Be Careful What You Wish For-You Just Might Get It

From Industrial Heat Equipment Association of which “The Monty Heat Treat News” is a proud member we have this report about the health of the industry. Everything which IHEA suggests in this report is coming true as we speak and has been reported in “The Monty” recently. Inflation, long deliveries and shortages are all becoming the order of the day.

“April 2021 Be careful what you wish for – you just might get it. This somewhat offset warning has rarely been as accurate as it is now when looking at the economy of 2021. At the start of the year there was some optimism regarding the recovery but it was tempered by the reality of a pandemic that was far from over and a host of economic indicators that remained weak. The optimists thought there was potential for economic growth in the 4.5% range, but by March even the less enthusiastic were asserting that growth of 6.5% or even faster was likely. This is great news, right? Yes and no to some extent. With growth come the challenges of growth – inflated prices, shortages and bottlenecks go along with sudden jumps in demand. Right now, the industry is getting slammed daily with higher priced commodities. Copper, aluminum, steel, lumber, nickel, iron ore, oil and petrochemical products of all kinds. For crying out loud, the price of Grape Nuts went up and there is a shortage anyway. This is one of the three planks of inflation (along with wages and overall money supply). 

Most of the country is not seeing wage hikes, although manufacturing, construction, transportation, and some other areas where needed skills are in short supply have been seeing hikes for some time. The money supply issue will become more obvious through the summer. The company that is getting hit with these higher commodity prices has very few options. They can absorb the price hikes for a while and hope that they go back down, or they can hike their own prices in response. This latter tactic is only feasible if there is tolerance in the consumer sector. If the competition is willing to swallow that price increase in order to maintain market share or the consumer finds some kind of substitute good there is not much wiggle room and costs dig into profits quickly. Everything in this month’s report points to further growth and that is good except when it isn’t. This growth means that inflation threats are here to stay for a while. The question is how long. The two drivers are as they always are – demand and supply. The demand side is pushing inflation for the moment – there is too much for the producers to keep pace with. The suppliers were not ready for this level of demand and remain a little cautious as far as how long that demand holds. If the demand is real and it seems to be, the producers will begin to ramp up to meet that demand as they will start to covet market share and gaining that advantage will rely on being a little more price competitive than the other guy. The potential hitch in this process is the money supply driver for inflation referred to earlier.

In normal circumstances there is a limit to inflation tolerance that stems from the willingness and ability to pay the higher prices. If the consumer confronts the higher price and decides that it is just too high or they simply don’t have the money, they will refuse to pay the inflated price. If there is money available the consumer then has to decide if they want what is on offer. The estimate is that there is close to $5.5 trillion in excess savings worldwide so now the consumer will complain about the higher price but then they will shrug their collective shoulders and pay anyway because they want the good or service on offer and they have the money to pay for it. Those that will be left behind will be those that don’t have the money set aside or lack the ability to increase their personal money supply – the fixed income consumer and the company that is locked into their current pricing structure. Given that many manufacturers are selling into larger companies and assemblers they often lack the ability to adjust prices, so they watch their own costs rising at the same time they are unable to hike the price they charge to their own clients. At this point the expectation is that inflation pressures will ease by the end of the summer or early fall as the producers catch up with demand, but all it takes are some unexpected crisis situations such as the shutdown of the Colonial pipeline and inflation is driven faster. This is the season of hurricanes and storms capable of creating issues that cascade through the markets and there is more fragility in the system than has normally been the case.”

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