Materials Handling

Jim Haughey, Director of economics for Reed Business Information -- Industrial Distribution, 9/26/2005

Rapidly rising logistics costs are both an opportunity for expanded MRO sales to capacity constrained logistics operations and a challenge to industrial distributors to invest enough to keep their own costs competitive.

The cost of moving and storing goods has been boosted substantially by the combination of two years of above-average economic growth, unusually tight worldwide oil supplies, rising interest rates for loans to carry inventory, and Hurricane Katrina, which shut freight lanes and pushed oil prices even higher. The logistics share of business costs is almost certain to rise a little more and will remain much higher in the next two years than it was in 2001-2004. 

The Federal Reserve Board will keep pushing interest rates up slowly. Six percent of the U.S. oil supply will be shut in into the winter. Soaring oil demand in China, India and Russia, plus the replacement of oil borrowed from emergency reserves, will keep energy prices well above the early 2005 level. Factory and warehouse capacity will be further strained by still strong economic growth. And consumer spending caution in the wake of Katrina may quickly initiate another inventory accumulation cycle.

U.S. materials handling equipment purchases jumped 35 percent in the 12 months ending in June. However, this overstates the opportunity for MRO sales because the increase was largely replacement industrial truck purchases. Ahead, total equipment purchases will stay at the recent level. But the capacity addition share of purchases will increase, as will the purchases of the more MRO-intensive conveyor and overhead equipment. An increase of 8 percent to10 percent is expected by the end of next year.

Added distributor business servicing additional warehouse space began slowly in summer 2005, although construction spending for warehouses, adjusted for inflation, is still more than 10 percent below a few years ago. More warehouse space is coming to service the expected 6 percent increase in “goods” purchased in the United States by late 2006. Already, much of this space is in the pre-construction planning phase.

Soaring logistics costs and strained capacity are forcing moving-and-storage operations to be more attentive to maintenance. Short-term loan costs are up nearly 2 percent in the last year, with another 50-100 basis point rise still ahead. Truckload freight rates have risen 5.2 percent over the same period. With the more flexible LTL rates up 8.1 percent (pre-Katrina), truckload rate increases will continue. 

These higher logistics costs are beginning to creep into goods prices along with the temporary impact of Katrina on the prices of many goods, especially building materials, plastics, chemicals and some types of steel. Distributors should expect inflation for the goods they stock to be as much as 1 percent higher a year ahead and as much as 10 percent higher for capacity short building materials and plastics products.