Inflation threat can't shake buyers' sunny outlooks

By Staff -- Purchasing, 5/18/2000

There's plenty in the economic headlines to give people pause-inflation appears to be gathering momentum, stock market investing seems to grow riskier by the day, and the Federal Reserve continues to raise interest rates with some officials hinting that more decisive increases may soon be forthcoming.

But regardless of any storm clouds lurking on the distant horizon, the mood among industrial buyers remains more decisively positive than it has been in years. For two months running, nearly seven out of 10 people on Purchasing Magazine's monthly business survey panel classify themselves as optimistic about business prospects for the coming six months. On the eastern seaboard the numbers run even higher with 77% of Northeast and 74% of mid-Atlantic-based buyers expressing positive business sentiments for the coming six months. Only 7% of this month's survey participants classify their outlooks as pessimistic, while 26% describe their business outlooks as neutral.

In most cases, buyers are hanging their optimism on strong order rates and rising backlogs. Compared to a month ago, nearly 70% of survey panelists say business remains either flat or steady. Compared to a year ago, 65% say the same.

A Michigan-based procurement manager notes that "Future orders for the next two to three months are ahead of last year." A PM in Minnesota says, "Our increase in orders is much larger than normal." In Georgia, a steel buyer reports orders that are "higher than forecasted." And a Wisconsin-based PM says his company's capacity is "booked for the next six months."

Some respondents share expectations of seasonal upswings. A resins buyer in the Northeast says, "We are seasonal to some extent, and our season is now through July 1." An Iowa buyer of steel says, "It's been slow since Christmas, but this is typical. We expect an increase by April." A Washington-based purchasing pro says, "We have enough orders to keep us busy for two months-and boating season hasn't started yet!"

Product innovation remains another big reason for buyers' collective high spirits. For example, the purchasing manager for a Chicago-based company remarks that, "Many new items will be approved and will start in production in the next six months." The PM for a food manufacturer in Wisconsin says, "We're coming off our third consecutive record profit year and we're launching new products which are expected to increase sales and profits." The purchasing manager for a company in Kinston, N.C., says "We are presenting additional items to the marketplace and receiving a positive response." And a PM in Costa Mesa, Calif., remarks that "New product introduction appears to be gaining ground. We anticipate a 10%-15% total revenue increase for the year 2000."

Bad with the good

While booming economic growth is a good thing, it certainly makes buyers' jobs much tougher as productive and labor capacity continues to tighten. One in three buyers surveyed nationwide say they've begun to experience some shortages of supply. The figures rise closer to 40% in both the Northeast and Southern regions of the country.

Latest diffusion indexes tracking general leadtime trends for various commodity groupings sort out as

follows-

• Strong supply pressure (70% or greater reporting stable to longer leadtimes): semiconductors (79.7).

• Moderate supply pressure (55%-69% reporting stable to longer leadtimes): aluminum (67.8), copper & brass (64.0), steel (63.4), machinery (62.0), petroleum (61.0), plastic resins (60.3), industrial chemicals (57.8), transportation services (56.8) pulp (56.5), corrugated (54.6) and paper (54.5).

• Neutral (45%-54% reporting stable to longer leadtimes): packaging (53.3), MRO goods (52.2) and computers (45.5).

• Downward pressure (44% or lower reporting stable to longer leadtimes): other office equipment (43.3).

Meanwhile, in the pricing realm, buyers report little relief. In fact, concerns about runaway inflation are becoming more common. One mid-Atlantic-based buyer speaks for many when he says, "Rising prices are my biggest headache. Combine price increases with higher freight (due to rising fuel costs), and we could be looking at runaway inflation like we haven't seen for quite some years." A purchasing manager in Florida worries about "continued material increases," while a Tex-as-based buyer predicts that rising supplier prices "will force up prices on finished products" ultimately slowing growth.

National diffusion indexes tracking major pricing trends for various commodity groupings sort as follows for the current month-

• Strong upward price pressure (70% or greater reporting stable to higher pricing): petroleum (95.1), transportation services (90.7), corrugated (89.7), pulp (88.5), resins (86.4), paper (84.1), aluminum (83.3), packaging (82.0), chemicals (73.9), copper and brass (72.4), steel (71.9).

• Moderate upward price pressure (55%-69% reporting stable to higher pricing): semiconductors (69.1), industrial machinery (66.7), MRO (62.6).

• Neutral (45%-54% reporting stable to higher pricing): other office equipment (46.1).

• Downward price pressure (44% or lower reporting stable to higher pricing): computers (32.4).

Nine in 10 buyers nationwide report higher transportation costs for the latest month. Fuel surcharges have resulted in freight hikes of 2%-5%, according to survey respondents.

A Midwest buyer citing transportation as his biggest headache remarks that most freight carriers are "talking about fuel surcharges but can not be relied upon to pick up and deliver when customers would like them to." A Kansas-based steel buyer notes that "transportation problems have caused inventory shortages."

Buyers report corrugated price increases ranging everywhere from 3%-12%. One fed up buyer in South Carolina complains that "Companies are using fuel prices as an excuse to raise prices, but it's pretty much just plain greed, especially in the corrugated sector." Likewise, a Texas-based purchasing agent voices doubt that corrugated increases are due to short supply as he's being told. "I think it's simply increased profit for some," he says, "and to reduce debt for others." Buyers report paper price increases ranging from 6%-13%.

Resin price increases are in the 2%-8% range, according to buyers. Most blame the increases on higher oil prices, but a purchasing VP in Kentucky says that resin increases are due also to "low supply, increased demand in Asia and greed."

Buyers report stainless steel price increases of 3%-18%, but a Pennsylvania purchasing manager notes that he's seen prices for stainless steel plate, sheet and coil rise 30% between September 1999 and March 2000. Stainless steel tubing has gone up 5%-8%.

A Wisconsin-based PM says, "Steel mills have increased prices and leadtimes. Some shutdown locations are causing longer leadtimes-out from one day to three to four days. The solution is to go to their competitors in our area." In fact, nationwide 63% of survey respondents report longer leadtimes for steel. A Michigan steel buyer complains that stainless steel leadtimes have extended from 12 weeks to 14-16 weeks and cites "steel availability" as his biggest concern. A PM in Ohio says his biggest problem is obtaining "stainless steel shapes and sheet."

Boosts in aluminum prices are running in the 10% vicinity, according to buyers polled this month. Some reports show aluminum sheet prices gaining 7% in first quarter 2000. Leadtimes for aluminum extrusions are said to have gone from four weeks to six weeks. Aluminum wheels continue to be in short supply.

Buyers report longer leadtimes for copper as well, especially beryllium copper strip. An Illinois purchasing manager cites leadtimes for this commodity extending from six to eight to 20-26 weeks.

Here are the main price pressure points by region-

• Northeast: Every Northeast pulp buyer surveyed this month reports higher pricing. Price trend diffusion indexes in the 90%-99% range include aluminum (92.3) and refined petroleum products (91.7). Also showing strong upward price pressure are corrugated (89.3), transportation (88.5), packaging (86.4), plastic resins (80.0), paper (77.3), steel (72.7) and industrial machinery (71.4). Buyers report the following items are in short supply: aluminum disc wheels, nickel alloy plate and sheet material for fabrication, copper, stainless steel, titanium dioxide, capacitors, ICs and laboratory supplies.

• Mid-Atlantic: Buyers unanimously report rising prices for pulp, refined petroleum products and resins. Ninety-five percent of buyers report stable to higher pricing for corrugated and transportation. In the 80%-89% range are packaging (85.0), industrial chemicals (83.3), industrial machinery (80.0) and copper and brass (80.0). Strong upward price pressure is also reported for aluminum (77.3) and steel (70.8). Short-supply items in this region include hydraulic pumps and tantalum and ceramic capacitors.

• South: The general price diffusion index for refined petroleum products registers at 100% in this region. Strong upward price pressure is also evident for transportation (95.8), corrugated (95.5), packaging (93.8) and pulp (91.7). Commodities falling into the 80%-89% range include aluminum (88.2), resins (85.7), semiconductors (83.3), steel (81.6), paper (80.8) and industrial chemicals (80.0). Price index tracking industrial machinery pricing comes in at 75.0. Items in short supply are: steel and aluminum, molded rubber, machined parts, tantalum capacitors and ICs, inductor cores and lumber (dried maple and cherry).

• Midwest: Topping the price pressure charts are refined petroleum products and transportation with both diffusion indexes registering at 92.9%. Pulp index is at 90.0 this month. Corrugated (88.2), plastic resins (87.3), aluminum (83.3) and copper and brass (81.8) also show strong upward price pressure. Commodities in the 70%-79% range include packaging (78.9) and industrial chemicals (70.0). In short supply are aluminum truck wheels, polypropylene, ABS resin, iron castings, motors, relays and diodes, capacitors, resonators and resistors, processed steel and wide flange beams, stainless steel pipe, copper and safety relief valves.

• West/PNW: Ninety-two percent of buyers in the West/PNW region report stable to higher ricing for petroleum. In the 80%-89% range are corrugated (86.1) and plastic resins (84.6). Strong upward price pressure is also evident in nine other commodities, including transportation and industrial machinery (both at 75.0), aluminum (73.1), paper and steel (72.7), semiconductors (72.2), packaging (70.8), and pulp and industrial chemicals (70.0). The following items are listed in short supply: copper, stainless steel, castings, flash memory, tantalum and ceramic capacitors, machined parts, switches, rod ends and bearings.