PURCHASING HOTLINE

By Staff -- Purchasing, 2/8/2001

ECONOMY

• Consensus growth forecast for the U.S. economy in 2001 plunged five tenths of a point between December and January, according to Blue Chip Economic Indicators. The newsletter, which tracks the forecasts of 48 professional prognosticators, now reports a collective 2.6% growth prediction for real GDP in 2001, compared to 3.1% in December and a high of 3.5% in September-October. Of the forecasters reporting to Blue Chip, only six maintained their real GDP predictions for 2001 while 42 reduced and none raised. Says Blue Chip: "Panel members believe the bulk of the slowdown will occur during the period Q3 2000 through Q2 2001."

• New jobs may be harder to come by in 2001 but people already holding positions face small risk of losing them, according to a survey by the Washington-based Bureau of National Affairs (BNA). Only 1% of surveyed employers plan to cut technical or professional jobs during the first three months of 2001, down four points from projections for fourth quarter 2000 and the lowest since the survey was started in 1974. What's more, BNA reports that "After rising to 10% three months ago, the percentage of firms projecting production or service staff reductions fell back to just 5%." Only 4% of firms surveyed say they will cut office or clerical staff, down from 6% in the previous quarter.

• Word on the street says manufacturing's in recession. PURCHASING 'S data tend to bear this out. Example: Diffusion index tracking current demand for industrial packaging-a good bellwether for the manufacturing segment as a whole-slipped to just 36.0 in January from 44.5 in December and a peak of 58.5 back in June, 2000. (Note: The index measures half the percentage of buyers reporting steady buying levels, plus the whole percentage reporting rising packaging purchases. Above 50, the index suggests growing demand. Below 50 suggests the opposite.) The index tracking future buying plans for industrial packaging (three months out) fell to just 41.5 in January compared to a peak of 60.5 back in March of 2000.

• A fourth quarter industry survey by the National Association of Business Economists (NABE) says underlying demand "slowed sharply in the fourth quarter, falling to its lowest level since 1991." What's more, the group notes that "For goods producers, the switch from growing demand to falling demand that took place in the fourth quarter is the largest quarter-to-quarter decline in the 18-year history of the NABE industry survey." Other NABE survey highlights: Panelists say profits continued to be squeezed in fourth quarter 2000 as most claim to be absorbing rather than passing along higher energy costs to customers. But while becoming increasingly pessimistic for 2001, the industry survey panel continues to predict moderate growth for the economy.

• Popular wisdom now calls for slow improvement in the U.S. trade picture in 2001 as weaker economic growth translates into falling demand for imported goods. In November, the U.S. trade deficit fell for a second consecutive month to $33 billion as imports of crude oil, autos and computers all declined. Commerce says the trade deficit for all of 2000 was on track to hit $366 billion, more than $100 billion above the previous record of $265 billion set in 1999.

PRICES

• Carbon steel use will decline in 2001, leading to lower sales prices, suggests analyst Charles A. Bradford at Bradford Research in New York. "It appears that contract prices in 2001 will be down about 5% and that spot prices will be down as well," he says. Bradford notes that the 2000 average price for hot-rolled coils was $298/ton. "It's highly likely that the average spot price in 2001 will be below the average recorded in 2000, possibly down by as much as 10%" or $268 for the year. (Note: Purchasing's more-bearish forecast places hot-rolled coil at an average of $253 in 2001, representing a 15% decline.)

• Buyers say specialty steel mills are going to have a tough time making natural gas surcharges stick. Several mills are trying to impose charges to offset the rise in natural gas prices that has occurred over the past nine months. But buyers contacted by PURCHASING say they'll reject the surcharges, noting that their companies are also experiencing higher operating costs due to pricier natural gas.

• OPEC 's decision to cut daily crude production by 1.5 million barrels in February will make it harder for consuming countries to rebuild oil stocks and will aggravate price volatility, according to Robert Priddle, executive director of the International Energy Agency (IEA) in Paris. Although oil demand is expected to slow this year, "stocks are still low," Priddle says, "and low stocks contribute to market volatility, which is in the interest of neither producers nor consumers."

• Heightened political instability in the Democratic Republic of Congo has boosted cobalt prices only slightly. Merchants say prices in the U.S. for 99.3% material rose from $10 to $10.50/lb following the assassination last month of President Laurent Kabila, who was succeeded by his son, Joseph. The Congo is a major world supplier of cobalt, but traders say the world market is in balance and they dismiss the Congolese political situation as a "minor distraction."

• Spot prices for stainless steel sheet won't recover before third quarter, says analyst Michael Gambardella at J.P. Morgan Chase & Co. He expects end users and service centers to "further reduce inventory" well into first half 2001. Reason: Latest data shows stainless inventories among distributors totaling 4.7 months worth of shipments, compared to an average 4.3 months in 2000 and an average 3.8 months in 1999. "As for demand, strength in energy and the oil and gas markets will be offset by weakness in automotive and appliance markets," Gambardella predicts. The analyst believes stainless sheet prices will fall 2% in first quarter 2001 while shipments decline 3%.

• Polyvinyl chloride (PVC) resin sales have been faltering, due mostly to a slowdown in demand from the construction industry. Spot price for general purpose grade PVC slipped below 50¢/lb in December and January. Several market sources now suggest spot tags could fall further because of rising inventories at a number of processing plants.

• Market analysts suggest that recent 4%-8% price hikes for nickel-based superalloys and 7%-15% increases for titanium-based specialty alloys won't take effect until second half 2001. Reason: While demand from the energy equipment market remains strong, the aerospace mart still is adjusting purchasing plans to match projected commercial aircraft expansions. Atop that, there are long leadtimes associated with these products.

• Polypropylene (PP) producers are attempting to halt a sudden spot-market price slide by announcing 3¢/lb hikes for both February and March. However, buyers see prices actually slipping in coming weeks. Spot tags averaged 41¢/lb in December, but buyers report sales as low as 36¢-38¢in January. Reason: The already oversupplied PP market is being loaded further by Dow Chemical's new 550 million lb/year plant and by the imminent 1.5 billion lb annual capacity addition at Formosa Plastics USA (a joint venture of Union Carbide and Tosco).

• Polyethylene (PE) prices rose a nickel last month and may jump another 6¢/lb this month. Reason: High gas prices and curtailed production.

• Import prices for hot-rolled, cold-rolled and galvanized steel sheet are expected to increase slightly in second quarter 2001, according to a survey of American Institute for International Steel members. A sizable majority of survey respondents believe the sheet steel market will remain "in sizable oversupply" over the next few months. However, the importers suggest that import prices will begin to rise in the April-June period because foreign-made steel volumes will begin to decline in first quarter.

• Zinc buying has slowed because of weak orders for galvanized steel, and that has cut zinc premiums in the U.S. market. Special high-grade zinc sold last month in the U.S. for just $3.75/lb above the London Metal Exchange (LME) settlement price. The U.S. produces 300,000 metric tons of zinc per year, but usually imports almost five times as much.

• Major U.S. uncoated free-sheet producers are supporting a $60/ton price increase which will raise average transaction prices for cut-size grades by around 10% from an estimated $890/ton. The move is based on the partial success of a $60/ton hike implemented in fourth quarter 2000. Paper buyers appear ready to fight the increase since the printing and writing paper market is weak.

• Sluggish trading in North America and global spot output have combined to drop transaction prices for hardwood grades of market pulp. Northern bleached hardwood kraft (NBHK) sales last month were under their $670-$680/metric ton list and Southern bleached hardwood kraft (SBHK) was selling below its list of $650/metric ton. The benchmark, Northern bleached softwood kraft (NBSK), reportedly sold in January at $710/metric ton (same as in the prior quarter) although some buyers report making buys at $680.

• U.S. Steel Group has asked its suppliers to reduce future contract costs by 8%, as a means for offsetting depressed market conditions and rising natural gas costs. The request was made not only to suppliers of the steel group's various plants but also to suppliers of the company's iron ore operations.

MARKETS

• U.S. auto sales are expected to slump to 15.5 million units in 2001 from a record 17.4 million in 2000 (an increase of almost 3% from the 17 million sold in 1999). Motor vehicle sales in Canada are expected to edge up to 1.56 million units in 2001, up from a record 1.55 million in 2000.

• If complex deals by American and United airlines are completed, the two carriers will control 51% of the U.S. air-travel market. American, the nation's second largest carrier, is buying most of Trans World Airlines Inc. The purchase is motivated by American's attempt to keep up with United, the largest carrier, which is buying most of US Airways. Analysts say the deals could prompt more industry mergers since United would have a 26% market share, American would have 25%, and Delta, in third place, would have 15%.