Prices are rising as the industry runs out of capacity

Symptom: Prices have seen a recovery because the industry is running out of capacity.

Implications for the market:

Prices can stay high as long as the industry is likely to be capacity constrained
There is some chance, though, that real prices could fall again within a few years
- The current price recovery is fueled by new, higher levels of demand that outstripped capacity. As that capacity comes on stream, operating rates will fall, inventory levels will build, and price weakness will return (unless all competitors have decided that discounting will not move share).
- The basic industry structure has not changed. There are still as many competitors as before the recovery.
- And customers still show a strong willingness to move part or all of their volume to a competitor who offers a lower price.
- As a result, when economic pressures return, any competitor offering a lower price is likely to gain volume and force the industry's real prices down again.

Recommended Reading

For a greater overall perspective on this subject, we recommend the following related items:

Analyses:

Perspectives: Conclusions we have reached as a result of our long-term study and observations.

"Can We Raise Margins With A Price Increase?"
Before a company commits itself to a price increase, it should check marginal costs in the industry and the ability of low cost producers to expand.
"Must the Cycle Start Again?"
Does hostility represent an inevitable cycle at work or can an industry prevent, or at least delay, the return of bad times?
"The Grasshopper and the Ant"
Leaders of industries coming out of hostility would do well to remember the grasshopper and the ant. Hostility, like winter, always returns.
"What Ends Hostility?"
The challenge for business leaders is to recognize the true end of a hostile market place when it arrives and to avoid being deceived by a temporary ending.