A Winter of Losses Might Offer the Promise of A Summer of Profits
If you read enough reports and company explanations about why profits are up or down you are reminded that there are cycles in business and to expect them and work with them. But you have to be careful about making assumptions.
It might be tempting to think that with a slow down in home construction there would be an increase in the available supply of materials and therefore it would be a good time to stock up at lower prices. Well, it doesn’t look like there’s going to be a break in material costs.
The Non-Manufacturing ISM (Institute for Supply Management) Report on Business, put out by the Institute for Supply Management, shows construction as one industry reporting higher prices for materials and services in January. This is in the face of construction being listed among the 14 industries that saw negative growth the same month. That means there’s less building going on, but material prices are rising.
When you look out across the landscape of material suppliers you see losses being reported. Louisiana-Pacific Corporation (LP) reported loosing $39 million in the fourth quarter of 2007 and blamed that loss on the decline in construction in the housing industry and the decline in the value of the dollar. Encore Wire (WIRE), makers of electrical wire for buildings, reported a $1.1 million loss and largely blamed the decline on the actions of other wire makers who kept lowering prices. Its CEO, Daniel L Jones commented:
“Despite strong copper prices, margins in the building wire industry continue to be compressed. Certain competitors continue to respond to the slowdown in residential construction by cutting wire prices in an attempt to maintain market shares, compressing margins below our expectations at this level of copper prices.”
Temple-Inland (TIN), a well diversified company, reported overall record profits, but lower gains than 2006 for building products like lumber, particle board and gypsum. The company cited lower prices in Q4 of 2007, when compared to Q4 of 2006, as a contributing factor to this drop in revenue. Doyle R. Simons, chairman and CEO said:
“Building Products pricing and demand were adversely affected by deteriorating housing markets in 2007. We are focused on lowering costs and matching our production to our demand. We expect 2008 to be difficult for our building products business.”
At some point in the future all three companies will be probably be reporting they had the expected or record profits and cite the obvious reasons why. And so it seems that business cycles, like the seasons, owe their very life blood to expected changes that happen at regular intervals. It’s not something to fight, or rail against, or whine about…it just is.
