Path: bloom-picayune.mit.edu!snorkelwacker.mit.edu!americast.com!americast.com!americast-post Newsgroups: americast.ibd From: americast-post@AmeriCast.Com Organization: American Cybercasting Approved: americast-post@AmeriCast.com Subject: Executive Update Date: Wed, 11 Nov 92 12:52:31 EST Message-ID: <11.1992Nov11.125231@AmeriCast.com> 11/11/92 TITLE Executive Update #m#gm#m##m#sw#m#Industrial Firms Attempt Price Rises, To No Avail Buyers Just Won't Accept Increases Given Soft Demand, Plentiful Capacity Farrell Kramer It's not easy to turn a profit selling commodity goods like steel, tires and building-block chemicals in a slow economy. Over the past four months, commodity goods producers as a group have been unable to raise prices, despite numerous efforts. Weak demand for the finished products that the commodities are used to manufacture has Business Conditions made it tough to sell buyers on increases. Prices for industrial commodities are up just 1.6% from a year ago, according to fig- ures released yesterday#m#cq#m# by the Bureau of Labor Statis- tics. And no letup is expected as long as the economy continues to muddle along, analysts say. Weak pricing means continued tight margins for manufacturers of industrial commodities. But for others, the news is positive. "The situation is benefit- ing most purchasers of raw materials because prices are not in- creasing, and in some cases they are getting lower prices than they got last year," said Frantz Price, vice president of indus- trial analysis at Wefa Group in Bala Cynwyd, Pa. "There is a lot of resistance to higher prices on the part of buyers," he added. Resistance to price increases, overall weak demand and overcapa- city in many industries have conspired to make the lot of commo- dity producers difficult. The government's producer price index for industrial commodities was essentially flat from June to Oc- tober. The index had moved up earlier in the year, to a level of 118 in June from 115.7 in January. But since then, it has done little, ending October at 118.6. A year earlier, the index stood at 116.7. The PPI for industrial commodities is compiled by ex- cluding farm products, processed foods and feeds from the overall producer price index, the nation's measure of wholesale infla- tion. Some industries have fared better than others, but the weak demand from finished goods buyers has put pressure on commo- dities suppliers. Many commodity goods producers have found it nearly impossible to increase the prices their products fetch, in some cases despite increasing prices for their own raw materials. Lower Prices Demanded Also, some buyers of commodity goods have demanded price de- creases, and in return have pledged to work with suppliers to help them operate more efficiently. General Motors Corp., which has suffered huge losses the past two years, is spearheading that movement. "This is a supplier- customer relationship of mutual activities that benefits both partners," said Richard Stuckey, chief economist at Du Pont Co. Stuckey says the effort can be as simple as buyers teaching sup- pliers more about how their businesses operate, leading to greater efficiency. But it can go as far as having suppliers tailor manufacturing processes to meet buyers' specific needs. "The motivation is that we are in a disinflation or deflation en- vironment," Stuckey added. "So, you'd better find ways to work more smartly or more efficiently." Some industries, however, have been under more pressure than others to raise prices. Achieving additional efficiencies has been especially hard for those that have been working long and hard to squeeze costs and inefficien- cies out of their operations. The nation's steel industry pro- vides a good example. "There've been at least five serious at- tempts at raising prices in the last year and a half, and they haven't held," said John Jacobson, president of Jacobson & Asso- ciates, a steel consulting firm in Swarthmore, Pa. "The end markets, at least in the short term, are not strong enough to warrant increases," he added. Steel Price Increases The most recent effort to raise prices, led by USX Corp.'s U.S. Steel Group and LTV Corp., is scheduled for Jan. 3 and includes all flat-rolled products, like the sheet steel used to make cars and appliances, Jacobson says. Steelmakers would like to raise prices 5% to 10%, but based on the failure of past efforts to win support, analysts aren't optimistic. Tire makers, another group that serves the beleagured U.S. auto industry, have also recorded spotty success in trying to fetch more for their goods. "Real- ized prices had essentially been flat for at least 12 months, from the middle of '91 to the middle of '92," said Harry W. Millis, managing director of Fundamental Research Inc., a Cleveland-based company. "They began to inch up a little bit in the third quarter." Millis explains, however, that those in- creases, which came to about 2%, were a response to higher natur- al gas prices. Derivatives of natural gas are used in the manufacture of tires. In September, the industry announced another set of price increases, amounting to 3% to 4%, to take effect between Oct. 1 and Nov. 15. Millis says it's too early to tell whether they will be successful, but he's skeptical. Millis says in the near future he expects more price announce- ments than actual increases, much the same situation as has been seen since the recession began. "The impetus to raise prices is there, it is very strong, because that's one sure way to increase your profits," said Wefa's Price. "So the producers will keep trying. "As far as the economy is concerned, some of these price increases will start sticking as the economy picks up," Price ad- ded. But he doesn't predict that will occur anytime soon. Wefa's forecast is for growth in gross domestic product of 2.7% in the fourth quarter and about 3% in 1993. That's well below the 5% to 6% usually seen in the early stages of an economic recovery. And that weak demand, coupled with continued pressure for cost- cutting and added efficiencies, should spell slow growth in in- dustrial commodity prices for some time. "The consumers are essentially saying they're not going to pay up," Fundamental Research's Millis said. "That's being reflected all the way down the line." This article is copyright 1992 Investors Business Daily. Redis- tribution to other sites is not permitted except by arrangement with American Cybercasting Corporation. For more information, send-email to usa@AmeriCast.COM