Document N2kBG3Jo92nQrwBqLe9pj0Rxg

ICttPl TRENDS Inflation/Lead Times 4 Are Procurement Headaches John E. Eggleston, Bechtel Corp., Sbn Francisco, Cal. Procurement hii certainly fait the effect! of the anercy crunch. It has bean, and continues to be, a real challenge. Energy, however, is but one factor in the complex market system we are now facing. Steel and money are also in short supply and they contribute greatly to the current crunch. Govern ment cost controls are a factor too. Some of the causes and few trend charts will help to pinpoint what is happening. Steel is in short supply worldwide--has been since early last year. U-S-. mills shipped a record 111 million tons last year by using up inventory and postponing maintenance shut downs. Total hipmenf this year will fall short of this record. But, still the demand increases. Foreign steel won't help because worldwide demand is also strong. The steel shortage was already with us last fall when the oil producing nations suddenly bal looned the price of oil. Drilling programs im mediately expanded, and the resultant demand for oil country tubular goods staggered the already overloaded steel industry. Government price controls also contributed, particularly in recent months. Controls kept do mestic prices too low, with the result that mills in creased exports, thereby worsening the steel short age. The elimination of controls should bring some realignments of supplies as well as of prices. Late last fall, we prepared some trend charts to show what was happening to some of our com modities. The charts covered the period from 1969 and included a projection for 1974. They are re produced on these pages along with pertinent comments. These are simply selected trends on a few . major commodities. They do, however, reflect the </ general unsettled nature of the markets we buy from. We hope that markets will stabilize and that the supply situation will ease, but this doesn't seem to be in the cards for the balance of this year. Price and delivery escalation are not the only problems that the steel shortage and energy crunch have caused, however. Wildcat strikes This material mb* exctrpted from a talk given at Ike AICkE Engineering Construction and Contracting Com mittee'* meeting in San Francisco in May. The entire paper anil be included in the Proceeding* which are to be published Their availability wilt be announced in CEP. Ed. have shut down a number of machinery shops. Firm price quotes are vanishing. Until last sum mer most purchases were made on a firm price basis; now it is rare. Requests for advance and progress payments are increasing since suppliers are having difficulty financing their operations. Finally, force majeurt claims are up, with some manufacturers refusing to ship firm orders until they get increased prices due to the volatile pricing conditions they, too, are facing. PRICE BASE YEAR 190`100 ; LEAD TIME IN WEEKS Cast Steel Valves The major volve suppliers jacked up their prices by as much as 40% during the four-month period from October to February. This has always been a competitive, low-profit industry. When the prices f the castings, forgings, and other raw materials leaped up, the valve manufacturers had no margin to cover them. The rapid rate of increase predicted for the balance of 1974 reflects the expectation of the manufacturers that the prices they pay for their materials will continue to escalate at a rapid rate. CHEMICAL ENGINEERING PROGRESS (Vol. 70. No. 7) ucc 03641b July 1974 47 TRENDS MICE BASE YEAR Mff'100 LEAD TIME IN WEEKS C ntrifugal C mpr ssors The lock of demand for new refinery units is re flected n this chart by the declining lead times fr m 1970 through 1972. During this period, a maj r manufacturer concluded that there was more capac ity available than the demand would support and that firm went out of the business. The upturn in demand now finds the industry with insufficient capacity. Centrifugal compressors will remain a bot tleneck Hem for the foreseeable future. PRICE BASE YEAR 1949*100 LEAD TIME IN WEEKS 19' WTO ' 1971 ' 1972 ` 1973 ' 3974 Fabricated Piping (Refinery) Critical shortages of pipe, flanges, and fittings hove severely altered the delivery situation for fabri cated piping. And recent price rises for these mate rials have caused rapid escalation in the price of fabricated piping. MICE BASE YEAR 100 LEAD TIME IN WEEKS 120 My 1974 1970 - 1971 ' 1972 ' 1973 Heat Exchangers Prices hove risen steeply, much more to than any one thought they would last fall. This has been a low-profit business for many years, but perhaps this is changing. Lead timet ore following the predicted curve, and the manufacturers believe the 70-week prediction for the end of '74 it about right. Perhaps H it, but this depends largely on future oil refinery and petro chemical plant expansions. If tome more expansions are announced, heat exchangers could become a real bottleneck. - -------------------------------- ;-- ucc 036417 CHEMICAL ENGINEERING PROGRESS (Vol 7D. No. 7) PRICE IASE YEAR 1M9*100 LEAD TIME IN WEEKS Refinery pump suppliers were not ot full capacity far several years and the drop in lead times from 1969 through 1972 reflects this. Most of the pump suppliers were unprepared for the sudden influx of orders that started in late '72. Their heavy backlog, together with shortages of forgings and castings, ' hos extended lead times considerably. R inf rcing St el(N n-Nud ar) This is rebar f r plants that don't need the nuclear quality assurance pedigree. The price sh t up faster this spring than anyone could predict. This was mainly due to the unprecedented rise in the price of scrap steel, which rose from the $50 price of last summer to a high of $155 per ton in early April. Scrap is important to rebar because most re* bar mills use electric furnaces and these usually are 100% charged with scrap. The relationship betwe n the price of scrap and the price of rebar is equal, dollar for dollar. In recent weeks the price of scrap has dropped to somewhere around $95 per ton. Actually, scrap varies widely from city to city and from type t type. The figures used here are for #1 heavy melt at Chicago. We have tried to get from our suppliers some pre dictions as to the future of the price of scrap and the price of rebar, but we have no takers. The delivery trend is really difficult to depict ac curately. Earlier this year a number of firms simply stopped bidding rebar and it became very scarce. Then in February the Cost of Living Council granted some of the smolier steel mills some pretty good price increases. Almost immediately several firms called to say that they were back in the marketplace and could deliver on fairly good schedules. Note that we expect the deliveries of rebar to drop under 20 weeks by the end of the year. PRICE BASE YEAR 1969 * 100 LEAD TIME INWEEKS OCMICA1 ENCMEEMNG PROGRESS (Vol. 70, No. 7) ucc 036418 July 1974 49 TRENDS Hereogain the c st controls held prices d wn too low too tong and created a supply shortage. Prices started upward in February when the Cost of Living Council permitted what was called a "volatility" price increase. This allowed manufacturers to increase prices in relationship to their increased costs. Atony were using a significant amount of imparted copper which was priced above SI a pound compared to the domestic controlled price of 60 a pound. With the end of controls domestic capper jumped to 80. Plastics, which have also been in short supply, hove risen with the end of price controls. These higher prices are bringing some materials bock into the domestic market. For this reason, cable manufacturers are telling us that they do not expect deliveries to lengthen as much as we had originally predicted. The trepd curve shows the aver age delivery time for different types of cable, a wait we now expect will lengthen to about 50 weeks by the end of the year. steel and steel products. Until their shops fill up, deSveries f about tw years will be available, but at high prices. Bargains hove gone ut f style every where. Domestic shops have the heaviest backlog in history. Some shop expansions are being planned, but nowhere near enough to satisfy the demands. PRICE BASE YEAR 190 *100 LEAD TIME IN WEEKS Heavy-wall Reactors Lead times have continued to lengthen, and might reach 190 weeks by year-end, except for Japan, at least for a while. The Japanese shops were also over loaded until the oil-price crisis. This turned their bolance of payments situation upside down. In order to stem the tide they conceled most of their domestic programs and started up a heavy xport program of SO July 1974 The curve on this chart reflects an unusual situa tion. Lead times are not os bad at forecast. Many fabricators throughout the nation have been able- to get sufficient allocations--more than they expected they would. This reflects the fact that most of the standard heavy structural shapes are q more profit able item for the steel mills than some of their other lines. There are still shortages ip some areas of the country, particularly in shops in Texas. But on the west coast and throughout the east, structural shops appear to have sufficient allocations to assure de livery of orders for fabricated steel within 50 weeks. Some of the lightweight structural shapes and plate ore, however, in short supply. Some mills have drastically cut down on production of these hems because they are low-profit items. Structures utilizing large amounts of lightweight shapes and plate could require longer lead times. Prices for fabricated structural steel have risen more rapidly than anyone could foresee last fall. 'vhw ' ,e ' T, Eggleston UCr 036419 CHEMICAL ENGtNEtMNO PROGRESS <Vel 70, No. 7).___