Slight silver lining emerges in buyers' business view

By Damon Francis -- Purchasing, 3/8/2001

Buyers reported a slight improvement in business in late January-early February, marking the first uptick in four months. Respondents to PURCHASING 's latest Business Survey are also slightly more optimistic about the next six months. It's too early to call the report a turnaround, but the economic scene is brightening more than was expected late last year.

• Monetary relief. Fed Chief Alan Greenspan signaled that a federal tax cut would be welcome-a surprise turnaround in his stance.

• Job growth. Close to 270,000 new jobs were created in January; a gain of a paltry 83,000 had been projected.

• Surprise in Detroit. Auto sales are down-but just 10% from a record year. A little over two weeks ago, Chrysler officials announced a projection that the automaker would be back in the black by early next year.

While that news was welcome, business remains weak, and most buyers' comments were negative.

When asked about the biggest buying headache for the past month, a buyer from California succinctly replied, "Energy, energy, energy." Echoing the sentiments of the majority of buyers, a purchasing manager from Salem, Ore., reports a pessimistic business outlook for the next six months and his reasoning is that, "energy prices are starting to be passed on and I only see this trend increasing in the near future."

Up slightly from last month, the diffusion index for month-to-month business conditions is 42.7, which is still extremely low. The diffusion index measures the percentage of buyers reporting business as better plus half the percentage reporting business levels as unchanged. The index tracking business activity as compared to a year ago now stands at 40, indicating that growth has halted on an annual basis as well.

Business conditions were the strongest in Mid-Atlantic states and weakest in the Midwest. Fifty percent of Midwestern buyers report that business is down compared to last month and only 26% report better or more stable business compared with February. After hitting a high of 70 in June, the Midwest has seen its monthly business diffusion index plummet to 37.9.

The diffusion index tracking desired materials inventory relative to sales rose to 72.6.

Here are the price trend details by major commodity grouping:

Paper and Corrugated: The diffusion index for paper and corrugated pricing is 60.3 and 58.9 respectively, indicating fairly strong upward pressure for the month of February. The pressure for both commodity segments can be linked to rising pulp prices (diffusion index of 71.4). Upward pricing pressure on paper was strongest in the Midwest where the diffusion index is 68.2.

Industrial chemicals: Historically, industrial chemical pricing will follow the lead of refined petroleum and this month proved to be no exception. Although severe upward pricing pressure abated from last month's peak, the diffusion index for industrial chemical pricing remains high at 68.5 and buyers anticipate further hikes until the second quarter of 2001.

Refined petroleum products: The biggest headache for buyers in February was no surprise. Petroleum prices continue to soar and cold winter weather conditions will continue to keep natural gas prices high through April. Petroleum is the commodity with the highest diffusion rating this month with a mark of 89.5.

Steel: Steel pricing continues to be big news as crashing prices were reported across the board. The diffusion index for steel pricing is 40.4, second lowest among commodities this month, but slightly higher than last month's annual low of 34.1. First quarter spot prices have shown no signs of significant improvement, validating the predictions of analysts and buyers alike. A trend noticed by buyers is that some forging suppliers are invoicing for energy surcharges.

Copper and brass: The diffusion index for copper and brass pricing is 65.4, indicating healthy upward pressure. The advent of a Republican president and therefore increased military spending has resulted in demand growth for copper nickel tubing. Copper's role in electronics manufacturing and refrigeration has held off an anticipated first-quarter drop in demand.

Semiconductors: Buyers report that integrated circuits are in short supply this month. The diffusion index for semiconductor leadtimes is 62.5. Leadtimes were the biggest headache for buyers in the Midwest who reported a whopping leadtime diffusion index of 87.5, the highest among commodities this month. A diffusion index for pricing of 62.5 indicates fairly strong upward pricing pressure.

Computers: Bargains on personal computers continue as the major players compete for increased market share and the rising quality of products eliminates the need for constant replacement. Lowest among commodities this month, the diffusion index for computer pricing is an astronomically low 21.2. Midwestern buyers reported the most downward pressure on pricing.

Machinery: The diffusion index for machinery pricing is 65.9 indicating strong upward pressure on pricing. Leadtimes also continue to show upward movement, especially in the Midwest where buyers report a diffusion index for leadtimes of 70. The quality of machinery remains unchanged.

MRO: Southern buyers report skyrocketing MRO prices and the diffusion index for pricing in that region is 83.3. Nationally, pricing continues to show healthy pressure and the diffusion index remained consistent in the mid-sixties.

Packaging: There was a surprising disparity between regional pricing reports in February. The diffusion index for packaging pricing is 67.6, up slightly from last month's mark of 66.3. After hitting a high in May of 2000, packaging prices have leveled off with a consistent diffusion index in the high sixties.

SOURCE: PURCHASING MAGAZINE