Welcome to Metals Outlook April-May 1997
Lewis A Weiss
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All Metals & Forge Group, LLC
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In the world of economic analysis, revisions are commonplace. The goal is to make the data more accurate. In January, The Federal Reserve Bank adjusted its indexes of industrial production measurements for 1996.
And, guess what? The governments number crunchers found that their manufacturing indices for last year were as strong as originally reported. Then, they noted that based on their new economic barometers, durable goods output rose by a totally unexpected 3% in January and February of this year. In fact, the government's index of leading indicators has risen every month since February of 1996.
This all means that, any way you slice it, the North American factory sector is healthy. Economist Tom Runiewicz at the WEFA Group in Eddystone, Pa., says that "There had been talk of a small slowdown in manufacturing's use of metals, but this new outlook of a continued healthy manufacturing economy soon may justify new forecasts of 1997 growth for steel and nonferrous consumption."
So far this year, industrial production is rising in the factories, utilities, and mines of the U.S. and Canada. Cold weather has lifted utility output. Assembly of motor vehicles and production of parts is healthy. In short, the output of U.S. business equipment, capital goods equipment, and durable consumer goods continues to advance. Atop all that, Canada's manufacturing economy continues to grow at what Statistics Canada calls a "frisky" pace. With global economic growth now expected to be stronger in 1997 than in 1996, U.S. and Canadian export demand looks to be even stronger than last year.
Note that North American machine tool shipments exceeded 38,000 units last year, valued at a recently revised $9 billion. As you know, metal-forming and metal-cutting machine tools are used to shape metal in making everything from golf clubs and small appliances to automobiles and aircraft. That's why, for many economists, the demand for these tools provides a key leading indicator of the future pace of manufacturing. No big drop-off is forecasted for 1997, according to economists, because rising capacity utilization rates at global metalworking plants means continued good sales of new capital equipment here and abroad. In fact, production of all industrial machinery and electrical equipment in 1995 and 1996 has been the strongest sustained period of production in almost a quarter century.
As industry retools worldwide, capital equipment buyers in 1997 will continue to source a substantial amount of new lathes, metal-cutting tools, cranes, industrial boilers, and all those other forms of steel-bearing machinery.
And, don't forget that major appliance production now is expected to come very close to matching last year's revised and record level of 55 million units. Moreover, Detroit and the transplant automakers look to be boosting first-quarter output in the U.S. and Canada by almost 9% from the same quarter of last year.
That's because output still is playing catch-up to demand - especially demand for light trucks and minivans. With attractive new vehicles, especially sport utilities and minivans, on the way, it's easy to see why the analysts forecast that U.S. and Canadian car and truck sales will be somewhere between 16.5 and 17 million units again in 1997. That will keep production above 14 million units for the third consecutive year.
A busier 1997 is also the latest finding of a survey of the National Association of Purchasing Management's 40,000-member companies.
According to the NAPM's March survey, companies in the various metal-consuming industries were especially upbeat, and believed that low finished-product inventory levels should stoke further output gains early this year. Note that annual sales growth out paced inventories for most of 1996 so that the ratio of business inventories to sales for manufacturers and wholesalers closed last year very close to a record low. It's a simple case of Economics 101 that cleared-out inventories will pave the way for increased factory output.
The latest consensus forecast from Purchasing's panel of steel analysts sees a 2% slippage in U.S. steel use this year from last year's 117.5 million tons. But, this view soon may come under revision. If the prospects for manufacturing growth continue to improve, 1997 North American use of steel mill products will at least match the totals of last year - or even grow by about 2%.
Last year, U.S. mills shipped 95.5 million tons to domestic customers while foreign mills shipped another 22 million steel mill products. These levels haven't been this high in 22 years. If metalworking maintains its first quarter pace of steel need, last year's shipping and consumption levels could be surpassed, according to market analysts.
Purchasing's Metals Columnist, Peter Marcus of PaineWebber, believes the key customer segments to watch will be automotive, off-road equipment, heavy machinery, agricultural equipment, oil and gas drilling and transportation equipment, process machinery, and machine tools. He's especially interested in the latest outlook from the purchasing manager's Steel Committee, who are looking to at least maintain current buying throughout spring and maybe even boost it a little this summer to prepare for strong manufacturing this Autumn.
So, against this heady manufacturing overview, let's home in on automotive in this edition's Metal Chips segment. As you probably know, sales of cars, minivans, sports utility vehicles, and trucks of all size were close to 16.4 million units in the U.S. and Canada last year.
That means that 1996 was the best North American motor vehicle sales year since the 16.6 million units purchased and leased in 1988. And even with some slight labor disruptions last year, U.S. and Canadian automakers assembled nearly 14.3 million motor vehicles - just slightly less than the number produced the year before. So, with steady overall economic growth, low interest rates, and strong consumer confidence forecasted for 1997, it's no surprise that Detroit is hoping 1997 will be another year on cruise control.
Most industry watchers are predicting that North American production and sales will hover close to last year's levels. Chrysler's Chief Economist, Van Bussmann, tells MetalsWatch! that "1997 will be more of the same old story, which is great news." And Ford's Chief Economist, Martin Zimmerman, says: "Frankly, I don't see why this recent sales growth can't continue into 1998."
But all this optimism doesn't mean that the auto industry has no concerns. The external optimism is tinged with internal worry. In fact, some of the auto making executives with whom we talked are keeping a nervous foot poised over the brake pedal - just in case. The possibility of a pending economic downturn concerns the auto industry, now that the economic recovery is six years old and aging. But the biggest impact for the supply base could come because of Wall Street-driven demands for higher productivity and reduced costs.
What really worries most top-level automotive executives isn't Wall Street, but the threat from Tokyo that once again is looming large in Motown's rearview mirror. And that worry has some validity. The weakening of the yen against the dollar last year sliced Detroit's average price advantage over Japanese models to $1,000, from $1,400 the year before. If the U.S. dollar continues to tick higher against the yen this year, the chance exists that the slight foothold in Japanese market share late last year could become a major erosion.
With the yen heading South against the dollar, Japanese made cars become more competitive in the U.S. market. But remember, most Japanese-nameplate cars, trucks, and minivans sold in North America are made in North America. And now, the Europeans are getting into the act with the new BMW and Mercedes plants in the southeast cranking out new vehicles this year.
Now, how does all this relate to steel? Well, end use and distribution buyers in the U.S. and Canada purchased a record volume of sheet steel last year. In the U.S. alone, buyers consumed 61.5 million tons of hot-rolled, cold-rolled, and coated sheet steel products. That was 7.5% better than in 1995. Non-construction bar use was in excess of 12 million tons, a 3% improvement.
Since automotive manufacturing is expected to remain healthy this year, slight slippage in activity is expected among appliance makers, machinery manufacturers, and construction products firms. Thus, the consensus forecast sees only a 2% slippage in North American steel use. Of course, the slowdown in consumption might not occur until 1998 because of the overall health of manufacturing and its need for production-grade metals. "So it looks as if North America will remain a steel-intensive marketplace in 1997,'' says Analyst Marcus at PaineWebber. "While automotive and appliance remain the key end-use sectors," he points out that makers of machinery, construction materials, recreational equipment, and a myriad of other industrial, commercial, and consumer products are also buying lots of metal.
In fact, the service centers are so busy these days because several integrated mills are taking three months or more to make deliveries. Atop that, independent processing plants are taking at least two months to get metal to market. And importers suddenly look strapped, faced with continued strong demand here while sales are burgeoning in western Europe.
In fact, coated steel sheet is a hot commodity just now. Use last year was close to 27.5 million tons, an increase of 6% from the 25 million tons consumed in 1995. The advance was led by a 9% increase in purchases of galvanized sheet and an unforeseen 5% rise in demand for tin-plate, which offset an unexpected 3% decline in sales of painted and other coated steel. Prices are firm, and mill delivery lead times are extended. In parts of the Midwest, end-use and service center buyers are complaining about short supply in the spot market. Industry executives are forecasting another year of full order books.
Consumption of tin-plate in the U.S. was 4.3 million tons last year - which has been its annual average of use for the past 13 years. However, this level of tin-plate demand last year busted through somber forecasts of a sales slowdown.
Tin-plated steels usually are equated with sanitary food cans. In fact, the steel industry's marketing council is spending a small fortune boosting the use of steel cans for canned foods. But, tin-plate also is used extensively in the production of aerosol cans, paint and other solvent containers, various types of canisters, and non-food consumer product cans. Can making had been pretty flat for some time, but started to show some new life last year. And now, tin-plated steel use actually is being bolstered by its becoming the source material for new products. Such things as oil filter jackets, bakeware, light fixtures, shelves, picture frames, battery jackets, and builders' hardware are being made from tin-plate. In fact, market analysts now think there's no immediate slippage ahead in tin-coated steel consumption because of the growing non-traditional uses.
Suppliers have been complaining for months about "mixed signals" when different customers discuss "supply chain management" strategies. According to Dr. Bob Monczka, the suppliers have a point.
Monczka is Professor of Strategic Sourcing Management at Michigan State University, and one of the most respected observers of global procurement strategies. What he says is that after almost a decade of existence, supply chain management continues to be poorly understood, badly explained, and wretchedly implemented. Compared to most other business concepts, supply chain management requires more than the development of a new vocabulary. According to Monzcka, this business concept requires the amalgamation of all materials management processes into a single focus to assure the delivery of valued-added materials.
In fundamental terms, supply chain management requires that a company's chain of suppliers - from the Tier I group down to Tier 2, or even Tier 3 - are on the same page. In other words, all of the suppliers must acknowledge one product quality definition - the one expressed by the customer. The suppliers also must acknowledge that their order fulfillment, delivery response time, and planning for the future is in tune with what the customer wants. This, of course, requires lots of cross-company cooperation. And that's where problems show up.
And, because of its complexity, the concept has had other stumbling blocks. Simply stated, supply chain management has been misunderstood and misapplied by buyers and suppliers alike.
Some companies have failed to fully integrate the concept from purchasing and materials management through design engineering, production engineering, and product manufacturing. That's because some key corporate managers haven't fully bought into the concept.
Some companies have been slow to develop supplier measurement systems, integrated data information systems, and electronic commerce programs. So, Monzcka says, it's easy to see why suppliers complain that different buyers in the same firm don't always present the same supply chain management requirements to the supply base. The problem is that buyers sometimes will stress the parts of the supply chain management concept they are the most comfortable with or understand the best - without properly explaining the overall concept to the supplier.
Monzcka suggest that suppliers continue to have some patience with procurement operations trying to implement upgraded supply chain management. That's because they soon will be asking suppliers for even more help than ever before. The buyers must continue to work to develop an integrated supply base capable of becoming true supply partners. To do that, the buyers will need to use the assets of their suppliers. The way he sees it, future global competitiveness by North American manufacturing firms will require buyers to effectively use resources from three, four, or five companies in a chain. That will provide new challenges for them, and for their suppliers.
Sales of forged steel, aluminum, titanium and high-temperature alloys improved by an annual average of almost 9% last year, according to preliminary industry data. While this information is subject to revision, it looks as if buyers sourced a $4.84 billion worth of forgings. 13% in 1994 and 1995 so that last year's sales were a record $4.44 billion. The industry's 149 firms in the U.S. and Canada, therefore, did meet their goal of shipping in excess of 1.6 million tons. A basically healthy U.S. manufacturing sector is benefiting forging sales. So is the resurgence in commercial aerospace production. Since the domestic forging shops have initiated completed major quality-improvement, production-efficiency, and value-added machining expansions, the heavy forged parts out of North American mills are globally competitive. Also, such technological advances as computer-aided design and manufacturing are becoming widespread.
So far this year, business can best be described as stable. Lead times from most independent impression-die and open-die forgers have shrunk from 10 weeks to 7 weeks, but a large number of buyers are complaining that custom-designed parts still take between 20 and 30 weeks. And there are complaints about the dimensional quality of some forgings for critical applications. Forging shops blame this on a shortage of skilled labor. So, many buyers continue to scour service-center warehouses and Internet materials-sourcing files for stocks of forgings.
While growth in the production of heavy machinery, machine tools, off-road equipment, railroad hopper cars and large freighters, boosted demand for large-sized forgings last year. This year, these metalworking sectors look to slow output somewhat, so forging supply may loosen as the year progresses, suggests Steel Market Analyst, Bernard Lashinsky, at AUS Consultants.
As we've noted before, the chief competition for forgings are such substitute materials as powder metal parts, castings, plastics and ceramics. They all sell parts for transportation products (passenger cars, trucks, buses, trailers, motorcycles, bicycles, airplanes and trains); aerospace (aircraft engines, guided missiles, and space vehicles); stationary engines; off-highway vehicles, heavy construction vehicles, and mining equipment; agricultural implements; military ordnance; industrial, petrochemical, and commercial machinery; industrial and commercial refrigeration and air conditioning; pumps, compressors, steam engines and turbines, mechanical power transmission, and specialty hardware.
Industry sales could slip somewhat in 1998 because the capital-equipment portion of the economy may cool cyclically. However, forging executives continue to see long-term growth from commercial aviation and another round of new business opportunities from the second wave of automotive "transplants" when European-owned domestic auto plants accelerate the purchase of powertrain (engine and transmission) components from domestic forging shops. Now, we're hearing more and about a 5-year "up cycle" in oil and natural gas exploration in the Gulf of Mexico. This should prop up sales of Oil Country Tubular Goods, heavy-duty structural steel products, and forged heavy duty equipment for drilling and transport.
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