U.S. capacity overhangmakes for fast deliveries
By Anne M. Porter -- Purchasing, 5/6/1999
Strong economic numbers in first-quarter 1999 have prompted producers in a number of commodity industries to start campaigning for higher prices. Reports from the field show recent price-hike attempts (and a few successes) in such beleaguered industries as corrugated, plastic resins, industrial chemicals, even some steel segments. But a quick glance at Purchasing's aggregate and individual leadtime indicators suggests that supplies remain excessive in nearly every major industrial commodity category in the domestic U.S.In March of this year, Purchasing's Leadtime Index--a weighted average of leadtimes for 145 popular industrial commodities--fell to its lowest level since the series was rebenchmarked in 1985. The cycle began about three years ago. In 1996, the Leadtime Index fell nearly 10%. It edged down another 3% in 1997, and fell 5% in 1998. For the twelve months ending in April 1999, leadtimes shrank at a 5% annual rate.
The biggest leadtime improvements are occurring in the following categories--
* Steel. For the twelve months ending April 1999, Purchasing's composite index tracking steel leadtimes showed deliveries averaging 8% faster than one year ago. That rate of improvement is down slightly from 12% in the prior month, but still indicates considerable supply slack on a national basis. Based on the capacity expansion that has occurred in this industry plus an inventory overhang from 1998, Purchasing's outlook anticipates up to six more quarters of leadtime improvement (even with some tightening of imports).
* Nonferrous metals. After rising to 26% in November of 1998, the annual improvement rate in nonferrous leadtimes has fallen to a still-impressive 13%. Word on the street says domestic demand for nonferrous has started to slide following six years of growth. As such, Purchasing's outlook has nonferrous leads shrinking for at least five more quarters.
* Packaging (including corrugated). For the twelve months ending April 1999, Purchasing's composite tracking packaging leads shows a 12% year-over-year improvement rate, a trend that is difficult to reconcile with recent corrugated price hikes in the marketplace. Market sources say corrugated supplies have tightened from the mills, but inventories among distributors and box converters remain excessive. Nonetheless, the mills' attempts to tighten supplies could turn the leadtime trend in as little as six months.
* Chemicals & resins. On average, chemicals leadtimes have improved 9% in the latest 12-month period. At its best, the annual improvement rate for the chemicals industry grouping had risen to 11%. Outlook: Too much new capacity and still-weak export demand suggest the improvement trend could persist for at least four more quarters.
* Paper. Purchasing's paper leadtime composite shows a bit of supply slack remaining, albeit considerably less than in metals. For the twelve months ending April 1999, supplier delivery speeds improved 2% over a year ago. Still, considering that leadtimes improved 20% in 1996 and 7% in 1997, this may seem perilously close to a balanced market. Paper producers have been more restrained in expanding their capacity. However, offsetting this admirable restraint is a recent surge in paper imports that could soon translate into looser leads.
Intermediates areanother story
Supply conditions appear considerably less loose at higher levels of processing, according to Purchasing's leadtime data. For example, the composite index tracking leadtimes for fabricated metals stands nearly on par with a year ago, meaning that delivery speeds are not improving at all. In recent months, this indicator has actually shown fab metals leads to be stretching slightly--a function, most likely, of scarce labor availability in skilled metalworking and still-strong demand from the automakers and their suppliers.
A similar situation characterizes deliveries for processed rubber and plastic parts. Leadtimes are stretching at a 2% annual rate, again reflecting strong OEM demand combined with tight labor markets.
Leadtimes also are stretching somewhat on common MRO items. For the twelve months ending April 1999, Purchasing's leadtime composite for a market basket of popular MRO goods shows deliveries running 4% slower than last year, suggesting that distributors might be making do with leaner stock levels in a strong--but very uncertain--economic climate.
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