Last month's Prime Advantage Group Outlook (GO) Survey found that managing costs of raw materials and components are among industrial manufacturers' top sourcing concerns for the second half of 2009.

Results of the buying consortium's GO survey reveal that inflation is also a concern for small and midsized manufacturers, with 90 percent saying that they have seen or expect to see rising prices on raw materials over the next six months. In addition, 57 percent indicated the same expectation for energy costs and 56 percent indicated the same concern for the cost of components.

The following is a breakdown of the basic outlook for energy costs, raw materials prices and materials-handling equipment investments.

Energy Costs
Energy prices remain volatile, reflecting uncertainty in the market. Crude energy materials decreased 5.4 percent last month, and 5.1 percent from June to September, according to the U.S. Bureau of Labor Statistics' (BLS) latest producer price data.

In its Short-Term Energy and Winter Fuels Outlook, released this month, the U.S. Energy Information Administration (EIA) forecasts average West Texas Intermediate crude oil prices will rise to about $75 per barrel by December 2010 — from $70 per barrel this winter and $51 last winter — as U.S. and world economic conditions improve (assuming U.S. gross domestic product grows by 1.8 percent in 2010 and world oil-consumption-weighted GDP grows by 2.6 percent).

Weak economic conditions continue to hamper the industrial sector, where the most recent data show natural gas consumption is down by 12.4 percent through July compared with the same period last year. Natural gas inventories are expected to reach a record high by the end of this month, and the Henry Hub annual average spot price is projected to increase from $3.85 per thousand cubic feet this year to $5.02 in 2010. The EIA expects total U.S. marketed natural gas production will increase by 1.5 percent in 2009 and decline by 3.8 percent in 2010. Natural gas consumption growth in the commercial and industrial sectors in 2010 is expected to be offset by a decline in the electric power sector.

The EIA projects 4 percent growth in 2010 for coal use in the retail and general industry sectors.

Raw Materials Prices
Although prices for intermediate materials (excluding food and energy) rose 0.9 percent in September, their fourth consecutive monthly increase, prices for crude materials fell 2.1 percent, according to the BLS. In the third quarter of 2009, crude material prices dropped 3 percent after rising 11.5 percent during the second quarter.

Earlier this month, buyers reported that raw materials prices are "starting to hold."

Reed Construction Data reported last week:

Prices are generally declining for materials priced in the depressed domestic market, but prices are generally rising for materials priced in international markets. Prices are declining slowly for manufactured and assembled equipment where factory cost are very significant to raw commodity cost. Prices are also declining for domestic market commodities, such as [...] cement, down 1.4% in September and softwood lumber, down 2.4% in September.

Enthusiasm about emerging markets, especially in China, drove prices for most raw materials in the first half of the year, while fears of a drawn-out global recession tempered the gains. Signs of a rebound in the global economy have boosted commodities. Copper has more than doubled this year as demand surged in China, whose ambitious infrastructure program and stimulus plan have created a large appetite for raw materials. China said it imported a record amount of iron ore last month. (Sources: Reuters and Business Day)

This rapid industrial growth in Chinese markets, as well as in India, continues to create demand for industrial and consumer chemicals of all types, despite the economic downturn. Purchasing magazine last month forecast that polymer prices "will rise across the board in 2010, but will not hit the levels of 2006 through 2008" and that "chemical and resin demand remain soft and supply remains plentiful." Howard Blum, senior associate at global consultancy Kline & Co., said in a separate Purchasing piece not to expect shortages of key polymers in 2010, as "a global surplus should provide sufficient supply until 2012."

The American Chemistry Council last week gave the U.S. chemical industry its most positive economic rating for the first time since February 2008. According to Plunkett Research estimates, the U.S. chemicals, coatings and plastics sectors combined will generate about $930 billion in revenues in 2009. The global chemicals industry will total about $3.5 trillion in 2009, or about 6 percent of global GDP.

Of course, "cautious optimism" remains the phrase du jour for materials.

While overall steel production and metals are gradually improving worldwide, the major indicators for business activity in the metals industry remain far below their pre-recession levels. Prices for steel soared to historic highs last year. After climbing for six years on higher demand, global steel output fell in late 2009. Many industrial metals more than halved in value by the start of 2009.

Recovery of steel and aluminum is set to be slow and fragile, but the prospect of increasing output and trade may signal a return to market stability in the near future. (See The Future of the Steel Sector)

In its quarterly production report, BHP Billiton last week warned that improvements in the world economy did not necessarily mean that real and sustainable demand for raw materials had returned. The miner, which sells 19 different commodities from iron ore to oil, noted that China, the driver of the rally in metals prices this year, has nearly replenished its commodity stocks as evident by higher-than-normal stockpiles, according to Financial Times analysis (subscription required).

While a return to growth in developed countries such as the U.S. could offset the effects of full Chinese stockpiles, this sequence of events should not be expected, BHP said.

Materials Handling and Logistics
In its 2009 State of the Market: Mid-Year Insights report, Aberdeen Group found that reducing the cost of materials and production was among the top strategies in organizations' 2009 agenda — "not surprising given the increased focus on sustainability and the year-long fluctuations in some raw materials and commodities prices."

At the fall meetings of the Material Handling Industry of America (MHIA), industry leaders discussed trends in the $156 billion material handling and logistics market.

Through the first half of 2009, orders for new equipment declined 44.9 percent over 2008, according to a report on the meetings' findings. A cyclical trough is expected in the last half of 2009, the MHIA report says, but "progress toward recovery is anticipated through 2010."

MHIA forecasts the decline of new orders will slow slightly in the last half of 2009 and hold the total year decline between 35 percent and 38 percent. MHIA expects a decline of another 5 percent to 10 percent next year before the industry returns to growth in 2011.

For a breakdown of trends, outlook and growth opportunities for each material handling market, including package-handling conveyors, industrial racks and automation, see MHIA's report highlights.

Earlier

The Raw Deal - Up, Up and Away

Mitigating the Chafe of Raw Materials Costs

Combating the Sky-High Price of Raw Materials

Materials Handling: The Big Picture

Resources

Prime Advantage Group Outlook Survey
Prime Advantage, Sept. 2, 2009

Short‐Term Energy and Winter Fuels Outlook
U.S. Energy Information Administration, Oct. 6, 2009

Buyers Say Higher Raw Materials Prices are Starting to Hold
Purchasing, Oct. 15, 2009

Producer Price Index - September 2009
U.S. Bureau of Labor Statistics, Oct. 20, 2009

Energy Price Cuts Drop September Construction Materials Price Index
by Jim Haughey
Reed Construction Data, Oct. 22, 2009

Commodities Sectors Go Their Own Way (subscription required)
by Carolyn Cui
The Wall Street Journal, Oct. 1, 2009

Copper, Iron Ore Lead China Commodity Imports Revival
Reuters, Oct. 14, 2009

Fresh Evidence of a Rebound in Demand for Raw Materials
by Eric Onstad
Business Day, Oct. 15, 2009

Polymer Prices Will Rise, But Not to 2008 Levels
by Paul Teague
Purchasing, Sept. 18, 2009

Kline: No Polymer Supply Shortage in 2010
by Joseph Chang
Purchasing, Sept. 18, 2009

Health of U.S. Chems Turns Positive for First Time Since Feb 2008
ICIS.com, Oct. 23, 2009

Chemicals, Coatings & Plastics Industry Overview
Plunkett Research, Ltd.

BHP Billiton Production Report for the Quarter Ended 30 September 2009
BHP Billiton, Oct. 21, 2009

BHP Warns about Sustainability of Demand for Raw Materials
by William MacNamara and Peter Smith
Financial Times, Oct. 22, 2009

2009 State of the Market: Mid-Year Insights
Aberdeen Group, July 2009

Industry Leaders Discuss Market Trends
Material Handling Industry of America, October 2009

MHIA Sees a Turnaround in Process for Material Handling and Logistics...
Material Handling Industry of America, Oct. 13, 2009