MetalsWatch! April 1999

Welcome to MetalsWatch! April 1999

Lewis A Weiss
Publisher
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April 1999

I. Cover Story: Economic Overview

II. Metal Chips: Nickel and Stainless Pricing

III. Metal Chips Extra: ULSAB-AVC?

IV. Purchasing Focus: What Purchasing Professionals Want

V. Distributors Are An Important Metals Source

 

I. Cover Story: Economic Overview

President Clinton's economic advisers now predict the U.S. economy's longest peacetime expansion will continue through the year. Although recessions plague one-third of the world, the Council of Economic Advisers says U.S. growth in gross domestic product will be around 2.4% in 1999. Canada's economy also will hold its ground this year, aided by interest-rate cuts and rising consumer and business confidence. The Conference Board of Canada says economic growth will be around 2.8% this year. "Excellent employment growth, real wage gains, recent cuts in interest rate, and probable further tax relief should keep Canada's GDP nice and healthy," suggests Conference Board economist Paul Darby in Toronto.

The truth of the matter is: The North American economy keeps chugging along and economic indicators in the U.S. and Canada continue to augur growth in the months ahead. "Consumers have jobs, income, and confidence," says economist Sung Won Sohn of Wells Fargo in Minneapolis. "People have everything they need to justify spending with gusto; so, they are devouring everything in sight." And that's why he and other economic gurus are upgrading their forecasts for this year's North American economy. And, latest government and private industry data shows that U.S. and Canadian manufacturing strengthened in March as consumer spending on automobiles, computers, major appliances, and furniture remained strong all last quarter.

North American production of transportation products is ahead of some expectations. The automotive industry's output remains at a record high, driven by continued strong U.S. demand and the recent gearing up of new productive capacity. And this has maintained healthy production by motor vehicles parts makers. Production of aircraft, both large commercial and small private models, has erased an end-of-year lull, so the industry has returned to a growth path, and output in the railroad and rolling stock industry is at steady levels. Also healthy is the manufacturing of major appliances, telecommunications equipment, and electrical and electronic equipment. This industrial activity has more than offset reduced assembly of machinery destined for farms, mines, and factories. There is a definite slowdown in the assembly of machine tools, and mining, lumbering, and agricultural equipment. But, there has been continued strong manufacture of metalworked products for the building and construction segment. Note that the latest National Association of Purchasing Management factory index, which has risen for the past 3 months and now is at its highest level since November of 1997.

In a recent appearance before the Bloomberg News Forum, John Snow, the CEO of CSX Corp., commented that he keeps wondering "how long these marvelous economic times can go on." Still, the chairman of the third-largest U.S. railroad added: "I am being pretty bullish about the rest of this year, in part because I talk to fellow executives, and they seem pretty bullish.'' An interesting point is that the NAPM index measuring export orders now has held above the magical 50% level for the second straight month, suggesting that orders from overseas increased after 14 months of contraction. "Southeast Asia is beginning to recover; there's no doubt about it,'' says CSX's Snow. "We're beginning to take more stuff out of the United States now. That means our exports sector is beginning to recover.'' Snow knows this because CSX operates Sea-Land Service, the biggest North American ocean shipping business.

All components of the latest NAPM survey showed demand actually increased in March. Manufacturers said orders for goods rose by 2%, while the production index rose by 4.75%. David Orr, the chief economist at First Union Corp. in Charlotte, North Carolina, makes an interesting point, "I don't think North American manufacturing is accelerating, but the Asian drag is fading, so the domestic strength that's been there all the time is becoming more visible,'' he says. And, so far, this continued strong growth hasn't troubled Federal Reserve Board or Bank of Canada policymakers. The Fed, for example, has signaled it's prepared to wait to see signs of dramatic increases in consumer prices before it raises borrowing costs to slow the economy. That's because the recent rise in the NAPM price index is almost certainly tied to higher prices for oil, gasoline, and other energy products, according to the economists. Lynn Reaser, chief economist at Bank of America Private Bank in Jacksonville, Florida, tells MetalsWatch!, for example, that "Ability of commodity companies to pass on price increases still is very limited.'' That's apparent from the steel-buyer reports that the proposed second quarter flat-rolled price hikes are having problems being implemented. Service centers may be willing to accept the price increases, Purchasing Magazine's latest surveys have found, but spot-market end-use buyers continue to shop around for the best deals.

Interestingly, the state of the economy may force a revision in the recent consensus forecast of analysts and buyers, which had suggested a 3% drop in U.S. steel use this year, and a 5% drop-off in Canada. North American steel demand-steel delivered to the marketplace-has been rising annually since the recession year of 1991. Looking at 1999, the metals mavens have been a divided group.

A full 25% of those surveyed by Purchasing Magazine surveyed projected demand at or above the 1998 level. They argued that while durable equipment output would slow its rate of growth, no recession was likely, and no decline in output was to be expected. Atop that, this bullish group foresaw continued high levels of North American construction this year. However, the majority of the metals mavens felt that economic conditions that supported last year's level of steel use-the amount of steel that is actually processed into something-were beginning to deteriorate.

The bearish metals mavens noted that such end-use sectors as farm equipment, material handling equipment, machine tools, and metalworking equipment all would show declines in production this year. Due to a significant steel inventory drawdown this year, they suggested that demand would be lower than steel use. Thus, while they expected a 4-to-5% decline in steel demand in 1999 for both the U.S. and Canada, they also saw real steel use close to 1998 levels. But, if the first quarter's manufacturing activity continues to build in this quarter, there could be a major revision in thinking about steel use by these bearish forecasters.

II. Metal Chips: Nickel and Stainless Pricing

Nickel prices are at their lowest levels in a dozen years, and they are expected to skid somewhat lower this year as stainless and specialty steelmaking, the key end-use arena, stays depressed worldwide. And recently audited United States specialty steel market data paints quite an interesting picture for buyers. It now appears that supply will be loose, and material will be inexpensive, in the U.S. market in the short term. In fact, the stainless and specialty steel products arena is a mess. All last year, U.S. stainless steel mill execs kept saying business was "fairly strong." For the stainless sheet mills, that was true. Sheet constituted 74% of all stainless demand last year, and apparent consumption grew by 6% - which was ahead of forecast - to 1.84 million tons. However, some industry insiders believe actual end-use was only about 1.69 million tons - with the remaining 151,000 entering inventory. That's probably true, since stockpiles at Steel Service Center Institute-member companies alone closed 1998 holding 137,000 tons more than they started the year.

Also note that newly updated consumption data shows that stainless bar demand dropped 7%, stainless plate use dropped 6%, stainless rod demand collapsed by 20% , and stainless wire use was flat with 1997. So, stainless consumption overall was only 2% ahead of the year before ­ and that's about half the forecast. Worse still for the domestic mills was that a full 27% of the stainless steel market was supplied by foreigners. In the specialty steel arena, tool steel use was moving right along until the fourth quarter, and wound up sliding 2% to 108,000 tons. That's the lowest one-year consumption rate since the 102,000 tons of 1995. Demand in the final specialty steel category of electrical steels was flat with 1997. So, at 3.1 million tons, the U.S. specialty steel market was an underperformer - rising just 2%.

Looking at 1999, most mill execs believe overall demand growth will be at that 2% overall growth of 1998. Demand from makers of automotive, commercial aviation, appliances, and construction products are expected to stay healthy. But, there are problem markets:, especially the stainless-intensive capital equipment used by the wood, pulp and and paper, petrochemical, and energy industries. Of course, the year didn't start off very auspiciously. First quarter demand was terrible. When compared with the first three months of last year, demand was at least 20% lower. Some of that decline is being explained by service center inventory reductions. But, some analysts fear it's the start of a cyclical downturn in demand for stainless steels.

Spot prices for stainless steel products fell by 5% last year. That's the same rate of decline also evident in 1997 and 1996. In fact, one market analysis, noting that "Stainless steel has become really inexpensive,'' points out that over the past three decades, the average market price of stainless has declined by almost 63%. First quarter spot prices even slipped a little more. Spot pricing, in fact, has been weak since 1995, according to analyst Christopher Plummer, managing director of Metal Strategies Inc. in West Chester, Pa., who notes that "Market prices have been tracking with recessionary lows even though the economy has remained strong."

So, domestic stainless steel makers fared poorly financially again last year, despite the slight demand growth. A spokesman for the Specialty Steel Industry of North America Trade Association admits that "Firms in the commercial stainless production business have had a serious problem trying to make reasonable profits in today's marketplace. A lot of mills," he says, "are having real problems in this highly competitive marketplace." The mill execs, of course, blame this situation solely on what they term unfairly traded imports. It is true that foreign-made steel is a big supply source for stainless, tool and electrical steels. Last year, imports totalled some 840,000 tons ­ or 27% of the U.S. marketplace. Analyst John Lichtenstein at Arthur D. Little Inc. in Cambridge, Mass., agrees that "Import penetration has driven cost to the point where some producers can't compete." The mills think this will change sometime in 1999 because of anticipated duties on imports of flat-rolled, rod, and wire products. "We expect favorable dumping and countervailing duty rulings on the industry's trade complaints,'' agrees Bob Rutherford of Allegheny Ludlum. "If it happens, sheet, strip, and coiled plate imports should slow to some extent,'' he says, but adds concern that "Other countries not involved in these dumping cases will probably take up some of the slack." He also admits "The competitive nature of domestic producers will still have a dampening effect on prices, even if imports slow down, as capacity will exceed demand."

In effect, he endorses the view of buyers that supply will be loose, and inexpensive, in the U.S. market in the short term. "Allegheny Ludlum is anticipating that our business will be highly competitive this year," Rutherford says, "and that is why we are continuously reducing costs with capital projects and efficiencies ... while providing better service to our customers." So, just to be on the safe side, Allegheny Ludlum, the world's largest stainless steel producer, has expanded sales and marketing of a full range of titanium mill products.

Still, raising prices will be a problem for the mills this year. Note that service centers were paying the mills about 3% more for stainless steel coiled plate at the start of the year. That's less than than the 5% price hike that was supposed to have taken hold in October, which prompted Allegheny Ludlum and others to seek another 5% hike for January. Of course, in the face of weak demand, that price hike flopped. None of this has been affecting buyers, however, since distributors admit they haven't been able to get higher plate prices to stick in the marketplace.

III. Metal Chips Extra: ULSAB-AVC?

Remember ULSAB, the Ultra-Light Steel Auto Body program? Well, recently, representatives from 31 world steelmakers formed a new consortium to oversee an ambitious two-year automotive design and engineering program. The Son of ULSAB is called ULSAB-AVC, the ULSAB Advanced Vehicle Concepts, which is intended to go beyond the body-in-white to include closures, suspensions, engine cradle, and all structural and safety relevant components. In fact, they have turned from sheet-only projects to those that include forgings and castings. So, members of the world steel industry recently gathered in Miami, Fla., to hold the inaugural meeting of a new consortium for Advanced Vehicle Concepts that will take a holistic approach to the development of a new advanced steel automotive vehicle architecture.

ULSAB designed a body-in-white for a 4-door sedan. But, the auto industry doesn't revolve exclusively around sedans. In fact, in the North American market, demand for light-duty trucks in the form of sport-utility vehicles has ballooned through the past decade. To focus steel applications in this booming segment, the steel industry developed a separate, but similar lightweighting initiative, the LTS, or Light Truck Structure, study. Like ULSAB, LTS ran against benchmarks derived from a battery of real world pickup trucks and sport utility vehicles. And, also like ULSAB, the LTS program showed significant savings in weight, cost, and improved structural performance - a 19% reduction in weight, a 32% reduction in the number of body parts and 20% savings overall in cost against 11 other benchmarked SUVs.

While this was happening, the world steel industry was completing the first phase of its UltraLight Steel Auto Closures study ­ its ULSAC project - to define and develop state-of-the-art, lightweight, low-cost, high-performance steel closures. These are doors, hoods, deck lids and hatchbacks. Another study under way right now is ULSAS, the development of UltraLight Steel Auto Suspensions. Now the global steel industry has launched the new ULSAB-AVC program. Canadian steelmakers Dofasco and Stelco have joined this consortium from 20 other countries. Porsche Engineering of Troy, Mich., has been hired to develop a new advanced steel automotive architecture using advanced "engineered grades" of steel. Also to be developed are new manufacturing techniques for closures, suspensions, engine cradles, and all structural and safety relevant components to be made from steel. Targets are being set with reference to the U.S. Partnership for the New Generation of Vehicles, and EUCAR, the European CO2 reduction program.

Dofasco's president and CEO, John Mayberry, points out that "The objective of the program is to demonstrate and communicate that the innovative use of steel in automotive applications provides a range of functional and social benefits including environmental, safety and affordability." "This is an excellent opportunity to demonstrate the long-term advantages of steel as the material of choice.", says Dr. Christoph Schneider, chairman of the new consortium.

Dr. Schneider says "The original ULSAB project heightened interest in the use of steel in energy efficient, cost-effective automobile structures, and demonstrated that steel is capable of providing solutions to the most challenging automotive problems at affordable cost without sacrifice of safety or performance," Schneider explains. "In addition, steel does not exhibit the technology barriers characteristic of other competing materials." It was the extremely positive reactions from the automotive industry to the ULSAB project, he says, that encouraged the steel industry to embark on ULSAB-AVC.

He points specifically to: 1 - environmental responsibility through energy and resource efficiency; 2 - recyclability; 3 - safety through design and material selection; 4 - high-volume production through established and innovative manufacturing techniques; 5 - affordability through modern manufacturing technologies; and 6 - low cost of ownership - including ease of repair.

You should also be aware that the steel industry isn't just working on long-term applications. To help the steel industry maintain its current dominance in the North American automotive bumper beam market, a project group within the American Iron and Steel Institute is developing ways to assist the automakers in making better use of steel to achieve future targets for weight, cost, performance and even style. The bumper project group of AISI's Automotive Applications Committee has compiled bumper weight comparisons and information on repair, insurance, capital equipment and tooling costs on different types of bumpers using various materials, including steel, plastics, and aluminum. The group also intends to compile information on the uses and additional potential uses of high-strength and ultra high-strength steels-including some new varieties-in bumpers for trucks and cars.

Despite the fact that the use of steel bumper facebars has declined during the past 20 years, steel executives are confident that steel will continue to be the favored material for the reinforcing beams behind the fascias. They also are confident that bright-plated steel facebars will continue to dominate the light-duty truck market. More than 80% of the bumper beams made in North America in the 1998 model year were steel while 15% were plastic composites, and less than 5% were aluminum. Interestingly, while ultrahigh-strength steel beams are lighter than aluminum or composite plastic beams, crash tests by the Insurance Institute for Highway Safety found that vehicles with steel front and rear reinforcing beams had lower repair costs.

IV. Purchasing Focus: What Purchasing Professionals Want

Purchasing professionals have always wanted many things from their suppliers - high quality, on-time deliveries, strong technical support, quick response, just to name a few. But, results of a recent Purchasing Magazine survey indicate that sophisticated purchasers now seek suppliers that not only can meet standard performance criteria, but will also:

1 - Work very closely with customers to raise performance levels, contain costs, and develop leading-edge technologies; 2 - Share data, resources, and people to overcome obstacles that stand in the way of mutually agreed-upon goals; 3 - Identify aspects of the buyer's operations that can be improved; and 4 - Respond quickly to problems and emergencies.

According to the results of our survey, the vast majority of companies now track supplier performance, and more than half of these companies recognize superior performance with top-level supplier recognition, multiple-tier supplier ranking systems, or a combination of both. While only a few companies provide formal training for suppliers, most use supplier performance ratings and other data to spur continuous improvement in their supply base. Survey results also show that it's not at all unusual for suppliers to lose top-level status due to inconsistent performance.

The editors asked more than 1000 purchasing pros to identify common traits among suppliers that have achieved top-level status. After providing the "givens" of quality, on-time delivery, etc., many survey respondents elaborated eloquently on the best suppliers being those who "work together with purchasing" and "are proactive suppliers." Simply stated, purchasing pros don't want suppliers to sit around waiting for problems to happen. They expect them to anticipate potential problems and constantly prod buyers as to how they are performing, both positively and negatively. When problems arise, purchasing pros want their suppliers to move quickly to find the cause of the problem and correct it.

Many more purchasers than in the past are quite willing to share data, knowledge, and even in-depth financial information with their key suppliers. And that's why they want more regular visits from suppliers, and they're more than willing to send their own people out to help suppliers. Interestingly, a full 84% of the readers responding to the survey now say they systematically track supplier performance. This is a significant increase from the results of similar Purchasing Magazine surveys in past years. And also note that numerous buyers who don't currently track performance indicate that they're in the process of creating systems to quantitatively measure performance. As expected, it's usually the very small companies with very few purchasing personnel that do not measure supplier performance.

Data from supplier rankings is used in a variety of ways, purchasing pros say. Performance data is used by many companies to reward top suppliers with annual awards, dinners, and other formal recognition programs. It's shared with other internal departments, and it's used to award new business to top-performing suppliers when possible. Quality may be a "given" in some industries, but purchasing professionals continue to tell us that receiving product that meets specifications is the single most important trait in a top-level supplier, and that all too often suppliers still ship materials and parts that don't conform.

The survey asked buyers two questions concerning most-desired supplier performance traits: What criteria are used to rank suppliers? And, What traits are characteristic of top-performing suppliers? 44% of purchasing pros indicate that quality measures ­ that is, conformance to purchase order specifications - are used to determine supplier rankings. That's the highest figure of any performance measure. Another 28% of respondents identified quality as a key trait in their top-performing suppliers, again the highest figure of any supplier attribute.

Delivery measures are used by more than one-third of survey respondents in their supplier-performance tracking systems. In past reader surveys, buyers usually tagged delivery problems as the most frequent problems. This survey was no exception-as more buyers responded that late deliveries still occur more than any other problem. Also note that pricing issues continue to move down the list of most important criteria, albeit slowly. And nearly as many buyers indicate that "total cost," not price, is a trait of top-performing suppliers. As we've seen in the results of many other surveys, purchasing professionals continue to become more aware of the importance of total cost versus purchase price. They also continue to become more sophisticated at measuring total cost.

V. Distributors Are An Important Metals Source

North American metalworking industries consumed an estimated 128 million tons of steel, aluminum, copper, brass, bronze, and such other production metals as titanium and the superalloys. PURCHASING Magazine calculates that distributors, service centers, and processors supplied 45.5 million tons of these ferrous and nonferrous metals. Service centers shipped an estimated 32.7 million tons, or 30% of the total. Tonnage from service centers may slip a little this year, as overall metals demand is expected to drop 2-to-3% because of a slowing industrial economy. Yet, market analysts believe that buyer reliance on service centers will continue to grow. The mavens think metal service centers will grow to 40-to-45% market share in a decade or so. In fact, some analysts think 50% supply of highly engineered materials will be going through service centers early in the millennium. Just now, metal service centers supply a third of all the metal fabricated by manufacturing. The 32.8 million tons of steel and nonferrous metal shipped in 1998 beat the previous record of 31.5 million tons shipped in 1997 by 4.1%.

In fact, almost 26% of all the metal chewed up by metalworking industries last year came just from metal-stocking distributors. So, U.S. metals buyers sourced 31,318,000 tons of steel from members of the Steel Service Center Institute (SSCI) and the Association of Steel Distributors (ASD); 1,180,000 tons from members of the National Association of Aluminum Distributors (NAAD); and 231,000 tons from members of the Copper and Brass Servicenter Association (CBSA). Yet another 41,000 tons came from independent steel distributors and specialty firms that handle titanium and the superalloys.

Upshot: PURCHASING Magazine's Metals Distribution Index, which measures ferrous and nonferrous metals sourced annually through service centers and stocking distributors, by a strong 3% to a record 148.8 last year. Looking at 1999, forecasters say that manufacturing will be sluggish this year, so demand from metals service centers in the U.S. and Canada will slide by 2-to-4% in 1999. Upshot: A projected slide in the distribution index to 142.6 this year.

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