2006 Pricing Outlook
by Jim Haughey, director of economics for Reed Business Information -- Industrial Distribution, 1/9/2006
Cost increases faced by industrial distributors will be a little smaller in
2006, and the mix of in-flation rates across commodities will change. Indeed,
the change began a few months ago.
The 2004–05 inflation was driven by
commodity shortages that boosted prices for down-stream manufactured products.
Many of those commodity price spikes have ended. A few, such as for steel, have
been partially reversed. Prices for several commodities will continue rising
strongly, including cement, gypsum, and nonferrous metals where capacity
additions to meet higher demand are excruciatingly slow.
Overall, commodity
shortages are no longer the dominant source of inflation. That role has passed
to the worldwide strain on manufacturing capacity in the fourth year of above
average economic growth.
Obviously, the commodity markets that remain
tight in 2006 also contribute to inflation. The key consequence for your supply
and operations planning is that inflation will be spread over more products and
services in 2006, instead of being heavily concentrated in a few distinct
product types, such as metal and plastic products.
Specifically,
inflation will be higher this year for the manufactured products whose
relatively high labor content (either design or production) insulated them from
most of the impact of soaring commodity prices in 2004–05.
Prices for
some labor-intensive machinery products declined slightly in the last two years.
Inflation will be higher ahead for these products because increasing strain on
capacity permits higher margins, requires higher wage increases and has caused
the Federal Reserve Board to raise interest rates. Interest rates have been
rising for several years, but the pace picked up later in 2005.
Wage
gains, still very low, have been rising since last summer. Profit margins have
soared to a near record level with corporations recently realizing that they
again have pricing power in their markets.
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2006 Pricing Outlook |
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% Change | ||
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Dec'03 |
Dec'04 |
Dec'05 |
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to Dec'04 |
to Dec'05 |
to Dec'06 |
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Construction |
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Summary: Inputs to Construction Industries |
9.1 |
6.5 |
4.2 |
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Gypsum Products |
20.1 |
13.7 |
10.5 |
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Cement |
7.5 |
7.8 |
9.0 |
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Softwood Lumber |
9.6 |
-4.2 |
0.0 |
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Fabricated Building Steel |
18.8 |
3.4 |
6.1 |
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Plastic Construction Products |
6.7 |
20.1 |
0.0 |
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Builders' Hardware |
3.0 |
4.3 |
3.5 |
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Power Hand Tools |
2.6 |
-0.1 |
0.5 |
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Furnaces |
2.0 |
1.5 |
1.5 |
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Operations |
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Diesel Fuel |
37.9 |
45.1 |
-4.0 |
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Commercial Electricity |
2.0 |
10.3 |
2.5 |
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Commercial Natural Gas |
20.5 |
35.6 |
-8.2 |
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Short Term Financing Cost |
104.2 |
65.1 |
13.0 |
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Labor Compensation (wholesale trade) |
2.7 |
3.3 |
3.5 |
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Manufacturing |
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Summary: Industrial commodities, except fuel |
6.2 |
3.7 |
3.1 |
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Fabricated Metal Products |
10.0 |
2.9 |
1.8 |
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Machinery, except electrical |
2.6 |
2.5 |
2.9 |
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Welding machines and Equipment |
9.4 |
3.5 |
2.8 |
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Cutting Tools & Accessories |
1.4 |
6.9 |
7.5 |
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Fluid Power Equipment |
5.1 |
4.5 |
4.1 |
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Industrial Material Handling Equipment |
6.0 |
4.1 |
4.0 |
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Organic chemicals |
30.3 |
7.5 |
0.0 |
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Industrial Rubber Products |
3.1 |
2.7 |
3.1 |
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Small Trucks (under 14,000 GVW) |
1.1 |
-4.3 |
1.1 |
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Industrial Safety Equipment |
0.2 |
1.0 |
1.3 |
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Foundry and Forge Shop Products |
8.6 |
3.9 |
4.5 |
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Steel Mill Products |
49.3 |
-4.3 |
4.5 |
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Non-Ferrous Wire & Cable |
13.5 |
17.2 |
8.0 |
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Metal Containers |
9.4 |
3.1 |
2.1 |
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Bolts, Nuts, Screws, Rivers and Washers |
7.4 |
10.6 |
3.8 |
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Non-Residential Lighting Fixtures |
2.9 |
1.7 |
1.9 |
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Source: US Department of Labor |
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Forecast: Reed Research |
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