PURCHASING HOTLINE

By Staff -- Purchasing, 9/7/2000

ECONOMY

After pausing at 4.8% in June-July, the Blue Chip consensus forecast for real GDP growth in 2000 continued its upward march, rising to 5.1% in August following release of unexpectedly strong second quarter growth figures. "Notwithstanding the surprising 5.2% advance of real GDP growth in Q2, a majority of our panel members persist in their belief that accumulating evidence clearly suggests U.S. economic activity is transitioning to a slower pace," Blue Chip remarks. Outlook: Consensus now assumes a 3.2% growth rate in quarter three and a 3.3% advance in the final quarter of this year.

Manufacturing capacity utilization edged up two tenths of a point in July (to 81.6%) but there were small signs that demand for manufacturing materials may be faltering. For example, the overall operating rate in primary metals fell three tenths of a point while capacity use among iron and steel mills dropped eight tenths, coinciding with anecdotal reports that end use metals buyers are now cutting back on orders due to unwanted stockpiling. Overall chemicals industry capacity utilization has lost 1.3 points since January. Operating rates for most other major manufacturing raw materials segments remain well shy of 1994-1995 peak rates. Exception: CU rate for the semiconductors and electronic components segment hit 103.4% in July, compared to a previous high of only 92.8% in 1994-1995.

The Fed has already done enough to slow economic growth, according to 76% of the business economists represented in the latest Economic Policy Survey by the National Association of Business Economists (NABE). This represents a 14-point gain in the percentage of economists who deem Fed monetary policy to be "about right." Nine percent think the Fed has become too restrictive, up from 5% in February. Twelve percent think Fed policy is too loose, down dramatically from 32% in the February survey. Looking out six months, 35% of the economists surveyed by NABE would like to see more Fed tightening, a big drop from 61% in February.

Rising interest rates, a strong dollar, and high energy costs have taken a big bite out of business confidence among the nation's largest manufacturers, according to a recent survey by the National Association of Manufacturers (NAM) in conjunction with Fortune Magazine. In second quarter 2000, only 76% of large firms were feeling either very or somewhat positive about future business prospects compared to nearly 92% in first quarter 2000. NAM notes that "the downward trend was supported by predictions of lower sales and lower investment over the next year" plus a lack of pricing power that "continues to dog manufacturers."

More good news on the inflation front. The Producer Price Index for finished goods was flat in July. Core index (finished goods less food and fuel) only regained the tenth of a point it lost in June. For the twelve months ending in July, the top five PPI declines came in: microprocessors (-70.3%), softwood plywood sheathing (-38.5), lumber of two inches nominal thicknesses only (-34%), oriented strand board (-31%), and sanded softwood plywood (-30.5%). Top five PPI increases for the latest 12 month period are multi-layer ceramic capacitor chips (+159%), mixed recovered papers (+133%), chlorine (+94%), natural gas liquids (+93%), and aromatics, made in refineries (+92%).

Housing Market Index (HMI) from the National Association of Home Builders (NAHB) bounced up three points to 61 in August as mortgage rates eased. "The index has regained some of the ground it lost earlier in the year, when rising interest rates were negatively affecting new home sales,'' notes Robert Mitchell, NAHB president. The August reading is still 17 points below the last peak in late 1998, "but the recent rebound is a good sign that the market is stabilizing," Mitchell says.

U.S. government agencies that track the economy need more money next year or they may eliminate some economic studies and release fewer economic reports. The National Association for Business Economists (NABE), which has about 3,000 economists for members, is pressing Congress for an increase in funding for the divisions of the departments of Commerce and Labor that produce U.S. economic data.

PRICES

White paper makers are boosting prices by 8% in September, led by Georgia-Pacific Group, the No. 2 North American paper company. The move will boost prices by $60/ton to $780 for the type of paper used in copier machines. Prices for cut-size paper have increased about 15% over the past year because of rising demand and cutbacks in paper production by companies, notes analyst Anna Torma at Merrill Lynch & Co. However, industry statistics show summertime paper demand is slowing down.

Retail unleaded gasoline averaged $1.50 nationwide in August for a gallon of self-serve regular, according to AAA's monthly Fuel Gauge Report. The national average gas price is 24¢higher than in August 1999, but it is 8¢lower than the July monthly report.

Buyers are fighting efforts of paperboard producers to raise prices $40/ton on solid bleached sulfate, which would be the second market price increase of the year. The mills cite rising raw material costs, particularly energy, as the compelling reason for the price hike. But, big-volume buyers have resisted the new prices, seeking delays in the implementation date until at least September or reductions by half from the $40 proposal.

Spot tags for hot-rolled sheet have dropped to an average $290/ton in August from $300 in July, according to Purchasing's monthly survey of metals buyers. That's the lowest price since the $280/ton of last August. CRU International suggests that "prices appear weakest in hot-rolled coil." However, prices for cold-rolled sheet dropped faster last month to $390 from $420. Several buyer sources indicated that they had seen offers as low as $260/ton for hot-rolled and as low as $380 for cold-rolled.

U.S. crude oil prices continue to press the $32/barrel mark amid fears of a looming winter supply crunch since latest inventory data shows skeletal national petroleum supplies. Biggest worries center on potential heating oil supply crisis this winter, since distillate inventories are sharply lower than they were last year at this time. The OPEC cartel has little leverage to ease tight global supplies. Nine of the 11 cartel's members already are pumping at full capacity after the 2.4 million-barrel/day rise in the group's supply quotas earlier this year.

Aluminum ingot is vulnerable to a strong price rally next year, suggest the market analysts at Macquarie Equities in London. Their latest report says the London Metal Exchange (LME) price could be boosted by a weakening of the U.S. dollar, extended U.S. production cuts and a belief among consumers that the market will be in a supply deficit in 2001. LME cash aluminum is averaging 71¢so far this year because of booming world demand, as compared with 62¢in 1998 and 1999. The most-recent cyclical LME peak was 82¢in 1985.

National Starch and Chemical Co. has added a 9.5% surcharge to the price of all liquid adhesives sold in the U.S., due to rapidly escalating raw material costs. National says its raw material suppliers have substantially increased prices on almost all key feedstocks since the second quarter of 1999. In a related move, National has raised hot melt adhesive prices an average of 7%, also due to higher raw material costs.

The gold price has failed (after several attempts) to hold above $290/oz and drifted below $280/oz in early August. Analyst Julie Cunningham at CRU International says that "the weaker price and bearish moves on the New York Commodity Exchange are confirmation of an ailing market." And some other market observers are looking for a price under $260/oz, which was last summer's low.

Natural gas prices could jump to the range of $5 or $6 per thousand cubic feet during cold spells this winter, forecasts Tom Petrie of investment fund Petrie Parkman & Co. He puts the winter average price in the mid-$3 range. Reason: In order to supply enough gas this summer, suppliers have built little inventory.

World cotton prices will rise 9.5% next year because of stronger global demand, suggests the International Cotton Advisory Committee. For the first time since 1995, global consumption (19.9 million tonnes) is going to be above production (19.1 million tonnes). The 43-government cotton association says average prices on the U.K.-based Cotlook A Index will rise to 58¢/lb for the 2001 crop from a 53¢/lb average for the 2000 crop. Note: Prices on the New York Cotton Exchange are up more than 20% in the past year to 64¢/lb (delivered) for the December contract.

Zinc prices have risen 5.5% so far this year on the London Metal Exchange (LME), while the price of lead has dropped 11.8%. Zinc is averaging 52¢/lb so far this year as compared with 49¢for 1999. Lead, at 20¢is down from 23¢for all of last year. Neither base metal is near projected 2000 pricing-zinc at 57¢and lead at 25¢. Reason: Both zinc and lead markets were in surplus in the first half, according to International Lead and Zinc Study Group data, as compared with deficits last year that had been expected to be even larger this year.

With demand continuing to outstrip supply, copper prices on the London Metal Exchange (LME) are poised to rise to 90¢-$1/lb, suggests senior futures strategist William O'Neill at Merrill Lynch in New York. "Additionally, hedge funds, who had been mostly absent from base metals this year, seem to be returning to the investment arena, which might add to copper's upside potential," he says. Also bullish is futures strategist Ted Arnold at Prudential-Bache International in London, who is forecasting copper averaging 95¢/lb in 2001, based on the strength of global economic demand. The year-to-date LME average for copper is 81¢, compared with 71¢for 1999.

Midwest prices for low-residual scrap is expected to "snap back" in 2001 to $140-150 from a recent low of $105/ton, according to a survey of suppliers by MetalMaker.com. Not surprisingly, scrap buyers disagree. They note that scrap prices will remain depressed as long as there are high imports of foreign scrap, a surfeit of pig iron and new supplies of such scrap substitutes as direct-reduced and hot-briquetted iron.

Spot market tags for stainless bars have slipped, pushed down by high levels of low-priced imports. The price of grade 303 stainless bar is $106/cwt, while grade is 304 is $105.50, grade 316 is $128.50, grade 416 is $106 and grade 17Cr4Ni is $127.50. Although consumption of stainless bar was up 41% through April, import penetration jumped to 47% from 34% a year earlier.

"Downward pressure is expected for lumber prices for the rest of the year," says analyst Anna Torma at Merrill Lynch Global Securities. Reason: The Fed's six interest rate increases in the last year in an effort to cool the economy have slowed construction and hurt demand for building materials and lumber products. In addition, industry supply of timber products has increased in a period of slowing demand, creating an inventory glut that has further exacerbated the problem and knocked down prices, the analysts says. Lumber prices have fallen 15% from this quarter last year, while prices for oriented strand board, a plywood building substitute, have plummeted 30%.

P alladium prices have been extremely volatile, jumping from less than $200/oz to more than $600 in less than two years. Reason: Consumption by catalytic converter makers has grown at a compounded annual rate of 11.3% over the last three years. New-metal smelting growth has failed to keep pace. Outlook: Continued supply/demand imbalance, which will continue to gyrate market prices, says analyst Wayne Atwell at Morgan Stanley Dean Witter.

Large volumes of low-priced imports have driven ferrosilicon market prices down to 34¢/lb after being relatively stable at 36¢for the past several months. Imports are up 16% this year, with expanded supplies of the steel-alloying metal from Venezuela and Russia making up for a drop in shipments from South Africa.

MARKETS

Major appliance shipments have risen 6.1% through July to 39.6 million units, led by an 11.3% year-to-date increase in sales of cooking units. Shipments at present are on pace to exceed the National Association of Appliance Manufacturers' forecast of 63.6 million units for the full year. Last year, major appliance shipments were 62.4 million units. However, a cooling in the housing market could lead to a broader economic slowdown as demand eases for big-ticket items such as furniture and appliances.

The number of airline passengers is expected to reach 670 million this year, a 20 million increase over last year, and grow to 1 billion within a decade, projects Transportation Secretary Rodney Slater. So, he is pressuring the chiefs of all the major carriers to prepare short-0term and long-term plans to end rampant delays and cancellations. ``If you're straining the system right now with 650 million to 670 million passengers, what do you do to ensure that the system can handle 1 billion?'' asks Slater.

Tire makers are ramping up production as fast as they can to meet demand created by Firestone's recall of 6.5 million tires reportedly linked to peeling treads and tire blowouts. Goodyear Tire & Rubber Co., Michelin USA and Continental General Tire have boosted capacity. They cited consumer demand and requests from Firestone, a unit of Japan's Bridgestone Corp., and Ford Motor Co. on whose vehicles most of the recalled 15-inch ATX, ATX II and Wilderness AT tires are used. Firestone estimates that replacement of the recalled tires won't be completed until next spring.

Deere & Co. expects North American retail sales for the farm machinery industry to be flat to down 5% in the year beginning Nov. 1. Deere earlier had forecast North American retail sales for the farm machinery industry to be flat to down 5% in fiscal 2000 (ending Oct. 31). Agriculture already has forecast that U.S. farmers will reap the largest corn and soybean crops ever, keeping market prices low and leaving farmers with less money to buy equipment next year.

New freight car orders will reach 46,025 this year, the American Railway Car Institute forecasts, which is higher than the 1999 total of 41,420 but less than half booked in 1998. The Alexandria, Va.-based trade group projects orders will rise to 49,576 freight cars in 2001 and 52,925 cars in 2002. Deliveries are predicted to reach 52,645 freight cars this year, falling to 48,721 cars in 2001.

A sharp drop in demand has triggered an 18% cutback in heavy truck production by both Navistar International of Chicago and Freightliner of Portland, Ore. The heavy truck making industry has seen a significant slowdown in new orders because trucking firms are struggling with high fuel prices, rising interest rates, driver shortages and underused new vehicles bought earlier. "All the companies have kind of announced they will be taking production cuts and recalibrating their overall shipments to meet reduced levels of demand,'' says analyst Lisa Shalett at Sanford C. Bernstein & Co.