Welcome to Metals Outlook December 1994
Lewis A Weiss
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All Metals & Forge Group, LLC
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Let's start with this editions cover story, our first look at the '95 North American metalworking market.
Like the Starship Enterprise, steel is exploring strange new worlds. There are galaxies of sustained strong demand. A cosmos of supply tightness. Star systems of rising prices. A universe of supplier profitability.
The steel starship travelled Warp Nine in '93. This year, it's moving through hyperspace at Warp Five. Looking ahead, there may not be sufficient dylithium crystals available to keep traveling at that speed. Still, there's probably enough power to keep the steel starship moving at least at Warp Two through '95.
Pardon the Star Trek references. But, the fact is: After growing 9% last year, North America's net steel use is 5% higher this year.
That means that nearly 118 million tons will be bought by users and distributors this year in the U.S. and Canada.
Although business may slow from this hypersonic activity in '95, we still will see a 2% growth in demand to 119 million tons.
Analyst Michelle Applebaum of Salomon Brothers says that's because the industrial heartland of North America is-to use a consultant's phraseology --right-sized.
Manufacturing companies have cut production costs. So, once again, they are globally competitive. The weaker dollar hasn't hurt; it's put a damper on foreign competiton. And now, looking at '95, she says North American manufacturing needs to expand.
She believes metalworking will buy lots of steel, specialty alloys, and other production materials again next year. And, we can't find a dissenting voice among the other metalworking analyses.
You may have read recent government reports claiming that demand for new homes, home furnishings, automobiles, trucks, and appliances peaked sometime last quarter.
There is a point to remember: These statistical reports are reporting only that the month-to-month rate of growth in consumer buying has peaked. They show no decrease in activity.
People will keep buying cars, minivans, and trucks through next year. They'll also be replacing lots of old ovens, refrigerators, and washer-dryer combinations. They'll be buying new office furniture, backyard swing sets, and those other consumer products made of steel.
More important, industry will keep buying new lathes, metal-cutting tools, cranes, industrial boilers, and all those other forms of machinery and capital equipment made from steel.
Looking at machinery, remember that this year's growth in orders has been in the double-digits. Even if new-order growth drops sometime next year, the firms will remain active. These items take months to make and ship. So, this year's orders mean a lot of steel to be used next year.
In fact, all the tea leaves suggest steady consumer spending and expanded capital equipment activity in '95. That's good news for metalworking industries of all stripes.
Let's start with a look at automotive. Almost every analysis expects the production cycle to peak in '95. But, oh, what a peak it will be!
Through October of this year, U.S sales of cars, pickup trucks, minivans, and sports-utility vehicles totalled nearly 13 million. In Canada they were slightly in excess of 1 million.
That's 8.5% percent better than last year's 10-month sales total. It would have been higher, but Detroit got caught in model changeovers in late summer, and hasn't been able to make enough certain vehicles to meet demand. It's assured now that slightly more than 16-million cars and light trucks will be sold this year in North America.
That's why North American car and truck production will total around 14.5 million by year's end. Through October, assembly already was close to 12.5 million.
And, if you add the production of the big trucks and semis, output will be closer to 15.5 million units.
The economic pundists see North American automotive sales growing another 5-percent next year. That would mean between 17 million and 17.5 million cars, light trucks, and minivans.
To support that kind of sales volume, plants should assemble between 15-million and 16-million units. That's a minimum 7% production gain.
Then there's the appliance industry. Major appliance production has never been as high as this year. New data shows factory shipments of more than 51,000 units. We're talking about everything from ovens to refrigerators, microwaves to air conditioners.
WORLD STEEL PRODUCTION & FORECAST
(Million Metric Tons) 1990 1991 1992 1993 1994 1995 USA 89.7 79.7 84.3 87.1 88.3 91.5 Canada 12.3 13.0 13.8 14.4 14.6 14.7 TTL North America 102.0 92.7 98.2 101.5 102.9 106.2 Japan 110.3 109.6 98.1 99.6 93.8 95.1 EC-12 136.8 140.1 132.4 132.2 135.1 135.7 Rest of Developed World 42.0 38.8 41.4 43.3 41.4 42.5 Ttl Developed World 391.1 381.2 370.1 376.6 373.2 379.5 Ttl Developing World 102.1 111.6 117.2 128.0 135.2 138.6 WESTERN WORLD 493.2 492.8 487.3 504.6 508.4 518.1 E. Europe, Russia 203.3 166.0 147.2 125.5 105.4 107.3 China, N. Korea 73.7 78.4 88.2 96.0 101.8 105.2 EX-RED BLOC 277.0 244.4 235.4 221.5 207.2 212.5 GLOBAL TOTAL 770.2 737.2 722.7 726.1 715.6 730.6 % change -- -4.3 -2.0 0.5 -1.5 2.1
That's a 6% gain. Next year, another 5% gain to 54,000 units is expected.
You may not know this, but new statistics show dramatic gains this year in North American manufacturing of all kinds of machinery. So, it's little wonder the forecasts for '95 have been nudged upward.
Production gains are evident for engines and turbines, farm machinery, construction machinery, materials handling equipment, machine tools that cut and shape metal, special industrial machinery used to make products ranging from food to textiles, such service machinery as commercial refrigeration and heating, and pollution control equipment.
In fact, production of industial machinery is more than 6% stronger this year. And the outlook for next year is at least another 3% growth.
So, it's no surprise that PURCHASING Magazine's Steel Buying Optimism Index continues to average 60. Remember what we've noted in the past: An index ing at 50 or above indicates growth in industrial steel buying.
And that leads us to the '95 market for carbon and stainless steels, and some key specialty alloys - this editions's METAL CHIPS focus.
Based on what you've just read about projected metalworking activity, it's very likely that the supply of key volume materials will remain tight next year.
As I mentioned earlier, PURCHASING's metals mavens have raised their North American steel-demand forecast to net use of 119 million tons. Not only are carbon and alloy flat-rolled grades selling well, but so are stainless sheets, tool & die steels, and certain specialty alloys used in corrosive or high-temperature applications.
You may have heard about the sizzling steel markets of the late '70s or mid '80. Be assured that they pale in comparison with the North American steel-buying boom that began in '93. Stainless steel & nickel demand has been strong and steady here, and spread across many consuming sectors.
The big surprise has been the pickup in demand for specialty-alloy mill products and forgings. Sales to such non-traditional industrial and commercial markets as chemical processing equipment and heat-treating fixtures have been evident. And it's helped the mill offset volume lost when military and aerospace production retrenched earlier this decade.
In the past 24 months, usage records have been set of all kinds of steel and steel-related alloys. That's why the North American mills are operating close to effective capacity (89% last reported). And, that's why leadtimes are extended and prices are rising.
We've heard, for example, that two competing domestic specialty steel mills already are sold out of some grades until the autumn of '95 and forging sales are just as brisk.
Since inventory-building no longer is part of the steel-buying lexicon, almost all of the steel and specialty alloys being sourced these days goes straight to the stamping presses and other metalworking machines.
In fact, current steel-delivery delays would be worse if not for the imports. True, the U.S. mills are globally competitive again. But, they simply can't meet demand. And imports continue to exceed forecasts. Stainless sheet steel, for example, rose by almost 5% this year, and exceeded 300,000 tons for the first time ever!
The tone of the specialty steel and forging markets is strong. The tone of the specialty alloys market is improving. Tom Abrams of Kidder, Peabody & Co. now reckons that use of stainless steels and specialty alloys will exceed 1.2 million tons by the close of '94.
Market analyses show that '94 demand was so strong this year, there was no traditional second-quarter slowdown in shipments. A strike against Allegheny Ludlum did nothing to dampen demand; it just increased imports. And there has been little market outcry against autumn sales price increases for stainless sheet products. Not only have end users been buying record amounts of stainless, so have intermediate processors and distributors who service myriad markets.
Consumer goods has been a very good specialty steel market in recent months, especially in the manufacture of electrical and kitchen appliances. Demand from automakers has grown in line with the boom in production. Demand for capital goods has been centered in the petrochemical industry, but there now are signs of expanded sales to firms that make pulp and paper, specialty chemicals, and engineering plastics and machinery.
In a nutshell, North America has been the strongest specialty steel market worldwide in '94.
Looking at '95, the anticipated takeoff in capital goods production, plus capacity expansions in the process industries, can only spur further growth in demand for stainless and tool and die steels, and for high-temperature and corrosion-resistant alloys.
That's why Purchasing now sees stainless and specialty use rising by 5-7-percent to 1.3 million tons in '95. And, since foreign markets are expected to improve next year, buyers will see fewer imports and extended leadtimes.
Therefore, it's probable, note the analysts, that spot and contract prices for stainless steel products will rise again in January. Bernie Lashinsky of AUS Consultants says steel prices will be under upward pressure throughout '95. Tom Abrams of Kidder, Peabody & Co. says pricing power will remain with the stainless producers next year.Peter Marcus of PaineWebber puts the odds at 70:30 that sheet prices will spend '95 at elevated levels.
Buyers needn't panic, though. On balance, steel costs aren't going to rise all that much. Tags have risen 4-to-5% since the start of the year, but have only crept back to mid-92 levels. Our forecast suggests that spot-market tags will rise by about 5% more next year. And that will only get them back to mid-93 levels.
Also note, PURCHASING's spot-market price index for a marketbasket of 10 steel mill products also is forecast to rise by only 5-percent in '95.
Buyers should remember that recoveries, by their nature, often sow the seeds of inflation. One of trickiest areas of manuever in dealing with inflation is inventories of production materials. Inventories tend to reward on the way up, punish on the way down, and generally cloud the main issues the rest of the time.
In most manufacturing firms in recent years, the principles of just-in-time manufacturing have helped reduce traditional inventory problems.
But, in this period of a jagged upturn in production, even JIT is limited by problems in anticipating demand.
That's why this is an especially good time to review additional methods for getting in-plant inventories down to absolutely rock bottom. For starters, consider these suggestions:
1. Take a look at the use of systems agreements. They come in many versions, but key to most is a trade-off. The supplier gets all or most of the business in a particular product area, and you can replace inventory with an assured level of service.
2. Investigate consignment. It's a variation on systems agreements. The supplier owns the inventory, but stocks it at your plant site.
SHIPMENTS BY STEEL DISTRIBUTORS
(MILLIONS OF TONS)
3. If systems agreements and consignment are too scary for your suppliers, try to get them to set up some type of stocking agreement. Here, the supplier stocks inventory for you, but on their premises.
4. Consider doing an ABC analysis in all production items. Pinpoint those items with relatively high prices and low usage rates.
5. Remember that standardization reduces inventories. Don't give up on standardization just because you can't do it on all items. Even partial standardization reduces inventory.
6. Forget volume discounts on most maintenance items. In most cases, the cost of possession wipes out initial price advantages.
The point to remember about these suggestions is that even the best inventory control systems can use some fine tuning--and this is a very good time to do it.
Steel distributors see "remarkable" year
Bouyed by a 10% gain in nine-month shipments to buyers, steel distribution should achieve at least an 8% full-year increase to a record 26.9 million tons. Last year, distribution pushed 24.9 million tons into the U.S. market . "What we are seeing this year, continued shipments growth in every product category, is unprecedented,'" says Dave Roland, president of the Cleveland - based Steel Service Center Institute in Cleveland. "Strong demand for U.S.-made manufactured goods has pushed steelmaking and distribution to unbelievable levels,'" adds Ron Pietrzak, executive VP of the Association of Steel Distributors in Chicago. Steel shipments have been especially (and unexpectedly) strong to such customer areas as home appliance manufacture and offroad vehcile assembly.
Some steel buyers may slow intake in the fourth quarter for inventory adjustment purposes, but the overall strength of the market remains intact. PURCHASING now estimates that SSCI-members now are expected to ship about 25.3 million tons with another 1.6 million shipped by ASD members and independent distributors and traders. "Strength in the automotive, automotive parts, appliance & machinery sectors helped stimulate the first-half jump in shipments," notes Pietrzak, "now, sales are more capitals goods-oriented." Roland believes that "the change in end-use markets means that business will remain good not only for the rest of '94, but all of '95 as well."
Good news for buyers came in the rise in service center inventory levels at the end of September of slightly more than 7 million tons -- the highest level in more than three years. Roland maintains these stocks are appropriate because they are necessary "to keep shipping levels consistent with requirements, and equate to only 13 week's worth of supply.
That's all for this edition of Metals Watch.
Next Edition, COVER STORY will preview the '95 global steel outlook, and detail the impact on the North American markets for steel products.
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