Process controls offer opportunity

The past twelve months have brought positive margin gains for 15 out of 19 industries in the PLANT ENGINEERING factory equipment and tools market basket. In fact, margin grades improved significantly for six. The air and gas compressor manufacturing was the most dramatic. Its margin grade moved from F-minus one year ago, when manufacturing margins sat at a record-low level, to a passing B grade...

01/01/2006


The past twelve months have brought positive margin gains for 15 out of 19 industries in the PLANT ENGINEERING factory equipment and tools market basket. In fact, margin grades improved significantly for six. The air and gas compressor manufacturing was the most dramatic. Its margin grade moved from F-minus one year ago, when manufacturing margins sat at a record-low level, to a passing B grade this past September.

The best bet these days can be found in industrial process controls and equipment. Over the last 12 months, average prices for process variable instruments have increased nearly 3%. At the same time, the cost of making a typical unit of industry output has gone up only 2%, which has left a sizeable bottom-line windfall.

From a long-run point of view, the process controls and equipment industry is in good shape with margins estimated to be at a 10-year high now. Suppliers currently spend $40.92 to make $100 of market-valued output. That's $2.71 below the industry's average spending over the last five years. As a result, the typical supplier can afford to discount tags by 6.3% and still earn a five-year average return on manufacturing costs. A price cut of 3.8% moves margins to year-ago levels.

Several others pose good negotiation opportunities as well. To return margins to year ago levels, suppliers of cranes, hoists and monorails can cut tags 7.3%. Manufacturers of power and specialty transformers can discount 6.9%. Speed changers, drives and gears producers enjoy the ability to reduce prices by 4.8%. Finally, air and gas compressors can lower prices 3.6%.

Price/cost/demand roundup

Factory Equipment & Tools

Average Product Price (1) % Change During 12 Months Ending

Direct Manufacturing Costs (2) and Margins Grade

Growth in U.S. End Markets (3) % Change During 12 Months Ending

Industry

3 months ago

Current month

Costs are

Grade

3 months ago

Current month

(1) Average product price changes are calculated from the producer price index for each 6-digit NAICS (North American Industry Classification System) industry from the U.S. Bureau of Labor Statistics.
(2) Analyses of each industry's direct manufacturing cost changes are from Thinking Cap Solutions Inc.'s proprietary Leveraged Metric Intelligence (LMIQ) economic model. The "grade" indicates that recent price/cost changes have produced record high (A+) margins to average margins (C) to record low (F-) margins for the average producer in an industry. Grades of A to A+ mean plant engineers may be able to strike a better bargain with suppliers and better control plant costs.
(3) Growth in U.S. end markets data are estimates of output for the domestic end markets which purchase a given industry's products.
All data prepared and presented by Thinking Cap Solutions, Inc., Port Angeles, WA (e-mail: ebaatz@ice-alert.com).

Hand & edge tools (except saws)

3.27

3.60

stable

D

3.02

3.04

Saw blades & handsaws

1.22

1.68

falling

F

3.50

3.36

Metal hardware

4.08

3.85

stable

D

3.47

3.35

Mechanical power transmission equip.

6.43

5.96

stable

C

11.98

10.19

Conveyors & conveying equipment

6.67

5.55

stable

D

6.55

6.30

Cranes, hoists & monorail systems

13.71

15.96

stable

B

3.94

4.23

Industrial trucks (forklifts) & stackers

4.26

4.62

stable

D

3.03

2.95

Metal cutting machine tools

3.05

3.76

stable

C

6.50

6.40

Cutting & machine tool accessories

2.56

3.21

rising

D

8.01

7.52

Power-driven handtools

1.26

1.11

stable

F-

4.42

4.89

Welding & soldering equipment

8.76

8.89

stable

C

5.80

5.81

Pumps & pumping equipment

5.13

5.70

stable

B

4.89

4.50

Air & gas compressors

4.98

5.75

stable

B

6.37

6.42

Speed changers, drives & gears

5.62

5.43

stable

B

11.98

10.19

Power & specialty transformers

7.72

9.69

stable

C

3.42

3.68

Motors & generators

5.04

5.49

rising

C

6.05

5.92

Industrial process controls & equip.

2.91

2.98

stable

A+

12.77

12.68

Fluid registering & counting devices

2.40

2.48

rising

C

2.95

3.54

Instruments for electrical testing

0.60

0.71

stable

B

7.73

8.97


The PLANT ENGINEERING manufacturing cost index for equipment and tools fell 0.2% in the third quarter of 2006. That was the first quarterly drop since May 2002. Prices for equipment and tools, meanwhile, increased 0.4%.





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