New products, steel shortages, China's role, roil the market
William Atkinson -- Purchasing, 6/3/2004 2:00:00 AM
Ask about new products and services available from the fastener industry and most manufacturers and distributors spend little or no time responding to the question. Instead, they want to discuss the topic on everyone's mind in the industry—the shortage of steel. However, there are still a few new products worth mentioning.
One is a direct tension indicator washer. "It has small bumps on its face so that, when the washer is put into place under the head of a bolt, it will tell the installer that the bolt is torqued down properly as the bumps are flattened," explains Mike Smith, president of Smith Associates in Rockaway, N.J., a manufacturers' rep firm that sells to distributors. Smith is also president of the Metropolitan Fastener Distributors Association. "The washer saves time and money by preventing second-guessing on how much torque is required."
Another is a new generation fastener called HuckLok, manufactured by Alcoa Fastening Systems' commercial products group in Waco, Texas. "This has a very large blind-side footprint, yet also offers high strength and wide grip range," reports Jim Hutchison, global marketing manager. Alcoa has also released U-Spin, a U-bolt system that uses swaging technology to pre-load all four bolt legs on the same clamp. Instead of torquing fasteners together, a collar is swaged onto a pin or bolt, which elongates the pin or bolt to an exacting clamp. "This results in a maintenance-free U-bolt joint for the life of the vehicle," he reports.
There are also some innovations in fastening systems, according to Robert Harris, managing director of the Industrial Fasteners Institute in Cleveland. "A lot of companies are becoming involved in vertical integration by providing full components, rather than just individual fasteners," he explains. The reason is that the cold-headed process allows them to create parts very economically, as opposed to the screw machine process or some other methods of manufacturing.
In the service area, Alcoa Fastening Systems works with its distributors to get access to customers' production floors to look for some hard cost and soft cost savings, according to Jim Doran, regional sales manager for the company's Roswell, Ga., office and also president of the Southeastern Fastener Association. "When we can work directly with customers, we can help them improve process efficiency in order to reduce headcount," he explains. Example: One customer was using cap plugs to plug ports on hydraulic pumps. The plugs were expensive, and it took a lot of time to plug the holes. "We came up with an integrated molded cap plug, allowing the customer to cover several orifices with one piece," reports Doran. The piece was more expensive, but there were savings in the time it took to install them. In addition, the single unit did a better job of sealing off the pumps when they went through cleaning operations. Overall, the customer is saving about $150,000 a year.
Another Alcoa service: The company has moved much of its specialized installation tool sales and repair business to some key distributors throughout the U.S., reducing leadtime for end-use customers.
Metals Shortages
The most critical situation in the market concerns metals shortages, particularly steel. "There is not enough steel coming onto the market, and scrap is in high demand," reports Dave Merrifield, executive vice president of the National Fastener Distributors Association in Cleveland.
"It's hard to find wire to make fasteners," adds Henry Chernow, technical director of Mecom Industries in Wood Dale, Ill., who is also president of the Mid-West Fastener Association. "Purchasing people in our industry are stretched to the max trying to make sure supply lines don't diminish."
"Because of the shortage of steel, there is a real possibility that there will be a shortage of fasteners in the future due to a shortage of wire rod," explains Barry Porteous, president of Porteous Fastener in Carson, Calif., and co-chair of the American Association of Fastener Importers. The company is a master distributor that sells standard fasteners to other distributors.
Besides carbon steel, shortages are also affecting stainless steel, brass and bronze. "The shortage of nickel is driving stainless prices up, and there is also a shortage of copper," adds Porteous. "Copper mines are coming back on line in Arizona and New Mexico to try to meet demand."
The reason for the shortages? The primary cause is the demand for building infrastructures in developing nations, primarily China and India. "Consumption by the new middle class in China is also creating a huge demand for metals," reports Porteous. "When you consider the fact that there are 500 million families in China and they're all starting to purchase televisions, that's a lot of televisions! They're also buying cellphones, air conditioners and other appliances."
Harris of the fastener institute agrees. "China is soaking up huge quantities of finished steel and scrap. However, there is currently an action pending to stop the export of scrap from the U.S. until our mini-mills have sufficient feedstock to be able to produce and supply the U.S."
The implications of the shortages are hitting manufacturers and distributors hard. "Supply and pricing are major problems," reports Steve Kendall, president of Portland Screw in Oregon, and president of the Western Association of Fastener Distributors. "We are faced with a challenge of trying to maintain our supply of current steel and stainless steel products." Leadtimes for the company on some specialty products have increased, in some cases, from eight weeks to 16 weeks within a period of only a month. Distributors like Portland Screw are scrambling to get inventory when and where they can. "In addition, we've been getting letters from our suppliers telling us that prices are going to increase, and in many cases, they don't even know how much they're going to increase," continues Kendall. "A lot of the manufacturers can't even hold quotes for more than 30 days. One manufacturer told us that, for the first time in 30 years, they are rescinding their catalog pricing." As such, according to Kendall, buyers are going to need to open their wallets. "There aren't going to be many suppliers willing to sell at greatly reduced margins," he explains. "One- and two-year pricing is getting thrown out the window."
"We've increased prices 15% and don't know how much more we will need to increase them," adds Porteous. However, he encourages buyers to keep these increases in perspective. That is, his company's average fastener price per pound in 1998 was 74¢. By 2000, it had dropped to 61¢, an 18% drop which represented historical lows. "We've been in the business 38 years, and these were the lowest prices we'd ever seen," he explains.
His belief is that recent price increases are not actual increases, but rather price corrections to compensate for recent lows. "There will be increases, but they haven't occurred yet," he suggests. "Our current price, for example, is still only 69¢ a pound, which is five cents lower than our 1998 prices."
Almost no one in the industry saw the shortage coming, and no one seems to want to predict its end. "No one really has a solution to the problem, because it happened so quickly," admits Porteous. "We also don't know how long it will last. However, we certainly don't expect any let-up in 2004 and maybe even in 2005."
Looking Overseas
In our "Product Updates," when we ask commodity manufacturers and distributors to offer advice to industrial buyers, the first recommendation from most of them is usually to "buy on total cost, not lowest price." They quickly add detail along the lines of, "So don't buy from overseas, where quality is usually not as good as it is in the U.S." Does this hold true for fasteners? For the most part, fastener manufacturers and distributors don't seem to slam import quality as much as manufacturers and distributors in other industries do.
"A few companies are swinging back to U.S.-made products for quality reasons," explains Harris. "However, the quality of Chinese products is increasing and will probably mirror what took place with quality in Japan in the late 1970s and early 1980s." For now, though, business is growing so rapidly in China that they really haven't had a chance to catch up in terms of quality improvement initiatives.
"Buyers may want to deal with domestic suppliers for leadtime reasons, but in terms of quality, it's becoming much better overseas, to the point where it can be difficult to tell the difference," states Smith Associates' Smith. However, he adds, many companies still need to purchase fasteners manufactured in the U.S. to meet military and other federal government purchasing requirements.
According to Porteous, quality concerns from overseas sources have pretty much disappeared. "The majority of production in China and Taiwan is from large factories that are ISO-9000 accredited, and many are also QS-9000 accredited," he explains. "These facilities have significant investment in quality testing equipment."
If you are concerned about quality and reliability, though, especially when it comes to costly product warranties and product safety, Harris encourages you to take the time to trace the pedigree of the fasteners you purchase.
While overseas fastener quality may be on somewhat of a par with domestic sources, leadtime is a different story. "A number of large OEMs have returned to domestic fastener suppliers because they couldn't deal with 60-day leadtimes," states Harris. He adds that, "if you have a good relationship with a U.S. manufacturer or distributor, and if you're in short supply, they will usually try to do whatever it takes to fill your need. "These kinds of relationships don't exist with overseas suppliers," he notes.
If you are comfortable with overseas quality and can stand long leadtimes, the next issue to consider is pricing, where overseas sourcing continues to hold the edge. "Domestic manufacturers have lost domestic marketshare, primarily in the industrial commodity fastener products," states Harris. In 2000, domestic marketshare (product going into the distribution channel) was 51.3%. Today, it is 37.9%. The reason, according to Harris, is that, as China becomes more onstream, they are taking marketshare from Taiwan and also from U.S. manufacturers.
China's share has increased from 8.3% in 2000 to 16.2% today. "One reason is the cost of doing business," he states. "The National Association of Manufacturers completed a study showing that the cost of complying with government regulations in the U.S. adds 24.2% to the cost of manufacturing, which is equal to the total cost of manufacturing in China."
As a result, according to Harris, a number of domestic manufacturers are leaving commodity-level fasteners to overseas manufacturers and becoming much more specialized and niche-oriented. "For example, many U.S. manufacturers are focusing on products that are critical to assembly in specific segments, such as automotive or computers," adds Harris.
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