Economic malaise spreads, with pockets of strength
By Staff -- Purchasing, 12/10/1998
Most of the industrial buyers contacted for our latest grass roots economic and supply conditions poll say the manufacturing economy has taken a definite turn for the worse."September was an excellent month, but October is starting very slowly," says the buyer for a chemicals outfit in Indianapolis. "We expect to see a reduction in sales in the fourth quarter." The buyer for a North Carolina-based manufacturer says, "Our incoming orders are down...we expect this to extend through November based on our current market."
Meantime, a Houston-based buyer says, "The economy for the oil well servicing industry is falling. We've released all our temps and eliminated overtime. Major customers have reduced the amount of items on order by 50%. Items that remain on order have been delayed for delivery in second-quarter 1999. No pick-up expected until mid-1999."
Another PM says his company has been operating only four days per week since mid-June. "The slowdown was supposed to last only three weeks but it continued for 11 weeks," he says, adding, "August is one of our best months but, this year, we were quite slow."
Still, there remain pockets of strength in some regions and industries. Automotive is one standout, although it's difficult to gauge how much activity represents recovery from the GM strike. "The marketplace is really busy and our automotive customers are pushing for delivery." says one Midwest purchasing analyst. She thinks strong demand from the auto sector should continue for the next quarter to half year. An East Coast PM says: "We're working very hard to get our back orders filled. Business is good for us now, and if anything, I see it getting better in the next six months. Not everyone's in the same boat, but we sure don't have any problems due to any slowing of business."
The following summaries of supply conditions come from reports filed by Purchasing's grass roots field editors around the country--
* Prices: It's annual contract time, and, as one Iowa-based buyer puts it, "We're able to deal 1999 contracts at lower than 1998 pricing." Says another purchasing pro: "Prices are holding because we've insisted on it. We're getting a lot of pressure for increases, but we've been successful resisting...Our customers push us to keep prices stable, so we try to help our suppliers keep prices stable too."
An Arkansas-based materials manager remarks: "Pricing is generally down, but you have to ask for the decreases. Steel is down, copper is down, aluminum is down." Commenting on the polyethylene industry, a purchasing director remarks: "That market is crazy. They announce an increase and then one producer starts undercutting prices and, first thing you know, there will be a 5%-8% decrease. It is kind of wild." The PE example, he says, is part of a general trend toward lower prices for all major industrial materials. "This is very unusual because most of the time the trend has been slightly up. Now it is down or at least slightly down."
* Leadtimes: Typical are the comments of this PA on stainless steel products: "Leads are at bottom now--in fact, I've seen [product] on the floor at the warehouse. [Suppliers] are stocking and having it on hand ahead of time." Says the director of purchasing for a Southern utility company: "My impression is that everything is coming in on time. I think leadtimes might even be dropping a little."
* Inventories: Given the uncertain future, most firms appear to be pulling back on inventories. A commodity manager in Cleveland observes that, "People are concerned about the economy as a whole, so everyone is looking at inventory levels. They're starting to trim built-up inventories." His own company, he says, is trimming inventory of finished goods. "Demand may be good, but [people are] using inventories for production."
On the materials side, buyers say leadtimes are too short to justify inventory. "We can get our materials from the mill quickly, so why should we tie up our funds?" asks one metals buyer. "People are buying only as needed," says the PM for a maker of rubber products. "Orders are often called in just before items are needed. Like us, they're keeping a tighter rein on their money."
Purchasing's grass roots business poll also uncovers some early signs of unwanted inventory accumulation at the finished goods level. One purchasing director says finished goods inventory is up somewhat at his firm because fall and winter sales have not been tracking "quite as well as we had anticipated." He says, "consumers are just not out spending quite at the level that they were a few months ago. That has caused us to have a little higher inventory than we would have anticipated at this point a year ago."
* On-time delivery: Buyers report few problems now, but some say this represents a big improvement from just a few months back. Says one Midwest-based PM: "It got to the point where we had to have a person assigned to expediting and pushing suppliers to deliver on-time. We've noticed a little slowdown in business, but I think the economy will come back." Says a commodity director in Cleveland: "We had some difficulties this year. It was a little tight in the first quarter. We had to employ some other people to keep things going."
* Quality: Like on-time delivery, there are signs that product quality had begun to slip under the strains of a booming economy. A Midwest purchasing analyst says, "We haven't seen any major [quality] improvements because there's too much pressure to produce. It's just natural that as you demand more, people get a little more lax. While quality is acceptable, it is not where we'd like it to be." Another commodity purchasing director remarks that, "Quality is not perfect, but not bad."
* Imports. Buyers suggest that domestic suppliers will continue to face stiff competition from offshore producers. With many global economies suffering, one Arkansas-based materials manager says "anything imported can be picked up cheaper than it could before." Favorable currency exchange rates have caused his company to look at new suppliers in a number of foreign countries, namely, China, Singapore, and Brazil. Remarking on pressure from auto customers to cut costs, another purchasing pro says, "We don't hesitate to go offshore. The heat is on to get leaner and more competitive at what we do."
Here are the regional supply conditions details reported by our field editors and supplemented from Purchasing's monthly leadtime and price surveys--
East Coast
Domestic steel mills "quietly reducing prices to meet offshore competition." PE resin prices falling. Pulp prices down around $25 on average, should be at or close to bottom, small upturn possible by year end, 1999 expected to see flat pulp pricing. Coated groundwood down 5% ($60/ton). Custom motor leads out to 8-10 weeks.
Mid-Atlantic
Negotiations for 1999 steel contracts appear to be favoring buyers. CR contract prices expected to fall 3%-5%. Nonferrous prices dropping on weak futures pricing. Aluminum averaging 5% below year ago. Lower prices expected in 1999 for fabricated metals. Suppliers announced 4%-6% increase on 304 stainless sheet (effective 10/1), but buyers doubt it will stick. Slippage in stainless sheet and plate prices. Sponge prices expected to rise 5% after January. Glass prices up 10%. Mercury tags down by as much as 20%.
Midwest
Steel scrap down $10-$15 per ton, pig iron down another $10/ton; both items expected to drop further. Steel coil (HD galvanized, light gauge) is down 4%-5% for December availability. Stainless steel tags averaging 5% off year-ago levels and should hold for another 3-6 months. Leads for cold-rolled steel items down to 3-4 weeks from 4-5 weeks a year ago; turnaround possible due to steel trade cases. Galvanized steel leads down to 4-5 weeks from 5-6 weeks a year ago (for established customers, longer for others); price increase possible. Copper and aluminum tube prices down due to decline in primary metal. Leads for aluminum thin-stock flat rolled down to 4-5 weeks from 6 weeks a year ago. After going from two week leadtime to 6-8 weeks, aluminum extrusions have started to stabilize, leads falling into 3-4 week range. Leadtimes for stampings and die castings being stretched from 3-4 weeks to 4-6 weeks. Methanol down 8(cent)/gal effective in early October. Three percent reduction in corrugated box prices. Oversupply in office papers; prices are down. Prices for seals and rings expected to slip soon. Some multi-wall bag makers announcing increases of 6%-10%; leadtimes stretching.
West
Softness appearing in metals pricing. Leads shrinking from screw machine shops. LTL carriers taking a 5.5% increase. Leadtimes on gray iron castings in to 1-12 weeks from 16-22. Axle assembly leads in to 2-6 weeks from 4-8 two months ago. Steel prices expected to fall 2.5%-3%.
South/Southwest
Fiber container leads out 20%, but prices down from year-ago. Bottom fell out of the steel structurals market; all mills have cut some of their products (those most affected by imports). Not much improvement in leadtimes on wide-flange beams (6-10 weeks). Big improvements on steel plate leads with some mills offering shipment from the floor (versus no availability just two months ago). Prices on WF beams have fallen as much as $55 per ton; mill quotes on plate reflecting substantial drops in book price. PE prices down 5% over the past three months. Fleet vehicle tags down around 3%.
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