Metalworking needs materials; supplies remain adequate

Purchases will rise again in 2006 even though prices also will increase

Tom Stundza, Executive Editor -- Purchasing, 12/8/2005

The solid 15% increase in durable goods manufacture over the past two years has boosted purchasing of metal parts by 23%, yet only occasionally do buyers report tight supply or slow deliveries. "Delivery times from vendors of heavy cast metal parts have been slowing late this year," says the purchasing director for a mechanical and industrial automation equipment manufacturer in the Northeast. "But, overall, deliveries have been okay."

In fact, deliveries of castings, forgings and powder-metal parts haven't been much of a problem for some time. Leadtimes have stretched only from an average eight weeks at the start of 2004 to 10 weeks nowadays, according to buyer surveys by Purchasingdata.com. That's because metal parts come from so many small players—at home and abroad—that even periodic bankruptcies or shutdowns do not disrupt deliveries.

North America is the largest metals parts market in the world, consuming a 40-45% share of global output. This year, an estimated 42 billion pounds of parts will be purchased and used by original equipment manufacturers in the U.S.—even though prices are 15% higher than just two years ago, according to calculations by market researchers at Global Insight. With industrial production growing a modest 3.4% next year, analysts see metals parts purchasing rising by 3% to 5% in 2006.

There have been problems with the inflationary spiral of metals parts. "Our industry has been hit with raw material price increases over the last year and half," says the purchasing manager for a contract manufacturer of electromechanical products in upstate New York, "most of which has not been accepted as a pass-through by our customers."

Many of these metal parts are fabricated products that are made to order, rather than for inventory, so they are ordered as needed for assembly—no matter what the cost. And lately, there has been a lag between rising prices for primary ferrous and nonferrous metals and price increases for cast, forged or otherwise fabricated metals parts. So, while primary metals prices are forecast by Global Insight analysts to be flat to down in 2006, they expect metal parts to inflate in price by more than 5%.

"We are experiencing increasingly greater cost pressure against our margins as we try to correct and/or adjust selling prices against our metals' costs," says the operations manager at a Michigan metalworking company. "The mix of price increases and various surcharges on primary metals has created a situation that has tried our patience in trying to tie down our exact costs. Now, there's the lagging effect of prices for purchased metal parts, components and subassemblies as we move to replace depleted inventory stocks."

This meshes with a new market study by the U.S. International Trade Commission, which finds that intense global competition this decade has highlighted the inability of domestic producers to adequately increase prices to compensate for significantly rising business costs—mostly because purchasers can source parts from lower-cost foreign producers, giving buyers pricing leverage.

The biggest metal parts arena is castings. Demand is influenced largely by trends in the automotive industry, which accounts for more than one-third of U.S. castings purchases. A shift from aluminum castings for certain automotive parts kept purchases active despite a slowdown in production overall and a recent 8% drop in iron-casting buys. Makers of aluminum and copper castings have been able to pass most rising costs along to end users, but that hasn't happened for many cast parts made of gray iron, ductile iron and steel.

Purchases of cast metal parts last peaked in 1998 at 16.2 million tons and then went into a steady slide until buys bottomed at 12.1 million tons in 2003. Buying perked up by 6% in 2004 and the same percentage this year.

Purchases of steel cast parts used in the railway equipment, heavy construction and power generation industries increased because of the recent upturn in domestic manufacturing. But, there has been an overall decline in domestic-made shipments because a number of U.S.-based castings producers have moved manufacturing offshore. Copper castings lost market share and tonnage to lower-cost polyvinyl chloride plastic for valves and fittings.

The foundry industry has undergone change because of many technological and economic factors. In just the past five years, there has been a loss of casting supply of 255,000 net tons—bringing the domestic capacity to 3.3 million tons. U.S. purchasers acknowledge that domestic producers have lowered prices, improved product quality and shortened leadtimes to improve competitiveness. But about one-third of the buyers have significantly increased their purchases of foreign high-volume commodity-type castings at the expense of U.S. castings, primarily because of lower foreign pricing.

Iron is the most commonly cast metal because of its relatively low cost, ease of casting into complex shapes, ease of machining, and desired physical properties. However, wide dissemination of production technology makes cast iron parts vulnerable to foreign price competition. Similarly, foreign producers of both rough and machined steel castings have increased U.S. market presence through consistently lower prices and high quality that has matched U.S.-produced castings.

Large cast-aluminum parts are used increasingly in motor-vehicle engine applications because of light weight, relative strength and good recycling characteristics. Demand for copper parts is erratic and depends on investment in new capital goods, replacement of valves and residential construction.

High-pressure die castings are typically cast to almost the final required shape, with a minimum of subsequent machining required. Purchases of diecast parts made from aluminum, zinc and magnesium metals rebounded by almost 9% in 2003 but the growth rate slipped to 1.1% last year. However, purchasing perked up by almost 6% this year to the 1.12 million tons last seen since 1999. The North American Die Casting Association says shipments this year exceeded previous record-high levels. The Wheeling, Ill.-based trade group says demand has been growing steadily from makers of office machinery, computer systems, consumer and commercial electronics products, motors and generators, commercial and industrial instruments, power tools, various hand tools and meters and regulators.

Forgings are used for a wide variety of applications and custom impression and open-die forgings also have been in demand. However, forging buys are only rising by 2.6% this year to 1.97 million tons as the earlier spending rebound in the assembly of machinery and equipment began to run out of steam this half.

Also, suppliers of forged parts have been hurt financially this year by rising scrap steel prices, competition from China and cut-throat pricing among the domestic firms. Industry experts say the sector consists of so many small players that it is ripe for consolidation. That's why some U.S. producers have shifted some capacity from traditional product lines to compete in the current competitive climate.

Purchases of powder metal parts made from iron, steel, copper and other metal powders grew by 4.9% to 431,038 net tons in 2004, boosted by automotive applications and other uses such as lawn-and-garden equipment and all-terrain vehicles. In fact, the powder metal parts industry's mainstay product remains the powder-forged connecting rod. Also standard are tungsten-based parts used in cutting tools, oil and gas drilling, mining, and metal forming dies. James Trombino, executive director of the Metal Powder Industries Federation in Princeton, N.J. He adds that "copper powder's high thermal conductivity and electrical conductivity are winning new converts among designers of EMI shielding in cellular phones and other electronic devices."

However, the largest market for powder metal parts is the Big Three domestic automakers and their Tier One suppliers-all of whom have had a tough year due to reduced production. So, overall North America shipments of metal powder-and parts made from such powders-will be, at best, even with 2004, Trombino says. Thus, the industry is introducing new metal powder products featuring improved properties designed to enter such higher-strength markets for powder metal parts as gears and components for automotive transmissions. He believes that the need for more efficient heat sinks in laptops will open a new market for copper powder-based parts.