The industry cannot pass on cost increases

Symptom: The industry is encountering difficulty in passing through its cost increases.

Implications for the market:

• The high profitability enjoyed by the industry during the last few years is the primary cause of the developing hostile situation.

  • High margins encourage existing competitors to expand capacity, and encourage other firms to enter the industry.

  • In the industry, much of this expanded capacity has come in the form of Greenfield plant additions, implying that the industry has enjoyed very high price levels for a relatively long period of time.

  • This expanded capacity can readily operate and expand even further at margins well below those of today.

• The situation promises to get worse before it gets better. Once competitor expansion has started, prices must drop very low to stop it. Competitors will expand in marginal ways for some time because prices rarely get low enough to discourage this type of expansion.