Inflationary pressures are evident everywhere
Mary Clair Austin -- Purchasing, 7/15/2004 2:00:00 AM
The word on the street is that raw materials inflation is taking its toll on companies that make products from steel, nonferrous metals, chemicals and plastics. Margins are being squeezed by rising costs of materials, energy and transportation, buyers report, just as the recent improvement in business trends went into a stall. That's why several buyers report digging out 1970s-vintage "Whip Inflation Now" buttons from the bottom drawers of office desks.
The Federal Reserve's latest Beige Book survey indicates that economic activity in April and May continued to expand across the nation. But, PURCHASING magazine's monthly survey of buyers in June put the business activity index at 67.6 (on an index where 50 separates expansion from contraction). While still high, it does reflect slippage from the 72.7 average of the previous three months.
On the other hand, 73% of the buyers polled see prices rising in June, and the buyers of virtually every industrial commodity expect prices to continue rising in coming months. Inflation has been controlled for the past four years, hitting lows not seen since 1947, but all that may be changing. Recent jumps in oil-related prices and a surge in producer prices in May have stoked inflation worries, overshadowing other data that pointed to the recovering U.S. economy. Atop all that, consumer prices rose 0.06% in May, the biggest monthly increase since January 2001.
Beginning last year, strong demand for raw materials in China, the U.S. and elsewhere drove commodity prices through the roof, to multi-decade highs in many cases, and helped fuel some fears that inflation was about to make an unwelcome return. PURCHASING's index of commodities prices is 65% higher than it was at the start of 2003. So, it's not a shock that the central theme of the June survey brings comments such as: "Price increases are forcing end-product prices up," "we are being bombarded with price increase proposals" and "price increases are impacting profits."
"We are pleased to see the increase in orders, but believe if suppliers are not careful with pricing, the market may overheat, and all the improvements may be washed away," says a purchasing director of a chemical company in New Jersey. "While there is plenty of work, it's very hard to make money," says a purchasing manager of a tooling company in Michigan. "Orders are about 10% ahead of last year at this time; however, against our budget, we are running behind," says the buyer at an outdoor recreation products company in California. "That's because prices for the raw material to produce our goods are more expensive than last year—and, in some cases, prices are continuing to increase."
As expected, steel prices remain a top concern for purchasers. "We are trying to do the impossible," says a senior buyer for a liquid and gas delivery systems company in Texas. "We are trying to build ahead but maintain inventory. And keep purchased price variance down but buy an incredible amount of stainless steel. Are we wizards or genies?"
Other companies aren't so willing to joke. "If steel prices do not decline we will be in serious trouble," says a purchasing agent from a communications company in Alabama. But, a full 72% of the buyers in June (the same amount as in May) expect steel prices to continue to increase over the next three months.
Overall, responses from buyers surveyed in June reported that business conditions are improving, but not as well as expected, largely due to increased prices of raw materials. Although the Beige Book reports that manufacturing activity continued to rise in most areas of the nation, with several districts describing the increases as broad-based that activity is not being felt in company's profit margins. "Customers are extremely concerned with price and less concerned with development of long term relationships," says the purchasing manager for an aerospace firm in Connecticut.
Energy, logistics are big worries
Transportation and energy costs have continued to rise to a six-month high in June. That's reflected by 86% of the buyers surveyed in June who report price increases on transportation and 84% seeing price increases on energy.
"As long as gas prices don't get any more out of hand we'll be okay," suggests a supply chain manager of an automotive systems company in South Carolina. The pricing trends continue to be on the upswing, though, and most buyers are not optimistic about pricing trends in the next three months. Seventy-six percent of buyers polled in June expect prices on transportation to rise during the next 90 days, down slightly from 72% in May, while 79% of buyers expect energy prices to increase, up slightly from 76% in May.
The director of procurement at a tobacco company in North Carolina says: "Oil prices are beginning to boost fuel and energy costs for transportation." That's because, with fuel prices at record levels, transportation companies are passing increased costs along to their customers, according to Beige Book commentaries. A traffic control manager in New York says the "cost of global shipping is increasing, as the exchange of the U.S. dollar versus European euro is lousy!"
"Transportation by rail and over-the-road (OTR) trucking is difficult and costly these days," says a purchasing manager for a construction company in Florida. But, energy buyers say their firms are having trouble getting their customers to pay more. "Overall business is tough," says a restaurant chain's purchasing director in California, "since the cost of transportation continues to increase and it is hard to pass the additional costs to customers."
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