping a lid on prices. U.S. cathode was 76¢ last year. With excess primary metal still around, the 2003 forecast for London Metal Exchange copper is 72¢/lb-77¢ U.S. metal.

Copper Sheet

After several years of growth, purchasing of copper sheet has slowed during the past two years, and may not grow much in 2003-due to uncertain activity in automotive, telecommunications, lighting systems, and assembly of electrical/electronic devices. Even if sheet prices rise 4.5-5%, that kind of annual average increase won't get them back to 2000-2001 levels.

High-Grade Zinc

Years of zinc metal production that was well ahead of demand has created a substantial supply surplus that will get even larger this year and next. Zinc purchasing was flat last year, so the world glut rose to 10 weeks of consumption. This year, the excess is projected to grow beyond 11 weeks of world use, even if demand rises a projected 3.5%. Annual average high-grade zinc tags look to be flat with those of 2002.

Primary Lead

Reduced automotive and off-highway vehicle production worldwide cut demand for the past two years for the metal used to make starting, lighting, and ignition batteries. Continued oversupply is keeping prices down worldwide. U.S. tags slipped to 44¢ last year. The glut hasn't gone away, so weak buys by lead-acid battery builders will drop prices this year to 43¢.

Primary Magnesium

Magnesium has the benefit of lower weight than zinc and aluminum while maintaining high strength. Continuing to be substituted for aluminum and plastic applications, cast magnesium is on a tremendous growth curve-increasing more than 35% in the past four years. Spurred by new automotive applications, shipments are expected to increase another 12% this year. Ingot's price has dropped consistently, but the 2% uptick this year shouldn't slow demand.

Primary Nickel

Earlier forecasts of a big increase in the nickel price have been dropped because of new reduced-demand projections from stainless steelmakers and superalloys makers. Revised projections also suggest that specialty metal makers apparently overproduced in 2002 so their nickel buys in 2003 will be somewhat smaller. That will promote a slow recovery in prices.

Primary Tin

Tin prices finally stopped declining in fourth quarter 2002, but it won't be much of a recovery in 2003. Industry observers have attributed lower prices to an oversupply of tin in the market, which isn't going to go away. World tin consumption has been declining for the better part of two years.

Titanium Sheet

Sales have weakened and prices for some titanium mill products have sunk to levels not seen since the industry's last major slump in the mid-1990s. While military work has taken up some of the slack, it's not offsetting the continuing decline in commercial aviation work. Leadtimes are down to 8-9 weeks from normal 16-18 weeks. Outlook: No takeoff in prices.

Primary Cobalt

Spot prices for cobalt have fallen to a 14-year low due to the demand collapse for cobalt-bearing superalloys There is widespread pessimism about a rebound anytime soon in the key end markets of commercial aerospace and power generation. Also, there is less ongoing engine maintenance, so less demand for replacement parts. Outlook: Watch for $7/lb metal again in 2003.

Gold

A 14% price runup for gold in 2002 will be followed by only a 5% increase in 2003. The ability of gold to rally in price in the future will be limited by a decline in investment demand and industrial demand for use in fabricated products, as manufacturing activity around the globe continues to grow slowly. Look for $325/ounce for an annual average price.

Silver

Silver's average annual price rose 6% in 2002 but will flatten out at that level through 2003. Inventories worldwide are rising, but no growth in demand is projected. Industrial silver use rose 2% while photographic use rose just 1%. Coin use rose 13% while jewelry and silverware use fell 10%, but neither market is looking all that healthy for this year.

Platinum

Demand rose 8% to 6.4 million troy ounces last year while production rose just 1% to 5.9 million ounces, leaving the metal in deficit for the fourth consecutive year. Auto companies changed the platinum group metal mix in auto catalysts to increase the global substitution of platinum for palladium in converters for gasoline engines. So, demand has started to decline and market-price inflation isn't likely in 2003.

Metal Stampers

Since the cost of stampings dropped 2% last year, the implication is that most huge sheet steel cost increases were absorbed by stampers, with profit margins suffering as a result. The stampers won't be able to continue doing that-even though 60% closed 2002 by forecasting a business falloff in 2003-and plan to boost prices 5% this year.

Steel Castings

Steel castings demand has topped a million tons for 12 straight years. With prices relatively low and not expected to climb much, demand for steel castings is projected to rise 5-7% .Key market sectors are railroad, construction, oil field and mining machinery and equipment as well as cars, trucks, buses and trailers.

Aluminum Die-Castings

Die-cast aluminum accounts for two-thirds of the foundry output. During the past decade, shipments of all aluminum castings increased nearly 65% and topped the two-million-ton mark for the first time in 1999. Since then though, demand has been erratic and slipping. And, with secondary aluminum tags in a slump, die-cast tags will stay down.

Steel Forgings

Steel is pounded or squeezed under great pressure into high-strength parts known as forgings used in aerospace, heavy equipment, heavy machinery, industrial hardware and military equipment. The market has shrunk from $6.5 billion five years ago to $5.9 billion because of the decline in capital spending. Upshot: A slight pickup in price will match a slow pickup in demand.

Nonferrous Forgings

Nonferrous forgings are mill shapes hammered mostly out of aluminum, titanium and coppermetals used in motor vehicles, helicopters, commercial jets and supersonic military aircraft. Sales-and prices-have been stable for the past three years and most market insiders say there won't be a strong rebound in either shipments or prices until 2004.

Magnet Wire

Magnet wire is a solid electrical conductor wire (copper or aluminum) that is insulated with a polymer-based film. At this time of reduced demand, magnet wire prices have been depressed due to intense competition among domestic and foreign producers who have excess capacity. Weak six-month demand trends posted in December won't support higher prices soon.

Softwood Pulp

Northern bleached softwood kraft pulp prices fell $20/metric ton to $490 in fourth quarter 2002, and look to be slipping further now. Consolidation has dominated the pulp industry lately so the top five suppliers have 42% share of market. However, paper makers still have excess supply that is depressing purchases and will delay a recovery in pricing until 2004.

Hardwood Pulp

Northern bleached hardwood kraft pulp showed significant growth in shipments last year, well ahead of shipments of most final-product paper and tissue grades. Even though paper mills overbought, pulp makers have funded a 3.5% annual capacity expansion through 2005. Market prices, which fell 9% last year, will rise less than 3% this year.

White Bond Paper

After a three-year decline in annual purchases (caused by the collapse of the dot.com sector and the slow-growth economic recovery), demand for uncoated free sheet-white paper-is showing renewed growth. Since 1999, North American producers have shut 2.8 million tons of capacity. Still, prices have dropped almost 11%-and only a 4% price rebound is expected for copier/printer papers.

Forms Bond Paper

Printing and communications paper salesmen expect a bounceback in demand for such uncoated white converting grades as forms bond-when the economy re-engages. Demand was steady last year, so market prices for forms bond stayed above the forecast bottom of $700/ton. Mavens say forms bond could show demand growth of 2% this year. PURCHASING thinks that will move prices up 2-3%.

Coated Papers

Demand was weak for nearly two years and producers couldn't drop prices fast enough (-22%) to entice new orders. Mills have shuttered 21% of capacity for coated free sheet and 4% of coated groundwood capacity since 1999. Some of this has been offset by an increase in imports, but market supply is tighter, so mills are pushing for higher sales prices.

Linerboard

The last cyclical bottom of the 42-lb kraft linerboard market was $295/ton in 1997. Right now, liner is around $420. Few analysts foresee prices near the last cycle peak ($530 in 1995) despite capacity rationalization because box demand has dropped so sharply. The decline in manufacturing output of all types has undercut containerboard demand.

Corrugating Medium

Just like liner, medium has been battered by weak demand from boxmakers. Spot tags have fallen 12% since 2000. Despite capacity and production cutbacks, the market remains oversupplied. Spot pricing for 26-lb semichemical corrugating medium in the East is forecast to increase 10% in 2003. A manufacturing rebound could trigger improvement in demand for corrugated boxes across the entire sector.

Bleached Boxboard

Folding cartonboard has experienced slow sales growth in recent years. However, the recent rush to value-added, tamper-proof packaging systems in the interest of security (of consumer goods and other nondurable products) reignited demand for boxboard-to a 15% growth rate last year. Benchmark prices will rise and could move past the last peak set in 2000.

Desktop PCs

The global market returned to positive growth in the third quarter of last year (after five consecutive quarters of decline), but shipments of 135.5 million showed full-year growth of only 1%. The outlook for this year is a bit over 8%. During most of 2001 and 2002, desktop PC prices fell 10%. With weak sales forecast, IT buyers can expect further erosion in 2003.

Notebook PCs

Mobile personal computer market grew 9-10% last year. Full recovery will have to wait until corporations begin spending again. Still, the outlook shows notebooks outselling desktops due to advancement of broadband and wireless technology. Sales prices for the small-sized computers fell about 10% last year. Prices could remain stable this year.

Printers

For two years now, computer printers have sold with slow and steady quarterly price declines. Corporate technology buyers can expect more of the same over the next year. Also, office-product buyers are beginning to purchase more multifunction products-machines that print, copy, scan and fax-which are attractive from a total cost of ownership perspective.

Application Software

Researchers believe companies finally will free up investment dollars again. Of the prepackaged business productivity systems, application software is expected to continue to be the largest market sector. Prices will be erratic but won't climb this year-even as the worldwide market for packaged software shows definite sales recovery.

Software Maintenence

Don't be surprised to see maintenance prices rise, as software companies continue to view support as a value-add component of the overall software marketplace. Studies show the market experiencing healthy growth, reaching $38 billion worldwide through 2006. Keep a close eye especially on predictive/preventive maintenance and remote diagnostics-for application software and system software.

Cellular Service

Suppliers continue to offer buyers competitive pricing from numerous applicable rebates, add-on free minutes and free long-distance. Still, when purchasing cellular service, corporate buyers should pay close attention to basic rates (which keep rising) and total cost of ownership (which is forecast to climb 10-17% through 2007). Careful and analytical buyers can generate a 20% reduction in telecom costs.

Local Telephone Service

Don't expect local telephone service rates to be raised much above the overall inflation rate. In markets formerly the domain of regional Bell operating companies, new competition continues to push prices down. Also, while competitive local exchange carriers ( CLEC s) offer better rates, lower costs per minute and reliable service, switching suppliers hasn't always been easy.

Long-Distance Service

Competition among long-distance telephone service carriers continues to be intense, driving rates down to levels that are a fraction of what they were 10 years ago. However, at these rates, carriers aren't making any money so they are reducing services to customers. The woes of such carriers as WorldCom further cloud the outlook both for carriers and customers.

Office Supplies

Competition is heated among the big players (distributors of office supplies) driving a run of low prices. Until companies loosen the purse strings again to invest in both new facilities and new hires, tags should remain relatively low. Corporate buyers, who have been busy consolidating purchases and moving the buy to more efficient e-commerce systems, continue to hold costs down.

Office Furniture

Shipments of office furniture plunged 20% in 2002 to $8.7 billion and a rebound of just 8% growth is forecast for 2003. Buyers can count on continued downward pressure on prices through at least the first three quarters. It might be a good idea to keep an eye on future steel prices, since metal furniture producers absorbed most of last year's hikes.

Bearings

Prices aren't up or down. Despite general inflationary pressures, automakers are pushing for price cuts. GM buyers, for example, acknowledge they are looking for 4-6% decreases from bearings suppliers. Meanwhile, prices on some imported bearings may climb soon when punitive dumping duties take effect: Bearings from China recently were hit with duties of up to 60%.

Batteries

Price competition is expected to remain intense for most industrial-grade batteries, but that doesn't mean prices will be static. Reason: Shipments from U.S. suppliers should climb 6.4% annually through 2005, or slightly slower than demand. Imports may capture a larger share of the market, then cut prices. Watch rechargeable (lithium) batteries since some buyers will pay extra for them.

Motors and Generations

After many months of reduced pricing, forecasters see a rise in 2003. But, motor manufacturers expect continued pressure from end-users to cut motor prices. Reason: MRO buyers are working harder than ever to leverage purchasing power. Other factors that could influence motor pricing are offshore sources and increased use of reverse auctions.

Switchgear

Don't expect prices of switchgear to budge much over the next 12 months. Spending by utilities on automation systems could spur demand. But that isn't likely to have much impact on pricing, which has stabilized over the past year. Shipments from suppliers are expected to grow 3-4%, matching the projected demand growth from MRO buyers through 2006.

Controls

Buyers can expect some inflationary movement in prices for industrial controls over the next 12 months. A hold on capital spending, will keep demand for controls in check, especially solid-state models. Still, overall demand will continue to outpace supply a bit-6% versus 5.9%-according to market researchers. Reason: Competition is heating up for special-purpose devices sold to niche marts.

Industrial Relays

Manufacturing says end-market relay prices are at an unprofitable level. So, price hikes are in store for 2003. Relay consumption rates have been declining. But, purchasing growth for relays now is expected to come off the mat of 2002 and show annual average growth of almost 3% in 2003-2005. As demand increases, pricetags will inflate.

Pump and Compressors

Market researchers expect pump and compressor buying growth to average just about 4%/year through 2006. So, regional supply remains plentiful. Some suppliers contend that a quick economic turnaround could cause shortages for some pump buyers running very lean inventory systems. For the time being, though, pumps and compressors remain a buyers' market.

Engines and Turbines

Engine prices are not going anywhere anytime soon. Minor price increases last year (estimated at 0.7% industrywide) may not even be matched-much less replicated-in 2003. The consensus outlook is a price gain of 0.4%. Reason: Demand and supply are balanced, a scenario that is likely to continue through 2005.

Valves

Despite competition from cheaper imports, prices of industrial valves may pick up a bit over the next few months. While capital spending has slowed to a trickle and competition with foreign makers continues, buyers in the electricity generation industry are expected to continue purchasing valves. Demand also may increase from companies bent on automating and improving production processes.

Fasteners

The buyers' market continues for fasteners: Supply is ample. Deliveries are quick. Prices are low. Fastener manufacturers are working to combat hikes from their suppliers. They are pooling their plants' purchases to leverage buying power and entering into long-term agreements. Some are holding reverse auctions to help lower prices.

Resistors

Buyers can expect some price erosion of resistors and resistor networks in the first half, but prices will likely stabilize in the second half as demand picks up. Prices for some resistors in 0805-case and 1206-case sizes were reported in second half 2002, but the increases will be short lived. Capacity utilization rates are increasing past 60%; so, more supply.

Connectors

Price erosion is nothing new with connectors. Connector prices traditionally decline 3-4% each year, but tags may fall even more in 2003. One reason is the movement of production to such low-cost regions as China. Another reason is the continued weak demand for connectors from telecommunications equipment makers. Connector demand will rise but not enough to tighten supply.

Tantalum Copacitors

Buyers can expect prices to fall in first half 2003 and then stabilize. While demand will be healthy in 2003, it will not exceed capacity. Prices will be weak, actually for some time to come. End equipment demand is not expected to be stellar as OEMs are using alternative types of capacitors such as ceramic and niobium instead of tantalum.

Ceramic Copacitors

Sluggish first half demand and excess capacity will keep prices in check in 2003. Buyers can expect price erosion especially in the first quarter. Ceramic caps are used in a wide variety of equipment. But, until demand picks up across several industries, buyers can expect capacity to stay high and prices low.

Multilayer Chip Copacitors

Shipments will increase in 2003 as high inventory levels finally get worked off. However, buyers can expect prices to decline until key end markets-computers and telecommunications equipment-turn around. How much tags increase will depend on the recovery of the economy and end markets. However, there is plenty of capacity and shortages will not be an issue.

Flash Memory

This memory-used in cell phones, personal digital assistants and consumer electronics equipment for code and data storage-is expected to grow 39% from $7.7 billion in 2002 to $11 billion in 2003. Good news for buyers is competition will keep prices in check in 2003. Flash tags will fall in the first half and then stabilize.

Programmable Logic

Logic pricing should be volatile in 2003, but prices should end the year higher than at the start. If there is a recovery in capital spending, component demand including logic will increase and prices will rise. Such a scenario isn't likely until the second half. Still, any price increases will be small due to plenty of capacity.

Analog ICs

Analog integrated circuits and chip markets took a hit when the telecommunications industry went down. However, more analog chips are now being used in consumer electronics equipment and automotive applications, so use should increase in 2003 as that market grows 19% to $28 billion. Price will fall early, but then stabilize late in the year as demand rises.

Microprocessors

The pace of price erosion for microprocessors (MPUs) has accelerated. Intel used to drop prices every quarter; now, it seems like it's happening every six weeks. Part of the aggressive price cutting is due to competition from AMD. Processor buyers will see aggressive pricing continuing in 2003, with price cuts in excess of 50% likely for Pentium 4 MPUs. Note: A demand surge could boost second-half tags.

Microcontrollers

Microcontroller (MCU) pricetags overall should be relatively flat in 2003 despite growing demand as the market grows 25% to $12 billion in 2003. Much of that growth will be due to increased unit shipments as MCUs get used in more equipment. Because of ample supply and competition among major semiconductor manufacturers, MCU pricing should rise in 2003.

DRAMs

Prices could be volatile in 2003-rising for a short time and then declining as suppliers ramp up production. It's more likely prices will stay flat, so more personal computer manufacturers are likely to increase memory content. If computer shipments rise significantly, there could be some shortages of 256-Mb parts especially in second half 2003.

SRAMs

Cellular telephones and other portable electronic equipment have given SRAM (synchronous random access memory) chips a new lease on life and it should continue to be a growth market in coming years. SRAM tags fell in 2002 and there should be more erosion in first half 2003. Some analysts say prices could rise in the second half.

Acetone

Prices nose-dived in the acetone market in late 2001 and 2002, but tags were pushed higher in the second half from supply shortfalls and increased demand. The biggest impact on this market in 2002 was the outage caused by a September explosion and fire at a plant in Mobile, Ala. Prices will continue to climb and stay high through mid-2003.

Benzene

While costs for benzene producers increased in 2002, demand fell, so prices stayed still. Demand is expected to stay even for first half 2003, but prices may increase in the second quarter, as anticipated increases in crude oil prices have an impact. Supply could tighten if buyers begin to buy in advance of higher-priced foreign crude oil.

Chlorine

Chlorine demand continued to drop in the vinyls chain in 2002, but pricing didn't reflect the drop. With no signs of additional capacity coming online in the near-term, the forecast calls for higher prices, increasing steadily throughout 2003. Increased demand for chlorine derivatives will come from the overseas construction industry, and cause tightness in the domestic market. The already tight caustic soda market will likely follow suit.

Citric Acid

Citric acid prices slowly declined in most markets and applications throughout 2002, caused by falling energy costs and more supply than demand. The market is mature, so that trend is expected to continue. But, pricing competition has become fierce and will keep prices low, as demand grows at its normal 4% annual rate.

Ethylene

Demand for ethylene dropped in 2002, but several factors kept prices on a roller coaster ride-including plant outages, erratic energy costs and rising feedstock prices, followed by supply returns and depleted inventories being refilled. Demand is expected to grow into 2004. But, prices aren't expected to climb because of increased capacity ahead.

Hydrogen Peroxide

More than half of the hydrogen peroxide produced in North America goes into pulp and paper bleaching. Output didn't rebound as much as expected so prices of hydrogen peroxide rose only modestly. This year, pulp and paper producers plan to expand production, so peroxide demand may grow by about 5%. Some tightness in second-half supply could support price increases.

Industrial Gases

Demand for industrial gases is expected to rise this year, driven by a growing recovery in such end-use markets as electronics, petroleum and primary metals. Four major producers own more than 75% of the market and strongly affect the transaction pricing of these gaseous commodities. Buyers can expect prices to climb steadily in 2003, especially in second half.

Methanol

Prices surged in mid-2002 and have not yet come down in the methanol market. But, demand has been gradually declining. Demand for methanol derivatives will grow in 2003-except for the methyl tertiary-butyl ether being phased out of gasoline blending. With no new capacity on the horizon, prices will stay in the region of 60-65¢/gallon.

Propylene

Domestic supply is in excess. The slumping global economy had caused regional propylene demand growth to slow to an average 4% over the past three years. Prices increased last year due more to increasing energy costs than any demand surge. That may be the case again this year, although foreign shortfalls have been known to tighten domestic supply.

Soda Ash

Soda ash prices fluctuated worldwide in 2002 even though demand rose by as much as 4%. Pulping applications and increased demand and capacity in China may become bigger factors in worldwide pricing, as Asia currently consumes up to 36% of the world's soda ash supply. Look for prices to climb with increased demand in 2003.

Sodium Bicarbonate

After a long period of price declines and oversupply, producers began pushing through price increases in late 2002. The relatively high 3-4% demand spurt in 2002 was fueled mostly by the food industry. Domestic prices in the past had been held down by periods of overcapacity, but demand is outpacing capacity, so prices are climbing.

Styrene

Purchasing recovered by 4% last year-as demand for downstream polystyrene resin improved by a solid 3%. Prices plunged in late 2001, but came back up by the middle of 2002 due to some spot shortages. Styrene demand is forecast to grow 4% again this year, but inventories began growing late in 2002 and that may depress pricing growth.

Sulfuric Acid

Demand has been declining 5% annually from the pulp and paper industry as more users are recycling sulfuric acid-a situation that won't change in 2003-so prices will continue to reflect that loss of a customer base. Additional capacity is expected in 2003, which may bring pricing down even further.

Titanium Dioxide

Pricing for titanium dioxide has been erratic in the past year, hitting bottom in early 2002. Suppliers began trying to push through increases later in the year, but buyers have been resisting-creating a tense market. If paper production perks up, prices may jump early in the year, but will trend down again as inconsistent demand keeps the market balanced.

HIgh-Density PE

Suppliers pushed prices higher in 2002, but they may not be so lucky this year. Last year's growth of 5-6% was pushed up by inventory building-which will be a nonfactor in 2003. A Solvay/Chevron Phillips venture is bringing on 700 million lb of new capacity soon. That could tip a market already close to oversupply.

Polystyrene

Producers will push for higher prices in coming months as they bid to boost profitability. Prediction: They face tough sledding. First, inventories are now in balance after a two-year roller-coaster ride; second, demand in 2003 will return to normal levels, about the same as the overall economy; and third, monomer prices will be weak because global supply conditions are improving.

Polyvinyl Chloride

Prices will strengthen because of stronger feedstock tags and a growing robustness of the economy as the year moves along. Pricing dipped in the fourth quarter and will be soft through March. As construction gains steam, PVC producers will aggressively post increases. Most will stick. Note: Even though demand from China will boom, look for overall consolidation among suppliers.

Polycarbonate

GE and Bayer pushed hard for price increases in the high-tech oriented polymer, but buyers were able to keep hikes to moderate levels. Reason: Cheaper imports kept domestic producers from achieving such goals. Optical-grade markets are struggling and aren't expected to recover soon. Markets for blends in computer housings and keyboards remain soft, but may show some spark in 2003.

Polyethylene terephthalate (PET)

Polyethylene terephthalate (PET) resin demand in the U.S. is forecast to increase 6.2% annually to 6.6 billion lb in 2003, valued at $4.1 billion. Still, it looks like a buyers' market ahead. First, unseasonably cold temperatures in late fall and early winter have softened sales. The next major events are expansions by M&G Group and DAK that will trigger a fight for market share.

Rubber Hoses

Sales of industrial rubber products are forecast to increase 6%/year to $18 billion in 2006-about half from volume growth and half from price increases. This fits with this year's expected 2% price increase. Also, higher engine operating temperatures are creating applications for higher performance and costlier value-added hoses for automotive, aerospace, marine and off-road equipment.

Rubber Sheet

Erratic pricing for natural rubber sheet began a sustained upward trend last year, rising from 53¢/kilogram in January 2002 to 84¢ in January 2003. Insufficient supply and high prices have allowed for synthetic rubber to make end-use inroads, but stronger-than-expected demand from global automakers have made natural rubber a desired commodity, even with prices up.

Plastic Pipe

Demand for plastic pipe isn't growing as briskly as the mavens had forecast a year ago, when they predicted 5% average annual growth through 2005. Growth last year was just 2%. Housing pipe sales have been steady and industrial purchasing of pipe has slipped, so the rate of buying growth in 2003 is uncertain. Higher pipe prices reflect higher costs of such key raw materials as polyvinyl chloride and high-density polyethylene.

Plastic Sheet

The rate of rejuvenated sales growth slowed last autumn-so a 4-6% increase projected for 2003 sales may be too optimistic. Market-share competition is increasing in the global plastic sheet market among HDPE, LDPE, and LLDPE, and this has helped keep sheet prices low, despite the 2002 runup in resin costs. Look for a 2.5% year-on-year decrease in pricetags. Reason: Significant overcapacity in extrusion.

Paint Products

Industrial and decorative paint demand tends to be cyclical as it is influenced by the economy, and grows at about twice the rate of gross domestic product-or somewhere around 6.5% last year. This year, it will be more like 7%. Overall paint prices jumped 4% last year, but will rise only 2% in 2003.

Wood Products

Replacement lumber prices are expected to be stable this year-with supply and demand both off 2%. There will be little upward pressure on lumber prices-despite less competition caused by softwood lumber tariffs on Canadian material. Without the imposition of duties, analysts had expected a 6-8% decline in prices last year; with the duties, tags slipped only 1%.

Plastic Film

Ever-expanding applications will continue to boost demand for plastic film (mostly linear low-density polyethylene grades) by 3%. Packaging users are seeing increasing advantages of plastic film over rigid packaging, especially in food applications where polypropylene film thrives. Prices in this market will remain in the current range as demand remains steady along with supply.

Plastic Bottles

The market boomed in 2002, fueled by the beverage industry's presence in the bottled water segment. Market watchers expect a 5% growth trend for bottlers for several more years because of bottle-size adaptations. Additional capacity is being added in various global markets, which could bring prices down in 2003. But, higher resin and raw material costs could force pricing up.