With economic volatility expected to continue, managing indirect spend requires understanding of how added costs affect line item expenses that don’t often receive close scrutiny until budget season.
Although corrugated linerboard prices are holding steady, anticipated cost increases in polyethylene products create new profitability challenges. In this environment, a partner with group purchasing power and expert industry insight delivers quantifiable value through strong contract pricing and keen awareness of the alternative solutions that improve cost management compared to traditional buying habits.
Here’s a look at some of the manufacturing trends that are affecting the availability and cost of supplies you require to operate your business efficiently and effectively.
Manufacturing Activity Grew in June
Economic activity in the manufacturing sector grew in June, according to the Institute of Supply Management. The Purchasing Managers Index (PMI) increased 9.5 percent to 52.6, reflecting an expansion in the overall economy for the second straight month after April contraction ended 133 straight months of growth.
The New Orders Index jumped significantly to 56.4, up 26.4 percent from May. The Production Index registered 57.3 in June, an increase of 24.1 percent from May.
Of the 18 industries that participated in the ISM monthly survey, 13 reported growth.
With that growth has come increases in the ISM Price Index which rose to 51.3 in June, an increase of 10 percent over prior month.
- Caustic soda, copper, crude oil, personal protection equipment supplies and steel all reported increases in price.
- Methanol, packaging materials and plastic products all reported price declines.
- Of 18 industries surveyed, three reported higher prices, 12 reported no price change, and only three reported lower prices.
Looking more broadly at the economic impacts of COVID-19 in the first half of 2020, the U.S. Real Gross Domestic Product decreased at an annual rate of 5 percent for the first quarter. That decrease reflects negative contributions from:
- Personal consumption expenditures
- Private inventory investment
- Non-residential fixed investment
Those negative GDP contributions were partially offset by contributions from:
- Residential fixed investment
- Government spending
Meanwhile, U.S. unemployment dropped to 11.1 percent in June, reflecting an improvement of 3.2 million people removed from the jobless count. For manufacturing, ISM’s Employment Index registered 42.1, an improvement of 10 percent compared to May.
Linerboard Pricing Steady, Other Packaging Costs Volatile
Containerboard production continues to increase, supporting steady pricing throughout the first half of the year. In May, that increase was just 1 percent, month over month, but the uptick in production reflects a 6 percent increase year over year.
Corrugated pricing for June is at $715 per ton. Industry analysts predict any anticipated cost reductions will fall short as demand has remained stronger than expected. Additional capacity of containerboard grades has been delayed. This means a previously projected decrease of $30 per ton is not expected to be realized in the market.
Meanwhile, Old Corrugated Containers (OCC) pricing jumped dramatically during the global pandemic, up 196 percent in April compared to January 2020 levels.
Sales for both Linear Low Density Polyethylene (LLDPE) and Low Density Polyethylene (LDPE) are up through April compared to prior year. Domestic sales for LLDPE are up 2.3 percent, while LDPE sales are up 6.7 percent.
In response, producers have cut production to control inventory levels, as indicated by LDPE operating rates at 89.3 percent in April and LLDPE operating rates at 92 percent.
LLDPE large buyer contract prices bounced around during the first half of 2020, but have settled approximately 5 percent below the levels we saw at the end of 2019. Expect those contract prices to average 55 cents per pound in the third quarter of 2020.
At the same time, expect an increase of about 4 cents per pound for all grades of polyethylene resins. These increases are driven largely by efforts to control inventory levels, improvements in domestic demand and higher oil prices.
All major manufacturers have already sent increase notifications. Among these, stretch film producers announced a 6 percent increase in costs.
Managing Indirect Spend, Supply Costs with an Expert Partner
Indirect supply management is a tool available to your team to find the essential items you need at reasonable prices. By working with a partner in this space, your company can consolidate its overall supply space and form strategic partnerships on items you regularly need.
Our partnerships are unique because we can put all your indirect supply needs together in a group purchasing model, which allows us to drive savings for you.
No matter how you are sourcing your products today, it can be improved through consolidation and smart partnerships. As you set your plans for the rest of 2020 and into 2021, now is the time to look at your accounts payable data and get a spend analysis to map out how you can get even greater efficiency around your indirect materials operation.
Transportation Insight is your partner in driving success now and into the future. Let’s start a conversation today about how we can drive savings for your company together.