Welcome to Metals Outlook February 1997
Lewis A Weiss
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The North American economy is experiencing moderate growth and stable inflation
New factory orders for durable goods in the U.S. and Canada are running at an annual rate of well over $200 billion, and that's the highest year-end level in quite some time. Atop all that, the latest report card from the Organization for Economic Cooperation and Development gives the U.S. economy an "A" and the Canadian economy a solid "B". More importantly, the OECD is predicting another couple of years of solid regional economic expansion, and that, by the way, dovetails nicely with our latest outlook for North American manufacturing.
The OECD believes the U.S. economy will slip slightly from 2.5% growth in 1996 to 2% growth in 1997. The fretful economists at the Paris-based think-tank also worry that the economy could accelerate in the second half of next year. They fear that this could fuel inflation. That's why they think that a modest tightening of monetary policy, through the raising of short-term interest rates, might be warranted sometime around mid 1997. The OECD believes that would stifle inflation without jeopardizing the overall economy. However, at present, the fiscal policy makers in Washington believe the economy is slowing gradually enough and inflation is, "Sufficiently under control, thank you," that tinkering with interest rates isn't an immediate necessity.
Looking at 1997's U.S. manufacturing, the OECD believes industrial output will drop, but only slightly, from its current level, which is almost 4% higher than it was at this time in 1995. The analysts' estimate the U.S. economy now has around $2.5 billion in inventories to liquidate at the manufacturing level, which will keep utilization of industrial capacity somewhere in the 80% to 82% range next year. This shouldn't cause any major unemployment problems, according to the OECD economists. They now agree that today's U.S. factories can produce more with fewer people and at lower installed capacity utilization rates than in the past. In fact, they even hailed as a global model, the recent increases in in-plant productivity by U.S. manufacturers. Atop that, the OECD says many businesses have learned to cut back periodically on production to make sure there's no excess build-up in inventory.
Looking at Canada, the OECD report suggests that the pace of economic expansion will gain momentum over the next 18 to 24 months, backed by low inflation, strong export growth to the U.S. and elsewhere, and increasing domestic demand. The OECD believes Canada's major economic worry in the months ahead, is that the unemployment rate may drop very slowly from 10% this autumn to about 8.5% at the end of the decade. That's because the economic think-tank projects only an average 3.5% growth in gross domestic product in the next 2 to 3 years.
Canadian GDP could grow even faster, according to the OECD, but this will require four things: 1) A boost in consumer confidence; 2) A reduction in household debt; 3) An expansion in public spending and; 4) Stronger foreign investment in Canadian business, especially light and heavy manufacturing. Still, the OECD sees no let up in Canada's strong trade performance in raw materials and manufacturing components. The report also praises recent aggressive monetary easing by the Bank of Canada, which has brought short-term interest rates well below their U.S. equivalents. The OECD acknowledges that further fiscal restraint may be somewhat difficult as federal spending has reached historically low levels, and pressures are mounting to ease the tax burden on Canadians. But, the OECD maintains that both the federal and provincial governments must cut their deficits further to maintain investor confidence.
Against that North American economic analysis from the OECD, our panel of economic gurus thinks the North American industrial economy is, simply stated, chugging along. Ken Mayland, of KeyCorp in Cleveland says for example that, "Orders are still exhibiting enough forward momentum to keep the manufacturing sector gainfully occupied at least into early to mid 1997.''
Then there's Marv Goodfriend at the Federal Reserve Bank of Richmond, Virginia. He tells me that the upside and downside risks in the economy are, "As balanced as they have been in a long time." Goodfriend admits he is "Somewhat puzzled" at the behavior of the North American manufacturing sector. He says lately, "It's been waking up and then going back to bed without staying up for long." But, he and other economists remain optimistic for the overall manufacturing outlook. A key point, they say, is that manufacturers have had "some limited success" in passing along higher costs in the form of higher prices. But on the whole, they say the industrial inflation picture "Looks pretty subdued." And that's another good sign for continued industrial activity.
First off, there's the North American automotive business. Sales are generally strong at 15 million in the U.S. and 1.5 million in Canada. No great collapse is foreseen for 1997. Mark Girolamo, a Managing Director at Bear Stearns & Co., says, "The forecast for the U.S. and Canadian car and truck market is favorable." He is among the economists who see North American sales growing 2% to 3% to somewhere between 16.6 million and 16.8 million units in 1997. Says Girolamo, "That represents unprecedented stability at a highly favorable level." But, there are more-bullish voices.
Lincoln Merrihew, Chief Analyst at the DRI/McGraw Hill global automotive group, for example, says the sales of light trucks, minivans, and sport utility vehicles will maintain total new-vehicle sales momentum at a rate of growth of 5%. Whether a 3% growth or a 5% growth, sales will be up. And that will keep U.S. and Canadian car and truck output in excess of 14 million units for the fourth straight year.
Production of industrial machinery and electrical equipment has soared by better than 7% this year. In fact, activity in 1995 and 1996 has been the strongest sustained period of production in almost a quarter century, according to Mark Ulmer at DRI/McGraw-Hill. As industry continues to retool worldwide, capital equipment buyers in 1997 still will source a substantial amount of new lathes, metal-cutting tools, cranes, industrial boilers, and all those other forms of machinery and capital equipment. So, look for another 7% to 8% growth in heavy machinery.
Then there's the astounding activity in the machine tool marketplace. 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 aircrafts. That's why, for many economists, the demand for these tools provides a key leading indicator of the future pace of manufacturing. Shipments of machine tools will be up this year by 15% to $5.3 billion, and industry insiders think 1997 will show yet another 10% growth. That would ring sales up around $5.8 billion. Ralph Nappi, President of the American Machine Tool Distributors' Association, says he is encouraged about next year's business because by the diverse nature of the latest sales activity. "Recent investments in capital equipment," Nappi says, "are coming from companies, both large and small, within many industry sectors and geographical territories.''
Although housing starts have also had their monthly ups and downs, 1996 residential construction will close the year nearly 8% stronger than in 1995. Looking ahead, Randy Smith, President of the National Association of Home Builders, doesn't expect the 1997 market to spiral downwards. He agrees with John Tuccillo, Chief Economist for the National Association of Realtors, who says housing sales and construction will remain pretty steady because of low inflation, consumer confidence in the overall economy, and reasonable mortgage rates. The Realtors, for example, think existing home sales may slide by 5% or so in 1997. But that's to be expected, Tuccillo says, because 1996 was one of strongest home sales years on record.
When people buy new or existing homes, they tend to purchase such durable goods as major appliances. In fact, people have been buying ovens, refrigerators, washer-dryer combinations, and air-conditioning units at a record pace. Early 1996 predictions of a 2% decline in appliance shipments have been washed away by 2% growth to 53.7 million units, and that's just about the level of shipments now being predicted for 1997 by the National Association of Home Appliance Manufacturers.
Demand for agricultural equipment remains very strong, according to the people at John Deere. They point out that favorable weather conditions in the major producing areas in North America resulted in significant increases in 1996 production. And this, they say, will translate into continued strong equipment sales next year. Similarly, makers of industrial equipment are looking for continued healthy markets in 1997.
While commercial and consumer equipment industry sales were somewhat slower this year than expected, a solid recovery is being forecast for next year. And I don't have to tell you just how hardy electronic equipment production has been, and is expected to remain.
Early outlook for supply and demand of several key metals
Now, let's relate all this industrial bullishness to the early outlook for supply and demand of several key metals. In fact, the expectations of the analysts for metals consumption have been changing significantly in recent weeks. Rather than pausing or faltering next year, they now suggest that use of carbon steel, stainless steel, aluminum, and brass mill products will all improve.
For carbon steel, that will mean another year of 1.5% to 2% growth in consumption. For stainless steel, look for another 2% to 3% improvement in use. Aluminum demand should also perk up after a slow 1996 by 2% to 3%.
The analysts now think buyers in the U.S. and Canada will source a bit more than 120 million tons of carbon steel this year. That's because they don't see a recession in the cards for metalworking any sooner than the year 2000. And, interestingly, they also point to recent improvements in the region's oil and gas drilling activity. That's why the North American industry's operating rate remains quite high. Supply will remain abundant, though, because of foreign steel and new electric furnace-based sheet and bar tonnage. Looking ahead, the metals mavens now project North American demand for carbon grades running close to 121 million tons.
On a 12 month basis, North American use of sheet products has dipped by about 4% this year. A lot of that has to do with inventory adjustments by service centers and wildcat strikes at General Motors plants during the year. Looking ahead, the analysts are anticipating much better demand next year. Tin mill products, for example, will benefit from the canning of this year's record harvest of fruits and vegetables. This year's slippage in demand for plate, bar products, and structurals appears to have ended. That's why analysts are looking for a 4% to 5% growth in use next year.
Stainless steel buyers bought a record 2.5 million net tons of this product this year. The key growth segment last year was stainless sheet and strip, where use rose by 8%. Rod use rose by about 3%, as well, but consumption was flat for bars, and it actually fell slightly for plate and wire. Looking at 1997, and an anticipated rebound in plate use because of rising demand from aviation, analysts are forecasting overall apparent consumption rising to about 2.6 million tons. Supply should be plentiful and price-inflation should be muted. That's because a full 25% of domestic needs are expected to be supplied by low-priced imports.
As for aluminum, steel's chief competitive metal, demand slipped by about 2.5% this year to 8 million tons. That's mostly because sales of flat-rolled aluminum, the largest product segment, dropped by almost 10% so far this year. Transportation has dislodged packaging as the largest market for flat-rolled aluminum. Sheet markets outside packaging have shown a slight gain in demand this year. In packaging, there's been a 12% falloff in sales from the domestic mills that sell can stock and foil to make containers. That's because while aluminum is maintaining a 99% share-of-market in the manufacture of beer and soft-drink cans, it's been a slow year for can making; also, aluminum has yet to make any inroads in the steel dominated food can segment. However, looking ahead, aluminum sheet and plate is expected to rebound briskly, driven by a pickup in demand from the commercial aviation market. That's why early forecasts suggest a 2% to 3% pickup in aluminum use to 14.5 billion pounds.
The re-thinking of purchasing departments
The editors of Purchasing Magazine have noticed lately that many purchasing departments are re-thinking everything they do these days. In many cases, the purchasing operations seem to be tearing themselves apart, decentralizing in some places, centralizing in others, often operating in team groupings with other functions.
At first glance, all this looks like so much reshuffling of the deck chairs, and in some cases, it probably is a meaningless ritual. But, for many companies, what is going on has considerable practical meaning for the 21st Century. That's because the buyers in these companies are in the process of customizing their purchasing operations to better mirror individual corporate operating plans.
One outcome at many companies is that their purchasing operations will be highly focused on the end product and more closely attuned to cost control and maximization of supplier resources. The days of the piece/part buyer are numbered. In his/her place will be the buyer who is constantly nuzzling the supplier for ideas, for better ways to produce a component, for ideas about alternatives to components now being used.
This shift means taking greater responsibility for the prudent expenditure of all funds for goods and services, greater attention to suitability of goods purchased, and greater involvement in developing supplier alliances. ????? The sum of all these moves toward making purchasing more closely track corporate objectives is what thoughtful purchasing execs. like to call the development of strategic sourcing management strategies or, simply, strategic supply strategies.
Under either name, the strategy involves deploying the corporate sourcing management function to achieve corporate-wide competitive objectives. The objectives can be clustered around product quality, pricing, technical innovation, totally new product features, or in developing and marketing new products in less time than competitors. In most cases it also involves integration of all decisions that affect the design and flow of purchased items and materials into and through the corporation to finished products and aimed at specific customers. In the process, internal and external materials decisions become part of a single sourcing strategy aimed at aiding the improvement in corporate manufacturing competitiveness.
At this point, you might be asking "Why all this 'holy hokum' about sourcing strategy?" Well, here are two very good reasons: First, most of the traditional competitive strategies now in use are yielding diminishing returns. Re-engineering, downsizing, JIT, strategic acquisitions and mergers all are traditional approaches to meeting competition. And each of them is yielding progressively less in competitive effectiveness. Second, most companies simply don't have enough resources of their own to win a global matchup. In fact, only a strategy that makes use of suppliers' resources can give today's competitors the kind of lift they need.
Customers in all sectors of the marketplace have become more demanding. But, remember during all this turmoil, the best purchasing strategies are those that best meet customer demands by being built around the best suppliers.
Higher expectations by buyers
Higher expectations by buyers are making them more critical of the quality of metals.
This year's buyers poll finds them giving a "B" grade to the quality of the metals they buy for the second straight year. Although manufacturing continues to use record-setting amounts of metal, buyers are less-satisfied with the basic product, whether the metal was provided directly from the mills or from such middlemen as processors and service centers. In the poll, 78% say they are comfortable with the metal they receive, but 22% are uncomfortable. Note: This annual survey only asks buyers to rate the quality of the metal they received based on its utility in their metalworking machinery.
"What's happening at our firm is a combination of more aggressive quality standards and a stricter quality performance program than in past years," reports the Purchasing Manager at a large Midwestern metal-stamping company. The Purchasing Agent at a Great Plains fabricating company complains: "We continually have to ask our suppliers "Why did the metal fail?", and that's not acceptable." The Purchasing Director of an Upper Midwest valve maker the grade says he's willing to give his suppliers a "B+" this year, "but only because of lengthy negotiations to get better metal from our suppliers." Also, the buyers this year are peeved about prices. About half those polled are "very concerned" that mills may try to push prices up in 1997, and an additional 35% are "somewhat concerned." It's not that the mills aren't trying; they've invested billions to smelt and refine cleaner metals and to process mill-product shapes to tighter tolerances, and it's not that the distribution industry hasn't spent millions on new processing equipment and statistical process control systems. It's just that end-product consumers are demanding better quality, value, and reliability in the products they buy for the prices they have to pay.
1996 Metals Report Card
Carbon and alloy steels: "B" - Automotive-grade steels continue to rank highest in quality. Commodity grades, however, remain bedeviled with inconsistency.
Specialty steels: "B" - The highest quality stainless, tool & die, and specialty alloy steels anywhere are made here. But, sheet and plate rate higher than bars.
Aluminum: "B" - Industrial and automotive grades of sheet and extruded shapes are good, but not as good as aviation/aerospace grades. Spotty grades for plate, rod and bar, and tubes.
Copper: "B" - U.S. firms are making high-quality copper mill products, especially sheet grades. Tubing also gets high grades, but free-cutting rods need work.
Brass & bronze: "B" - Brass mill and rod mills continue to be plagued with inconsistency. High-end specialty alloy producers still faulted for sometimes missing zero-defect goals.
Superalloys:. "B+" - Producers are working hard to regain the "A" they routinely received until last year's falloff to a "B". Demand is up, and so is quality.
Titanium: "B" - Another metal group that dropped slightly in buyer satisfaction from previous surveys. Industrial mill products still not as good as aerospace/aviation grades.
Castings: "C" - Castings went from "C+" grades to "F" a year ago, but have rebounded. Non-automotive buyers are happier with steel and nonferrous product they've been getting.
Die castings: "C+" - Non-automotive die castings of zinc, aluminum, magnesium, and zinc-aluminum alloys still aren't as good as their automotive cousins.
THE HYPE OVER ISO. - A All Metals & Forge, LLC Commentary
To the individual in the metals business, the term ISO (International Standards Organization) means more work in our daily routines, people double checking our work and the constant presence of CAR's (Corrective Action Reports).
But what does ISO mean to a company as a whole. For starters, we become much more competitive than a company without ISO registration. Our appearance to foriegn customers improves greatly, (remember ISO originated in Europe), and our overall standard of quality as a company improves. There's no way around it, if implemented correctly, it has to. A predominent feature of ISO is the constant improvement stimulated by the system itself. With these features, the natural progression should be more business, resulting in increased profits and the benefits to employees resulting from more business.
However, with any newly instituted quality system, there's an adjustment period where the system needs time to form to your companies unique characteristics. The result is an ongoing company wide "self-improvement" system.
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