Part 1: Industry Price Outlook
Capsule: As in politics, all demand growth is local. You start by forecasting local demand growth and extend beyond the local service area only where necessary
For helpful context on this step:
Symptoms and Implications:
Where a detailed forecast of demand and supply might help the Company estimate future prices, the Company begins with a forecast of demand. Normally, these industries would have low marketing and sales expenses as a percentage of sales.
You project unit demand growth over the next few years for the markets that are within reach of its facilities. You can complement this local or regional projection with a national and global demand forecast for the markets where competition may arise from a larger area. Different geographic regions may have different rates of growth. In industries with low marketing and sales expenses, demand surges in one geographic area cause prices to rise across a very wide area, perhaps globally.
Practical economic shipping distances often define the economic boundaries of the geography your facilities serve. In commodity-like markets, where sales, general and administrative expenses are 10% or less of sales, the cost of shipping a product may be a substantial part of the variable cost of serving a customer. The maximum distance that you can ship a product in a normal pricing environment defines the geographic area the Company can reach. As demand increases beyond current capacity, these economic shipping distances expand rapidly.
The market may be national or global, even though few or no companies could ship globally from their facilities and still make a cash contribution on the sale. This occurs where products have standardized features or commodity characteristics, such that the product from one geographic region is similar to that from another. An example would be newsprint. Newsprint of a given basis weight and opacity is similar from one producer to another. In such markets, any substantial change in pricing in one market will tend to cause a related change of similar magnitude in other markets, even at some distance from the market where the original price change occurs.
Demand Growth Questions
This Reprieve may prove temporary, however. If new capacity again exceeds demand, Hostile conditions may return. A Reprieve market may last as short as six months or as long as five years as the industry capacity balance rebounds.
At the conclusion of the Reprieve market, industry conditions return to Hostility or Stability. The industry reaches a longer term Stable state when two concurrent conditions emerge: first four or fewer competitors control 85% or more of the industry's sales and, second, each of these leading competitors refuses to discount its prices to gain share against the other leaders. Without meeting both of these conditions, the market is likely to slide back into Hostility.
The growth in demand sets the bar for the industry's capacity expansion. The Company turns next to a diagnosis of current capacity and its likely expansion in the next three to five years.
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