Metal parts purchasing slows as durables stall
Lack of demand growth by manufacturing industries brings a drop in shipments of forgings and castings. But prices are still high.
By Tom Stundza -- Purchasing, 6/12/2008 6:00:00 AM
The crawl in capital goods manufacturing growth this year has stunted the purchasing of forgings, castings and other heavy metal parts. Still, buying in this $43 billion engineered-components marketplace remains healthy enough to keep average leadtimes extended at 10 weeks-plus for the third straight year.
Actually, forgings had a record year in 2007, with demand growing 10.2%. Demand for castings, however, declined 9%. This year is not likely to see such robust growth in forgings because heavy machinery, a key user, is softening. Still, prices for forgings and castings are high and they're driving buyers wild.
"Prices are out of this world this year," says Fred Cruz, senior purchasing manager for Signal International's drilling rig manufacturing and repair operations in Pascagoula, Miss. Discussing forgings, castings and other fabricated parts, he says: "If it's made out of iron or steel, prices aren't getting any better and sourcing isn't getting any easier." He says the same cost-driven price spike that has brought plate and structural steel products to record highs is impacting forgings and castings. And it's wreaking havoc with the company's 5% corporate purchasing price reduction goals.
Steel castings and forgings are also hot-button issues for Harlyn Ringhand at the Morris Materials Handling plant in Windsor, Wis. "Business is so good that we are booked out through summer," says the strategic purchasing manager for the firm that makes custom-engineered bridge, gantry and container-handling overhead cranes as well as hand-operated and electrical hoists. "The issue is that we have no control over pricing of castings or forgings," he says, adding that "this isn't sitting well with our customers" (who used to get guaranteed price quotes several months ahead of delivery).
Ringhand says in an interview that the price spike "has forced us to change the way we are buying so that there's no buying for inventory; instead, we're only buying for the job" even if deliveries aren't as quick as they had been in the past. He says that nonferrous prices are just as much of a problem as iron and steel parts.
Despite last year's strong demand for forgings, the dip in castings—the larger of the two in terms of tonnage—brought total purchases of cast and forged metal parts down in 2007 to 17.6 million tons (from a cyclical peak of 18.6 million in 2006). That's not as steep as the 7.5% drop that had been forecast, but enough of a decline to already trigger some supply base downsizing through shutdowns and consolidations. The early outlook for 2008 is a slight decline in purchasing to 17.5 million tons—as most market insiders expect a firming of demand in the second half.
The problem in gauging the castings market is that General Motors, Ford Motor, Chrysler, Briggs & Stratton and Brunswick, the marine equipment maker, actually source more from internal captive foundries than independent foundries. Many large metalworking firms also source a large percentage of forgings from captive forge shops.
Overall, the continued contraction of residential construction, the slowdown of domestic automotive assembly and stagnant major appliance and heavy machinery manufacture has flattened demand for heavy ferrous and nonferrous castings and nonferrous die castings and powder metal parts. Another problem for suppliers is that weight-reduction programs for metal parts are forcing adjustments in what types and grades are being shipped vs. previous years.
A late-2007 market study by The Freedonia Group of Cleveland says that "ferrous castings are expected to continue to lose share to nonferrous parts," especially in motor vehicle applications where the automakers are trying to reduce vehicle weight to increase fuel efficiency. "Aluminum and magnesium have become increasingly common in the production of automotive components due to their lightweight qualities," the report says.
Forgings grew last year because of the increased buys of components needed by makers of commercial aviation and aerospace products, military ordnance and vehicles, railway equipment, oil-field machinery and power generation equipment. Because of this, "the recession doesn't seem to be affecting us," says Don Farley, director of marketing for the Forging Industry Association in Cleveland. "We're coming off a record shipments year in 2007," he says, "and 2008 is starting off very strong."
While market analysts aren't sure if demand will grow as much this year, companies involved in the nuclear, solar, wind power and other new power-generation technologies are ordering heavy forgings for projects that may not even begin construction until 2009 or 2010.
Still, Farley acknowledges that high costs for raw materials are boosting prices by double digits for steel, aluminum, titanium and high-temperature specialty metal forgings—which has startled some contractors into delays, which could cut into future sales projections if the delays become widespread.
The costs have escalated for raw materials used in producing castings and forgings at an unprecedented rate due to the increasing world demand for available scrap, such as No. 1 heavy melting steel and shredded steel scrap. Rising prices for these commodities is being fueled by reduced manufacturing, which has limited the supply of scrap available to steelmakers, and a weak U.S. dollar, which has reduced the tonnage available to casting shops from offshore suppliers. That also has boosted the costs of steel billets and plates used to make forgings.
And it is the scrap-cost inflation, says David Roloff, behind his decisions to raise prices for the custom industrial and marine iron castings produced at his Roloff Manufacturing black-iron foundry in Kaukauna, Wis. Ferrous scrap costs had increased by $70/ton in April from January and alloys for making castings also were up, he says, and all these costs looked to be going even higher in May and June.
In the same vein, in May, brake drum manufacturer Webb Wheel Products of Cullman, Ark., moved to a monthly pricing schedule for all product lines "to mitigate the risks associated with skyrocketing global metals prices," according to CEO Pedro Ferro. He explains that "the unprecedented price increases imposed by the metals market on purchased metals, particularly castings, made our pricing action necessary."
In a statement, Ferro says that "castings are a significant part of our total product costs. Webb has been working closely with his casting suppliers to monitor the scrap market trends. In the first quarter of 2008, scrap prices have increased 88%, and we have experienced further alarming increases since the first of April. It's unfortunate, but we have no reason to believe the extreme scrap market volatility will subside any time soon, thus making the immediate pricing changes necessary," he says.
Nonferrous castings and forgings are inflating in price because base prices for primary metals have elevated to near-record highs this year—copper around $3.90/lb at the end of April and aluminum at $1.32. Difficulties in bringing new mine and smelter projects on-stream will keep copper prices strong until the end of 2010, according to analysts at Macquarie Bank, which has raised this year's price forecast 15% to $3.73/lb from $3.25 in 2007.
Analyst Adam Rowley suggests that the copper market has been roughly balanced so far in 2008. "However, with many speculators short in anticipation of a looming surplus, the swing in expectations to a balanced market has been enough to drive strong fund short covering," he says in a letter to clients, forecasting a small deficit of 36,000 tons for this year and a surplus of 98,000 tons next year, and extremely tight inventories throughout this period.
Rowley says that previously strong buying from hedge funds into the base metal complex via commodity products such as index funds is likely to wane. But none of that will change the upward trajectory of nonferrous metals until later in the year. In fact, prices for various types of nonferrous scrap and such other primary products as zinc, nickel and magnesium also have boosted sales tags for die castings. Purchasing of die castings was sluggish in 2007, says Daniel Twarog, president of the North American Die Casting Association in Wheeling, Ill., and 2008 is "looking like a 'batten down the hatches and prepare for trouble' kind of year."
He says he is concerned that purchasing of die castings could drop by an average 4% this year because "demand from the top markets—automotive components and such housing-related products as power tools, hand tools and door and window hardware—definitely are down." He suggests that downsizing and layoffs could become apparent among die casters this year, disrupting supply.
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