The future of the firearms industry?

[Preacherman]

Jim Shepherd is an investment analyst who publishes an online newsletter to investors. His Web site is here for those who are interested. I was forwarded this excerpt from his newsletter via the API List.

Yesterday, I joined in on a conference call between Remington Arms Company and financial analysts. In that call both CEO Thomas L. (Tommy) Millner and CEO Mark Little kept pointing analysts back to a single point: rising commodity prices are a very ugly truth in today's firearms industry. If you're in the ammunition business, it's the stuff of economic nightmares.

Copper, lead, zinc, steel, resins, electricity and natural gas are products upon which firearms and ammunition manufacturers depend, and the costs for each have continued to climb - sharply - over the past 18 months. Today, copper sells for around $2 per pound; a metric ton of lead has risen to over $900 per ton. If you're Remington and use 16,000 tons of lead annually, these prices represent a major impact on manufacturing costs - and the bottom line.

Prices are rising sharply enough that some manufacturers are facing the prospect that raw materials costs may achieve what the anti-firearms movements haven't been able to accomplish: move firearms out of the hands of average citizens.

It may not be legislation nor regulation that thins out the firearms industry, it may be a simple business fact: the marketplace will only absorb so much price pressure before there's a change in consumer spending habits. Changes that mean less spending and, not inconsequentially, lower demand. When demand falls in a mature industry (like firearms and ammunition), the most vulnerable companies fall as well.

Those potential failures may be accelerated if/when America's "big box" retailers suddenly realize they have product just sitting on their valuable shelf space - or should they decide the continued price swings in a large and complex product category that also carries a high liability potential is simply not worth their efforts.

At that point, they won't agonize. They'll act. "Big-box" observers tell me there are a couple of likely scenarios. Initially, they might reduce selections and reduce inventories, hoping to regain faster product "turns." If that doesn't work, they may simply decide to return unsold inventory and completely discontinue the entire category.

For more than one company, loss of one "big box" might be catastrophic. Loss of more than one might be a death sentence.

This is in no way intended to "imply" that Remington - or any other American-owned firearms and/or ammunition company - is failing. It's recognition of the fact that at several companies, executives are operating in "very strange territory."

That was, in fact, the description used by Remington executives as they described their raising prices in hopes of offsetting constantly rising costs. "Remington is not alone," said Little, "costs are above historical precedents, but price increases have held so far."

He also said there was no "guarantee all price increases would stick." Even if the mega-retailers do pass-through the latest round of increases and maintain their product mixes, there's still no guarantee even the newest price hikes will be enough to offset commodity and energy prices. Or consumers won't finally put aside their shooting and hunting pastimes for other, less costly, activities.

So what's a company to do?

Remington says they're taking several measures: from looking at further cost cutting, expanding product offerings -outside their existing lines with foreign partners, offering more varied product mixes (knives and other higher-profit items), and, the least liked option: raising prices.

In fact, Remington's next round of cost hikes begins December 1 with a four percent firearms increase goes into effect. On January 1, 2006, Remington ammunition will have a six percent across-the-board price hike. Even with those increases Remington executives were quick to remind the Wall Street analysts metals prices may continue to climb.

If so, there may be no other alternative other than raising prices - again.

So what's any of this business mumbo-jumbo mean for the rest of us?

Analysts I spoke with following the conference call say it will certainly mean higher prices in the short term. In the mid term, they say it may mean fewer choices in ammunition varieties and retail locations. In the long term, should conditions not improve for several companies, industry observers and analysts say it will almost certainly mean fewer brands.

--- Jim Shepherd

Sobering stuff...

 

[MachIVshooter]

While raw material prices will definitely impact ammunition, I doubt it will have too much effect on firearms themselves. The cost of a chunk of walnut and 4 pounds of high-carbon steel is a very small factor in rifle prices. Even less of a factor for handguns. We are paying for the crafstmanship. The increase in gun prices will be due to several factors, not the least of which is the necessary increase in pay for firm employees and other rising business costs. But even if steel prices tripled, the cost to a large gun maker like Remington would barely be 2 digits per gun.

Automobiles will be one of the first places we see a cost increase due to raw materials. Now you are talking 2,500-6,000 pounds of steel, aluminum and plastics. Materials cost is a big factor in such quantity.

 

[Owen]

I strongly disagree. I work for a group of machine shops that make parts for gun companies. On many of those parts, the raw material is more than 25% of the cost of the part. And there isn't 4 pounds of steel in a rifle. It's more like 10, mainly because the market wo't accept resource saving methods like castings.

Some of those materials are specialized, like the steels used for the gas blocks on sport-utility rifles (HNV3 is common with the companies I sell to). Those steels are now on an allocation basis across the market, meaning you place your order in June of 2005, and that's all you can get in 2006.

There is way to be made by using more casting and MIM, but the market generally won't suport that. Some companies go so far as to cast pistol slides, and then machine every surface, so that the origins of the part can't be determined with out sophisticated, destructive mechanical tests.

With pistols, there is a $500 magic number. Go over that number, and your volume decreases tremendously.

With .22's $300 seems to be the limit.

While raw material prices will definitely impact ammunition, I doubt it will have too much effect on firearms themselves. The cost of a chunk of walnut and 4 pounds of high-carbon steel is a very small factor in rifle prices. Even less of a factor for handguns. We are paying for the crafstmanship. The increase in gun prices will be due to several factors, not the least of which is the necessary increase in pay for firm employees and other rising business costs. But even if steel prices tripled, the cost to a large gun maker like Remington would barely be 2 digits per gun.

Automobiles will be one of the first places we see a cost increase due to raw materials. Now you are talking 2,500-6,000 pounds of steel, aluminum and plastics. Materials cost is a big factor in such quantity.

 

[Hypnogator]

lead has risen to over $900 per ton.

Yikes!
Back in the days of my trapshooting affliction I used to go through the shot right and left. In fact, one time, my buddy and I went together and bought a ton of shot. 1000# of 7 1/2s for me, and 1000# of 8s for him.

Just like everything else -- geting expensiver and expensiver.