Ripe for negotiation

By Staff -- Purchasing, 2/22/2001

Buyers of aluminum plate and sheet weathered eight average monthly price increases last year, so that by the end of 2000, average prices were up 5% from December 1999 levels and up 8.8% from December 1998. But Thinking Cap Solutions says the industry's December 2000 price gain was perhaps too aggressive. In fact, TCS says inflation-adjusted industry margins remain above both their year-ago levels and five-year norms, which means the average supplier can afford to lower tags and still earn a fair profit.

U.S. end markets for aluminum sheet grew at a year-over-year rate of 20% in December. And, though strong, this rate marks the first slowdown in end-market growth since February '99. By May, TCS suggests that slowing demand will push prices down 2.6%.

Last year, the average cost of making a unit of output in SIC 3353 increased just 0.47% while selling prices for sheet, plate and foils jumped 5.03%. This escalation mismatch increased margins by $3.45 for each $100 of product sold. Almost a buck of that gain is probably earmarked for higher overhead expenses, including a 17.4% rise in heat and power costs last year. But the rest of the 2000 margin gain should be in play during price negotiations. In fact, TCS thinks the current price/cost mismatch in SIC 3353 translates into a potential 3% price concession.

* All weights represent a given category's contribution to total direct manufacturing costs. Prepared by: Thinking Cap Solutions Inc., a company specializing in industry cost escalation analysis for purchasing applications. For more information, contact Elizabeth Baatz, Thinking Cap Solutions Inc. (360) 452-6159, or FAX (360) 457-2913 or E-mail ebaatz@ice-alert.com.