In a squeeze
Demand is healthy, but manufacturers are not
Tom Stundza, Executive Editor -- Purchasing, 12/9/2004 2:00:00 AM
Despite the fact that this is a period of relatively healthy demand for manufactured goods, the long-term viability of metal parts makers continues to be a marketplace issue.
In the aftermath of the recent manufacturing recession that shrunk the pool of suppliers, high energy costs and the elevated costs of ferrous and nonferrous scrap and primary metals are pushing some castings and forgings companies into bankruptcy and nudging some parts suppliers into unexpected and often unwanted mergers.
Privately held Citation Corp. and Intermet Corp., both metal-parts casting companies, filed for bankruptcy in September, in large part because they were unable to boost prices to cover costs of scrap steel. "Large consumers of scrap such as casting houses have become vulnerable to this year's rising steel prices," says commodity analyst Bob Garino at the Institute of Scrap Recycling Industries. "Fast rising domestic electric-arc furnace steel production and an inability to effectively draw upon existing obsolete scrap inventories are behind the rise in domestic ferrous scrap prices."
And, the villain—the sky-high prices of steel and nonferrous prices, which have crushed the financial results of metal parts makers in the second half of the year—show no signs of abating in 2005, according to economists and Wall Street analysts. "Parts makers are being faced with raw materials costs that are higher than were initially expected in fiscal 2004, yet the companies face continued pressure from customers to cut costs," says stock analyst Himanshu Patel at J.P. Morgan Securities' Chicago office. "Upshot: 2005 consensus earnings expectations for part makers are at risk."
"The crucial problem facing us today is this surcharge du jour and the instantaneous escalation of prices," says Miles Free, director of technology services for the Precision Machined Products Association in Brecksville, Ohio, an association of companies whose members make machined parts. "Our industry is based on long fixed-term contracts. Our members are being personally challenged to go eyeball-to-eyeball with their customers and make the case, because there is no room to absorb it."
Forgers can't just tack on scrap, steel or energy surcharges onto their products, either, says Sharon Haverstock, executive vice president at Scot Forge Co. in Spring Grove, Ill. "In the forging business, you are talking about custom work. It is very difficult to pass this along," as she told those in attendance at an industry meeting. "As a middleman, it is very difficult to keep up with the steep rate [of increasing prices], so profitability is going to be a very tough area for our business."
Inevitable shakeout?
In effect, too much supply has been chasing too little demand since 1998 and market insiders had been suggesting the latest rash of financial shakeouts was inevitable. Still, with factory orders improving again, metalworking activity is running 3.5% higher this year—after falling at an annual average rate of 4.3% between 2000 and 2003—and that means more parts are needed.
Economists, in fact, predict that 2004 purchases of fabricated metal parts will continue the rebound begun last year—and show growth of around 3.8%—to 15.4 million tons. In support of this view, 84% of the buyers polled by PURCHASING Magazine in November foresee even-to-expanded metal parts purchasing ahead. However, the buyers agree with the analysts that parts suppliers won't be able to boost prices enough to cover the increased costs until some kind of demand surge takes hold, probably later in 2005.
Metal castings, forgings and powder metal parts are used in just about every metalworking sector—from automotive to major appliances, from machine tools to material handling equipment, from construction materials to process industry machinery. North America is the largest metals parts market on the globe, consuming 40% to 45% of global output. But, the fabricated metals products are made-to-order, rather than for inventory, so they are bought when needed. It was no surprise that demand for metals parts had fallen for five straight years since the slippage in parts purchasing actually preceded by a full 18 months the metalworking malaise that began in July of 2000. The nadir came in August 2003, but the pickup in metalworking and parts-buying has been so slow that this autumn it is still 10% off the level of activity in 2000.
Parts makers say their industry has faced some pretty stressful conditions over the last few years. "Customers got more demanding," says James L. Mallory, executive director of the Non-Ferrous Founders' Society in Park Ridge, Ill. "Then, China became a major competitor. Now, costs for insurance, raw materials and taxes seem to take an ever-bigger cut of the sales-dollar pie. And, government regulations keep getting in the way of our ability to recover." Still, market analysts believe the fundamentals still point to a very healthy 2004 and 2005 for metals-parts producers. In fact, with most economists projecting strong manufacturing activity, consumption growth for metal parts should be around 4% for next year.
Castings and forgings
The metalcasting industry melts and casts raw materials and scrap metal into literally tens of thousands of intricately shaped metal parts. The foundry process involves pouring molten metal into molds, allowing the material to cool, then removing the cast part. Last year, 85% of all castings were ferrous—gray iron, ductile iron, malleable iron and steel. Nonferrous foundries that shipped copper, aluminum, magnesium and zinc foundry products sold the rest.
Forgings are metal products that have been hammered, pressed, or rolled under great pressure—the technical term is "plastically deformed"—into a specified shape that will maintain strength, toughness and reliability when subjected to loads and stresses. These products are manufactured utilizing a unique complement of hammers, presses, ring rolls and flow-forming equipment. Forged parts vary in size, shape and sophistication, from simple couplings to close-tolerance precision components. Sales this year of 1.58 million tons should rise to 1.64 million tons in 2005.
Castings and forgings are used in the manufacture of heavy machinery and large equipment, as well as various modes of transportation, but producers have faced an extremely tough operating environment in recent years so purchases of metal parts have fallen. However, spending on capital goods is improving and the American Foundry Society in Schaumburg, Ill., is forecasting growth in shipments of heavy-metal castings to makers of internal combustion engines, farm machinery, construction machinery and equipment, oil- field machinery, valves and fittings, pump and compressors, and forged gears and shafts. Sales of 12.3 million tons this year are likely to rise to 12.8 million tons next year.
Die castings are parts of nonferrous metal (primarily aluminum but also zinc and magnesium) produced under high pressure in permanent metal molds. Makers of motor vehicles, office and computing machinery, household appliances, electrical equipment, builders' hardware, instruments, powered hand tools, toys and sorting goods, and refrigeration and air conditioning equipment buy these parts. Demand of 1.09-million tons this year is heading toward 1.13-million tons next year.
Powder metallurgy industry insiders say that demand growth for parts largely is attributable to cost savings associated with net (or near-net) shape processing technology, which minimizes machining and finishing. And it is true that powder-metal parts can be found in a myriad of end product—such as lock hardware, garden tractors, snowmobiles, washing machines, power tools and hardware, sporting arms, copiers and postage meters, offroad equipment, hunting knives, hydraulic assemblies, x-ray shielding, oil and gas drilling wellhead components, fishing rods and wrist watches.
However, most powder-metal parts wind up in automotive applications—ranging from connecting rods to engines and transmissions, from brakes and steering systems. However, with automotive softening somewhat next year and commercial aviation more likely to buy superalloy parts than mainstream steel, copper and aluminum, power metallurgy-based parts will likely only rise to 533,000 tons next year from 513,000 tons this year.
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