Global Fastener News

Porteous: Price Increases Can Be Good

John Wolz

The good news and the bad news is that fastener prices will continue to increase, Barry Porteous told the Western Association of Fastener Distributors.\
“Price increases are a good thing,” the president of Porteous Fastener Co. ventured. “When your per-pound selling price goes up, your inventories are worth more. Your margins probably improve because many expenses in pounds haven”t changed.”
The downside is that replacement costs are higher, Porteous acknowledged.
The rising fastener prices since last fall represent only a recovery in prices and the increases will continue, the master distributor predicted.
“We don”t see the peak soon,” Porteous forecasted. “Prices are still increasing.”
Imported fastener prices started increasing rapidly last fall and by January fastener factories were offering quotes good only for a week. Now prices increase without warning.
Domestic suppliers are increasing prices too. “Nucor is operating three shifts a day. It is safe to say that the new owners of Infasco will raise prices,” Porteous observed. “Taiwan manufacturers are working overtime. China can”t get enough energy.”
Prices are not historically high, Porteous emphasized. Two decades ago China Steel was selling at $500 to $550 a ton. By the late 1990s steel was $300 a ton.
Fastener prices per pound had fallen over recent years about 20% to 25% from 1998 to 2000 before prices returned this year to 1998 levels.
“That”s a correction, not an increase,” Porteous pointed out.
“Our average costs are still well below our replacement costs,” Porteous suggested. “Everything we are receiving today is significantly higher than current inventory costs.”
“Steelmakers and fastener manufacturers have the same issues,” Porteous observed. “It is a major cash flow issue for everyone in the chain. Just as we have to come up with the money to replace inventory, steelmakers have to replace raw materials and manufacturers have to replace wire.”
Steel prices are up 50% to 60% in the past 10 months. Iron ore for steel is up 50% and coke is up 70%.
One of the fastener pricing problems is that steel prices used to be announced weeks in advance for the coming quarter. Increases might be 2% to 3%.
Now prices are announced on an “effective immediately” basis, leaving fastener manufacturers and the entire supply chain to guess, “What do I think I”m going to have to pay in 120 days when I produce orders I am taking now?”
It isn”t just steel that is driving up prices, Porteous observed. Ocean freight is up 25% to 40% and inland freight is climbing with gasoline prices.
Chinese Entrepreneurial Spirit
In the past when a Chinese farm met its production quota, farmers could sell the surplus and pocket the profit. Porteous recalled seeing bicycles rigged with chicken coops to take excess chickens to the open market.
The Chinese government has recognized that subsidizing money-losing factories is a drag on the economy and has sold fastener plants to management, Porteous explained. Management now has to figure out how to make a profit.
The Chinese people have an entrepreneurial history and have come a long way quickly. Porteous recalled having to drive three hours behind broken down trucks on unpaved roads to visit fastener factories just a few years ago. Today China has a freeway system.
China”s GNP is up 8% to 9% this year and the economy is doubling in seven to nine years, compared with 22 to 25 years for the U.S. economy.
By 2005 China will be the third largest auto producer. “The middle class is growing so fast,” Porteous noted. “China has 500 million households. It is a huge, huge market.”
However, China does have such growth problems as energy blackouts and brownouts. �2004 FastenerNews.com