Beige Book Report: San Francisco
June 16, 1976
According to our directors, operating rates are generally well below capacity at the present time and, except for natural gas, they foresee few supply shortages until mid-1977. New plant construction appears to be at a standstill, and there are only a few instances of modernization. The supply situation, however, is being monitored carefully, especially by steel and aluminum users. There is some concern that an upsurge in construction expenditures, added to a vigorous automobile market, would be sufficient to create supply shortages.
With continued real growth around 5 percent for the remainder of 1976, there is evidence that the chemical and pulp and paper industries will begin to experience some capacity and raw materials shortages by year-end 1976 or early 1977. No significant shortages are anticipated in agricultural commodities, except perhaps in beef, which might be in short supply by year-end. The textile and apparel industries are in a situation of excess supply.
The current situation in the basic steel industry continues to be one of excess capacity. However, here, more than in most industries, fabricators are reporting high operating rates and this is expected to put pressure on the steel industry by year-end. It is anticipated that shortages will be confined to certain product lines, such as wire, plate, and reinforcing bars, creating temporary bottlenecks but that a general resurgence of construction demand on top of a strong automobile year could cause heavy price pressure by mid-1977.
Demand for aluminum is very strong and is expected to increase 30 percent over 1975 to the 1974 level. Most of the increased demand is from the transportation industry, which is seeking both to reduce vehicle weights and increase vehicle mileage. No shortage of aluminum is anticipated until the second half of 1977.
The copper industry continues to operate at low rates. The market has been depressed but should receive some stimulus from a more active construction industry.
The forest products industry as a whole appears to have ample capacity for supplying demand currently. Looking first at solid wood products, domestic softwood lumber and plywood mills are currently running at about 90 percent of capacity. Lumber imports from Canada are down and could readily respond to any dramatic pickup in U. S. softwood lumber consumption, although the housing outlook makes such a pickup appear unlikely. Although softwood plywood is not imported from Canada, modest additions to domestic capacity are planned for servicing anticipated demand increases.
For pulp and paper, world pulp mill operating rates are depressed at about the 80-percent level and a large overhang of pulp inventory exists. Domestically, including the western states, paper and paperboard mills are currently running at about 92 percent of capacity, with enough new capacity planned to keep most of the markets in balance over the near term. The segment of the pulp and paper industry with the tightest supply situation currently is in publication papers.
Production in this segment is sold out several months in advance, and rationing is taking place. The reasons behind this situation appear to be the combination of resurging demand and attempts by customers to rapidly replenish their below-normal inventory levels. It is possible that once inventories are replenished, the call on production will moderate. None of the other segments of the industry appear to have this problem.
Operating rates in the aircraft industry continue to be quite low. Parts suppliers report that a recent increase in demand has already turned soft. Potato processing plants are not running at full capacity and have no plans for plant expansion. Farming acreage is at an all-time high. There is a surplus supply of beans, potatoes, and wheat. Demand is weak, and prices are low for these products. There is some evidence that beef will be in short supply by year-end.