People who seem to make the smartest long-term buying decisions in the coatings industry and basic materials industry aren’t lucky or smarter than everyone else. They are more likely diligent forecasters in tune with the market and how it’s affecting costs.
STABILITY FOR NOW
Right now, and in particularly in the last 12-24 months, manufacturing costs and related costs have stabilized somewhat in the coatings and materials industries. Solvents, resins, steel for containers and plastics for containers are holding steady. While there have been increases, these increases have been moderate in percentage (3%-8%), and rather than prices rising every couple months, we’ve only seen annual increases.
You may likely recall that just barely post-recession, from about 2009 to 2011, costs soared. Around this time, the spike in people coming back online to work meant an increased demand for materials, but many manufacturers and suppliers were either unable or unwilling to meet the need.
Businesses that had to shut down facilities in 2008 weren’t willing to open capacity when the market started to recover. Manufacturers and suppliers at the top of the food chain, as well as intermediary suppliers, increased prices at a high percentage and frequency to make up for lost earnings suffered during the recession. Thankfully, a lot of those issues aren’t nearly as prevalent today.
OVERSEAS MANUFACTURING
At one time an emerging market, China has been a major supplier to U.S. companies seeking cost-effective materials. But as its labor policies and national economy have evolved and Chinese workers are being paid more, U.S. business has shifted its manufacturing to newly emerging countries in Southeast Asia such as Vietnam and India.
That said, it’s simply not as cost efficient—or predictable—as it used to be to have an overseas company manufacture for you. The steady U.S. labor market has supported reshoring, so many domestic companies are investing in stateside manufacturing again.
REPLACEMENT SUBSTRATES
For companies with high-volume, higher-marketed products, such as cabinet manufacturers in the RV industry, one of the key issues to watch today is materials costing.
As a result of global demand, again especially in Asia, we are seeing many of our customers explore less expensive substrates as replacements for traditional, higher-priced ones.
For example, wood industry customers are switching from cherry lumber to soft maple—which is less expensive—and working to achieve as similar a finished look as possible as the higher-priced, higher-quality substrates.
2015 FORECASTING & CLIENT IMPACT
At Accessa, we expect to see an estimated annual increase in raw materials and finished goods of 3%-6% within the first or second quarter of 2015. Depending on how 2014 ends with both our suppliers’ revenues but more important with their profit margins, we will be able to better help customers prepare and project how 2015 will shape up.
GDP projections are on the higher side, at about a 3.5% projected increase, which indicates positive market momentum. One of the big unknowns right now is the effect of oil prices. With it under $80 a barrel, and other feedstock prices being down, we might see price increases pushed out to the second or third quarter of 2015.
We’ll be watching how U.S. oil production proceeds and what Saudi Arabia’s next moves will be. If the U.S. can continue to get oil out of the ground, across the country and overseas, we could see oil drop to $75 a barrel, or even further. That could possibly make a huge impact when it comes to controlling costs for Accessa customers.
Of course, another major impact on the cost of doing business is health care. The impact of rising medical insurance premiums continues to have a downside effect on businesses nationwide. With another year of the Affordable Care Act approaching, premium forecasts indicate 2015 renewal increases of 5%-15%. Accessa works with its professional consultants to help mitigate as much increase as possible while still placing the wellbeing of its employee family members as priority one.
Staying on top of market trends is important in that it enables us to better inform customers so they can prepare for the future. For example, if a company is quoting future work, it might need to put a more comfortable cushion in its estimate to cover impending costs.
Are you prepared for 2015? If you have questions about how your industry might be affected or how you can better prepare, please contact us at 317-879-2061.