Buyer's market prevails
By Fred Gardner -- Purchasing, 7/15/1999
With the economy in a slow but steady expansion mode, and supply and demand mostly in balance, buyers have conditions on their side in pricing as well as leadtimes for most cutting tools. Suppliers characterize today's market conditions as a "selective buyer's market," with no glitches due to raw-materials shortages in sight.Purchasers will reap the benefits of stagnant inventories and very selective demand, with price increases of less than 3%, even for specialty tools, industry sources say. Prices for some standard product are likely to fall. The result is this: Same-day shipping for abundant off-the-shelf supplies, while custom tools have six to 18 weeks leadtime, depending on sophistication of the tool specified.
Despite these trends, the market for high-speed steel and carbide cutting tools has been expanding annually between 8% and 9%, according to Rusty Duncan, principal of Industrial Market Information Inc., Indianapolis, Ind. Duncan estimates that the market combines at nearly $4 billion in the U.S., $1.6 billion for high-speed steel tools, and $2.3 billion for carbide tools.
Key industry market drivers this year continue to be automotive and aerospace, while demand in other industry segments remains spotty. Suppliers question whether automotive will maintain the strength to hold up cutting tool volume through the end of the year.
On the downside, while improved service programs continue to be a purchasing demand, financial resources and attention have been shifted from that imperative to deal with Y2K computer upgrades and readiness. Consequently, service has been relegated to second place this year, some suppliers say. Y2K initiatives most likely have been at least partly responsible for inventory buildups, says Tom Howes, resale products manager, Valenite Inc., Madison Heights, Mich.
"Most suppliers had to replace (aging) enterprise computer systems, and that situation usually produces excess inventory, because in the interim, the ability to monitor inventory levels has been reduced," Howes says. "Increased inventory also puts pressure on supplier capital resources."
Another factor contributing to bulging inventories is weak demand in South America and a still soft economy in the European community, industry sources indicate.
The industry continues to be dominated by two giants, which have been acquiring smaller competitors this decade, notes Industrial Marketing Information's Duncan: Kennmetal Inc. Latrobe, Pa.; and Sandvik Cormorant Inc., Fair Lawn, N.J. "The second tier is almost all gone," he says. Industry estimates give the two companies close to a 60% share of the high-speed steel market.
Most purchasing business goes through distribution, which is also suffering from the continuing softness in pricing. Typical distributor gross margins now run from 16% to 18%, says Duncan, down about 5% from early in the decade. Consequently, net margins are now running in a 1.5%-2% range.
Duncan also notes that carbide cutting tools continue to gain an expanding share of the market because of the increased quality of spindles. Where a decade ago spindles couldn't hold carbide tools to the necessary tolerances, they now perform up to carbide requirements.
Another element for purchasers to keep an eye on in cutting tools is e-commerce packages being adopted by suppliers. A recent entrant into the arena is NetVendor Systems Inc., Atlanta, Ga., which has developed a package that allows the purchaser to punch in specs, can support a CAD (computer-aided design) drawing interface, blow up drawings, show sub-assemblies, and place the order for the sub-assembly shown.
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