MetalsWatch! June-July 1999

Welcome to MetalsWatch! June-July 1999

Lewis A Weiss
Publisher
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June-July 1999

I. Cover Story: The Economy

II. Metal Chips: The Steel Market

III. Metal Chips Extra: The Super Alloys Market

IV. Purchasing Focus: Single Sourcing

V. Press Release: Designer Alloys

 

I. Cover Story: The Economy

Last autumn, the U.S. Federal Reserve Board looked at the troubled global economy, suggested that the U.S. and Canada couldn't remain an "oasis of prosperity" and began a series of interest-rate cuts aimed at warding off a possible U.S. recession. Remember how the economists issued some of the dreariest forecasts in years, on average predicting less than 2% growth for 1999? Remember how the Bank of Canada also was worried because of the drop-off in export sales of Canadian commodities, the weakness of the country's currency, and the lack of optimism about the Canadian economy this year?

Boy, were they all wrong. North America not only remains an oasis... it's thriving. Even as many prognosticators put out their grim outlooks, the U.S. economy was surging 6% in the final quarter of 1998, and it grew 4.1% in the first quarter of 1999. Compounded annually, the Canadian gross domestic product grew by 4.8% in the fourth quarter of last year-and then by 4.2% in the first three months of 1999. This continuing strength in the regional economies and the robustness of demand, especially by consumers, is unprecedented this late in a business cycle. Still, bending to a "new economic reality," economists now expect fourth quarter to fourth quarter growth of better than 3% throughout North America this year.

The U.S. Federal Reserve Board has raised interest rates a little because it feels that's a necessary move to slow inflationary pressures in the surging American economy. When the Fed raised interest rates for the first time in two years, it nudged borrowing costs higher for millions of American consumers and businesses. But the central bank indicated its tiny quarter-point increase might be all that is needed to keep inflation under control. That message cheered financial markets because investors had feared the increase would be only the first in a series of moves to cool down the red-hot U.S. economy.

Many analysts read in the central bank's statement a willingness to continue testing the view of many economists that the U.S. economy has entered a new era where higher productivity allows stronger growth and lower unemployment rates without triggering inflation worries. "The message from the Fed is that they are not in any big hurry nor particularly worried that quick action is necessary on the inflation front," says Allen Sinai, Chief Economist at Primark Global Economics in New York. "A few years ago most economists assumed that the economy could not grow much faster than 2% and unemployment could not get much lower than 6% without igniting inflation. Now we know that both of those assumptions are probably wrong," says Robert Reich, former Labor Secretary in the Clinton Administration and now an economics professor at Brandeis University. The U.S. economy has been growing at close to a 4% rate for the past two years, far above the Fed's speed limit of around 2.5%. The faster growth has pushed unemployment down to a three-decade low of 4.2% currently. He says he is "Pleasantly surprised" at the Fed's restraint because he was afraid the central bankers would adopt a tougher stance on the need to be pre-emptive about inflation threats. In fact, most economists had anticipated the small 1/4 percentage point increase in the overnight bank-lending rate to 5%. "A 1/4 point increase wouldn't be very consequential on the economy," suggests Diane Swonk, Deputy Chief Economist at Bank One Corp. in Chicago. But, she adds, it did send a signal that Federal Reserve Board's policymakers would be vigilant fighting future inflation. Rick Egelton, an Economist with Bank of Montreal, doesn't expect the Bank of Canada to match any U.S. rate hike. "I don't think we need the interest rate hikes in Canada like we do in the U.S.," he says. "In the U.S., the economy is red-hot; in Canada, it's just strong. What they want to do in the U.S. is to move the economy from red-hot to strong."

What the economists tell us is that the manufacturing economy throughout North America is being boosted by the strongest labor market in a generation, a strong stock market, relatively low interest rates, and high consumer confidence. But the real glue holding this splendid economic structure together is inflation's decline to the closest thing to price stability since the 1960s. Despite the recent uptick in consumer prices and interest-rate jitters in the stock and commodity markets, powerful anti-inflation forces buoy the outlook for inflation. First, investment in new technologies is lifting productivity and curbing unit-labor costs. Second, any global recovery will be too slow to absorb any worldwide capacity gluts quickly, and some capacity does remain idle. Third, growth and interest-rate differentials between the U.S. and other nations will support a strong dollar and hold down import prices. Plus, past deregulation in transportation, finance, telecommunications, and other industries is boosting U.S. and Canadian competition, and both nations have monetary and fiscal policies that are anti-inflationary.

So, continued low inflation works magic on an economy. Remember that low inflation also holds rates down by keeping the Federal Reserve on the sidelines, and it makes companies, more cost-conscious and more efficient, which supports profits even when product pricing is weak. Also, low inflation helps to hold down the cost of capital as companies rush to invest in new technology. Falling inflation also boosts household buying power. In the 1980s, workers' wages grew by better than 4% per year, but real wages stagnated. Since 1995, pay is rising at a slower 3%-plus rate, but growth in real pay is the fastest in three decades. And that's probably why the North American automotive market has been surprising many economists. In fact, Ford Marketing Chief, Bob Rewey now says, "A record domestic auto sales year is within reach." Through May, U.S. sales were running at a rate of 16.6 million vehicles compared with 1998 total sales of 15.5 million vehicles. The record was 1986, when 16 million vehicles were sold. "The 1999 market feels mighty strong, and I don't see that changing," says James Holden, Sales Vice President at Daimler Chrysler. Canadian sales are also robust. So, the projected assembly of North American motor vehicles-that's cars and light, medium, and heavy trucks-looks to be closer to 15 million units this year. That would be an increase of more than 4.5% from 1998. While automotive sales pace might be unsustainable from recent levels, car and truck purchases shouldn't slow much in coming months even if the Fed raises rates. Nicholas Lobaccaro, an Auto Industry Analyst at Lehman Brothers in New York, says a 1/4 point increase in interest rates might mean $5 more a month in a buyer's car payment, which could easily be absorbed by industry discount and incentive programs. "So," he says, "the outlook is going to remain robust."

Also remember that new and existing home sales set records last year, and the rate of existing home sales has remained high this year. And even revised statistics show that U.S. new home sales reached the second-highest level ever in April, even as new-home prices hit a record. And, mortgage rates would have to rise 3/4 to a full percentage point from its current 6.5% before we would definitely see severe pressure on new construction. At least that's the view of Joe Anderson, Executive Vice President of Consumer Markets for Countrywide Home Loans, a subsidiary of Countrywide Credit Industries, the No. 2 originator of retail loans in the U.S. And don't forget that real estate activity has a dramatic impact on the rest of the economy. People who buy houses also buy appliances, furniture, consumer electronics, computers, and much more.

Looking at Canada, consumer spending in that country is showing renewed vigor, with a notable advance in purchases of durable goods-especially motor vehicles. Stable interest rates and recent employment gains are boosting consumer confidence. It can't hurt that Canada's unemployment rate has fallen under 8%. Statscan says the robust U.S. economy has fueled demand for Canadian products, leading to an increase in exports-especially cars and trucks. And there also have been noticeable advances in the exports of Canadian-made machinery and equipment, which has more than offset recent declines in the exports of agricultural and energy products. Mark Chandler, a Senior Economist at Goldman Sachs in Toronto, says the recent growth in Canadian manufacturing of machinery and equipment is a pleasant surprise. He also points to a recent surge in building activity. The Canadian construction market has heated up, with business investment and residential construction growing briskly for the past two quarters. Chandler says "The overall story over the last little while is a healthy Canadian economy because Canadian residents are continuing to spend." And, as for housing, starts should remain in the 137,000-unit region of last year, according to the Canada Mortgage and Housing Corporation's most recent National Housing Outlook. Atop that, sustained employment gains, competitive prices, and low interest rates will continue to support the Canadian resale in excess of 300,000 units.

Paul Ferley, the Assistant Chief Economist at the Bank of Montreal, says he is impressed by what he terms "Canada's continued and broadbased economic strength." And, he should be, based on data from both Statistics Canada and the Bureau of Labor Statistics, which shows that the alleged recession in manufacturing never took place last year or this spring. While it's true there has been some reduction in capacity utilization in both countries, the measures of real manufactured output showed growth rates throughout 1998 and so far into 1999. Gordon Richards of the National Association of Manufacturers in Washington says that North American manufacturing actually has grown faster than the economy as a whole in the 1990s. While everybody touts the great service economy of the 90s, Richards points out that from 1990 to 1998, manufacturing productivity growth of better than 3.5% is more than double the productivity growth rate of the overall non-farm business sector.

II. Metal Chips: The Steel Market

Interestingly, all this good news about the robust North American manufacturing economy isn't translating into an overheated steel market. Although analysts are revising their earlier expectations, they're still projecting a full-year slippage of about 3% in actual steel deliveries in the U.S. and Canada in 1999-and actual steel use close to 1998 levels. There's still a significant inventory of steel mill products that needs to be drawn down this year. And, despite the turmoil in steel trade because of dumping complaints, there still was substantial importation of the metal into North America in the first half. But, there's no denying that steel sheet demand continues to be healthy. Most buyers and sellers mean "sheet" when they say "steel." Sheet and strip steel last year again accounted for better than 50% of all the steel used annually in the U.S. and Canada. Sheet steel use in the U.S. averaged 43 million tons annually in the 1980s, which then jumped to an annual average of 53 million tons so far in the 1990s. In fact, use has averaged 63.4 million annual tons since 1995. And you've now got market analysts admitting that nobody foresaw this sustained level of sheet steel demand happening. That's because earlier analyses failed to foresee the level of production this decade by automotive. The market mavens now generally agree that this decade's reindustrialization of North America, led by the motor vehicle industry, has expanded steel sheet demand dramatically. Note that since 1990, the percentage of light trucks, minivans, and sports utility vehicles has risen from 32% to 48% of domestic production. Each percentage growth in light trucks as a share of assembly adds an average 750,000 tons/year of domestic sheet steel demand.

Overall, you'd be hard-pressed to find anybody who predicted that major appliance production would grow from 43 million units in 1990 to 55 million tons in 1998. And, only the most cockeyed of industry optimists even hinted at the steady growth in steel use from the residential, commercial, and industrial construction marketplace. Also, sheet steel's biggest end-use markets beyond transportation and construction remain containers and other forms of packaging, machinery, and equipment. Production of these goods remained brisk through last year. But, now, there are questions about the second half of 1999. Some analysts think short-term demand in some of these markets is beginning to deteriorate. They're worried about July-through-August production levels of farm equipment, material handling equipment, machine tools, non-electrical equipment, electric power distribution equipment, and oil and gas transmission products.

So, it sure looks as if this topsy-turvy sheet steel marketplace will remain as such for the rest of this year. Steel buying set records again last year, and has been healthy so far this year. But, now, the buyers we surveyed are uncertain that buying will continue to be as robust in the second half. Some steel-buying surveys express optimism, but others note that bid-tonnage buyers outside automotive won't commit to big purchase orders for second-half deliveries. Some users are worried about late-summer supply disruptions at domestic steel companies. That's because labor contracts expire in July and August at several key large-tonnage integrated steel firms. Other users think there's going to be a strike against automotive at the end of the summer, and are holding off-expecting loose supply and lower prices.

And speaking of prices, several mills have proposed a series of higher prices for sheet, but it's tough sledding in, and spot sheet prices remain at near-historical lows. That may be due partly to the current deflationary environment, and partly because of imports. Imports have fallen from the peak in the fourth quarter of 1998, but still have come in higher than expected. And, despite reduced imports of hot-rolled sheet because of unfair trade complaints against Japan, Russia, and Brazil, tonnage from other nations - in the form of cold-rolled and coated product - has been pretty high. But the automotive labor scenario could be a key wild card. United Auto Workers contract talks have begun with General Motors, Ford, and Chrysler. They could center on GM and be somewhat dicey, says the union's President, Stephen Yokich. He notes the key to talks this year again will be the job-security and outsourcing issues that triggered last year's strikes against GM that disrupted the steel market throughout North America. Since those strikes, GM has announced plans to convert its aging U.S. small-car plants to so-called modular assembly to make them more efficient. Under modular assembly, outside suppliers pre-assemble parts, and deliver them for installation onto the chassis. "There's nothing new about modular assembly," Yokich says, and contends "it's just another word for outsourcing."

Despite the strongest demand in 25 years, supply of steel plate appears to be glutted. Even some steel execs fret that the plate market is saturated with inventory. That's pretty evident from the various steel-buyer surveys, which find buyers unconcerned about second-half supply-even if their domestic suppliers trade relief through punitive tariff duties. This year's steel plate market also is an enigma. Most analyses have forecasted reduced imports, which appears to be happening, and higher domestic production, which isn't evident yet. That's probably because of the continued overhang of warehoused plate. There's also some question about real end-use buying. Steel plate use by the construction actually should improve from last year's near-record tonnage. That's because of high infrastructure spending, especially for bridges, and expanded manufacturing of storage tanks, railcars, trucks and barges. Expected to drop this year, though, is the manufacturing of offshore oil and gas platforms, and the heavy pipe used in energy exploration and transmission. Also uncertain is the demand from the off-road vehicle, agricultural equipment, heavy machinery, and construction equipment sectors because of reduced export activity. So, overall 1999 plate deliveries in North America could slide by as much as 5%. Still, if construction remains strong-and heavy machinery manufacturing stays stable-actual end use of plate could be just as strong as last year.

Before we wrap up this midyear look at flat-rolled, let's touch on the domestic stainless industry, which is being pulled and pushed-depending on one's perspective-through a rigorous and sometimes undisciplined course of structural change that first began in earnest with investments and mergers and acquisitions in the early-1990s. The offshoots of this process are both varied and dramatic. For example, some may be surprised to learn that six service centers now control about 50% of the domestic service center market for cold-rolled sheet stainless plate. In fact, these six accounted for two-thirds of all initial domestic stainless purchases of these products last year. In other words, six (6) distribution buying teams now account for more than 30% of all initial purchases of these core stainless flat-rolled products. Carrying this theme forward, analysts see at least five major changes, now occurring in the North American stainless flat-rolled industry, which will continue to shape the industry's structure for years to come. After years of relatively stable domestic supply, a group of new entrants have come to crash the stainless party. These companies include North American Stainless, Nucor, and AK Steel. Between 1995 and 2002, these three companies alone will have added one million tons of sheet capacity to the domestic market. If these facilities were on line last year, they would have been large enough to supply over 100% of cold-rolled sheet shipments and 80% of cold-rolled sheet consumption in the U.S. In fact, the domestic stainless industry continues to make rapid progress in the area of 60-inch-coil production. AK Steel, Allegheny Ludlum, J&L Specialty, and North American Stainless have installed new lines. From no capacity and complete reliance on foreign sources as recently as 1994, the U.S. industry this year has 1.1 million annual tons on line. So, even without the import-limiting trade complaints against foreign stainless flat-rolled producers, market supply apparently will be swinging back to domestic sources in the months ahead.

III. Metal Chips Extra: The Super Alloys Market

Since nobody is arguing with Boeing's estimate that the world commercial airplane fleet will reach 17,700 "flying machines" for people and freight in 2007 from 13,000 in 1998, suppliers of nickel, titanium, and other specialty "super alloys" expect to see a decade of healthy demand from commercial aviation. What's up in military aerospace however, is still "pending further review." It could take off or nosedive-at present, nobody's sure. But, what is sure is that non-aerospace end uses (about 30% of the U.S. market) are starting to catch fire in such user segments as heat exchangers, turbine power generators, the process industries, parts for transportation products (i.e., autos), and medical implants. So, buyers should expect to see a continuation of extended leadtimes-since making, shaping, and treating superalloys and specialty metals is complicated. Buyers also should expect a continuation of major superalloy supplier consolidations, and a new wrinkle-an expansion of value-added processing by supply chain middlemen.

The super alloys market is cruising at a high altitude despite occasional minor turbulence from supplier consolidations, end-user inventory adjustments, pricing cyclicality, and buyer pressure for better-performing materials. Production of military and commercial aerospace products is stronger than expected, even with slowdowns in aviation orders from Asian markets. World demand for industrial gas turbines is sparking. And North American motor vehicle output is speeding along. And any buildup of excess stocks among users and distributors is expected to have worked itself out of the supply chain this quarter. Still, sourcing hasn't changed much for industrial buyers of superalloys and other specialty metals, who have been dealing with long leadtimes and high prices for the past three-plus years of strong demand.

So, it's no surprise that prompt delivery and availability remain the key current and long-term concerns expressed in surveys of super alloys and specialty metals buyers. That's partly because supply is complicated: A small number of firms make wrought and cast super alloys that are available in literally thousands of alloy recipes. And it's partly because demand from the key commercial aviation market-now flat and due to slip in 2000-is forecast to see renewed growth because of expanded jetliner assembly in 2001 and beyond.

U.S. use of the super alloys appears to be at the same 165 billion-lb level this year as it has been for the previous two years. So, mill delivery leadtimes continue to average three months for nickel-based and cobalt-based super alloys, and almost four months for titanium. And industry insiders agree with buyers that it's still takes too long-almost a year-between the time some of these materials leave a producing mill, pass through necessary processing and fabrication stages, and become part of an airplane's turbine engine or an automobile's exhaust system.

Super alloys use generally tracks the activity of its biggest end-use market, which is commercial aviation. 1999 looks to be a no-growth year for commercial jetliner production. But, super alloys use is 45% stronger than it was five years ago. And note: The projected delivery of 940 aircrafts is double the level of assembly of five years ago. The high-performance super alloy industry is characterized by high capital investment and high fixed costs. So, after enjoying many months of sustained growth in demand and stable pricing, the recent plateauing in demand and slippage in pricing has caused Special Metals' CEO, Donald R. Muzyka, to comment that "The climate for our industry is certainly not ideal." He notes that his firms and other alloys makers have seen reduced sales "as a consequence of global economic pressures, which have resulted in reduced volumes and increased pressure on prices, and customer inventory adjustments in response to earlier order patterns which led to overstocking in customer plants."

Still, longer-term, estimates for new commercial airplane demand - and super alloys use remain quite rosy. The industry forecasts the total jetliner airplane fleet will increase from 12,300 in 1998 to a level nearing 26,000 in 2017. Roughly 70% of the fleet in operation by 2018 is projected to be new airplanes. Billie Jones, Manager of Market Planning for large commercial aircraft engines at Pratt & Whitney also projects that 15,000 new jet aircraft could be constructed over the next 20 years, requiring between 37,000 and 38,000 installed jet engines. According to Jones, "This will create a big demand for super alloys because these engines will need more and more super alloys because they will be working at higher rotation speeds and, therefore, higher temperatures." Atop that, an estimated 4,100 business aircraft will be produced between 1998 and 2007, suggests Analyst Richard Aboulafia at the Teal Group. Sales of general aviation aircraft nearly doubled between 1994 and 1997, and rose another 55% in 1998. "After spending the late 1980s and early 1990s in the doldrums, the bizjet market is in the midst of a terrific growth spurt," Aboulafi says. And the aerospace industry bullishly predicts double-digit growth next decade in demand for space vehicles, especially those earmarked for telecommunications and Internet communications use on earth.

When industry pioneer Inco Alloys International joined Special Metals late last year, the companies combined to create one of the world's largest and most-diversified producers of high-performance nickel-based alloys. Interestingly, buyers polled are relatively unconcerned about the consolidations within the super alloys industry. As one service center buyer explains it: "The mills may have new owners, but they're still operating and still sometimes the only sources for important proprietary grades." Also, Oregon Metallurgical and Titanium Industries, key titanium suppliers, now are part of a revamped and expanded Allegheny Teledyne, which is marketing a wide range of stainless steels, nickel and cobalt-based superalloys, titanium and its alloys, and zirconium, hafnium, vanadium, niobium, and tantalum and their alloys. Also part of the Allegheny Teledyne Specialty Metals Group are Allegheny Ludlum, Rodney Metals, Allvac, Wah Chang, and Rome Metals.

Also viewed as relatively minor annoyances by buyers, have been the periodic ups and downs in spot-market pricing for super alloys-which actually have been trending down since 1997. Sales of these products are made under conventional purchase orders, one-year supply contracts, long-term firm price contracts, and indexed price contracts. Long-term firm price and indexed price contracts have become more prevalent in the super alloy industry because jet engine manufacturers are required to provide firm price quotations to airlines for jet engines to be delivered several years into the future.

IV. Purchasing Focus: Single Sourcing

In the past decade or so, a significant split has occurred in the way North American companies do business with their suppliers. In pursuit of highly integrated supply chains, some have reduced their supply bases to bare-bones minimums, often developing and operating with only one supplier per major commodity, per location. However, most companies continue to view such a strategy as too risky and either avoids single sources altogether or leaves themselves plenty of leeway for backing out of commitments. In fact, a recent reader survey by Purchasing Magazine finds high-technology firms are those that tend to operate with at least one voluntary single-source supply relationship. This dichotomy of sourcing styles is evident in the ways that purchasing pros think about single sourcing. Those with less apparent enthusiasm for the practice-and that's mostly commodity materials buyers-tend to view its potential benefits in more limited terms. A few see single sourcing simply as a way to make do with fewer buyers or to simplify budgeting processes by obtaining long-term fixed prices. Many more tend to confine their benefits lists to three things: price leverage, consistent quality, and more attentive service from suppliers. Some even mention benefits typically associated with higher levels of supplier development activity and supply chain integration such as greater technological innovation, leveraging of knowledge, sharing of business risks, obtainment of shorter cycle times (both production and design), integration of production planning, and the like.

In general, the Purchasing Magazine survey finds little outright opposition to single-source relationships among procurement professionals. A full 74% of the 1000 buyers surveyed say they are not, as a matter of principle, opposed to single sourcing. However, asked to rate on a scale of 1-10 their companies' attitudes toward single sourcing, the weighted average response is a lukewarm 6. What's more, 43% of purchasing pros say they have, at some time or another, encountered frank opposition to either their use or pursuit of single-source supply relationships. According to the survey, the general reluctance to pursue single-source relationships seems to stem with equal frequency from either of two fears. First, the fear of supplier complacency-such as creeping inflation, deteriorating quality, or delivery performance. And, second, the fear that emergencies or catastrophes-such as tornadoes, earthquakes, fires-could occur and disrupt supply with serious long-term consequences. Very often, such fears are well founded, according to the survey. Some 60% of the buyers report being disappointed, at one time or another, with the performance of single-source suppliers. Meantime, 43% of survey respondent's say they've been, at times, forced to return from single to multiple source supply arrangements.

Now it's true that buyers want suppliers to invest and take risks on the behalf of their customers, and such activity may be critical to achieving integrated supply chains. But, even the leap to single sourcing may not be the commitment it seems. According to the magazine's survey, periodic competitive bidding remains by far, the most popular method of keeping single-source suppliers honest in terms of both cost and service levels. What remains unclear however, is whether the purchasing department intends to switch suppliers, or whether it is simply pursuing the least-expensive means of establishing cost and performance benchmarks for preferred suppliers.

V. Press Release: Designer Alloys

When you need it - And can't get it - Design it!

You Design it - We'll Melt it! Form it! And Ship it!

All Metals & Forge, LLC can now supply Air or Vacuum Melted Designer Alloys™ in the below listed material families, in quantities as small as 250 lbs. (120 kgs.)

* STAINLESS STEEL (300 - 400 - 500) * NICKEL ALLOYS * COBALT ALLOYS * SUPER ALLOYS * PH GRADES * ALLOY STEELS * CARBON STEELS * TOOL STEELS *

We can custom air or vacuum melt these Designer Alloys ™ under the following situations:
• Newly created customer specific Designer Alloy ™
• Controlled chemistries of existing alloys
• Vacuum melt alloys - not normally available other than Airmelt
• Existing alloys that require a quicker delivery than normal mill deliveries
• Smaller melt heat lots than your regular mill can accommodate
• Out of date or obsolete alloys
• Foreign alloys not available in the United States

After the melt, we can take the air or vacuum melted cast ingot or slab and further process your material to manufacture almost any mill form with certain size restrictions.

From Round or Square Cast Ingot
• Bar - Forged or Rolled or Drawn
• Forged Products - Bar - Shafts - Step Shafts - Blocks - Hubs - Rings (Seamless or Welded - Contoured or Conventional)
• Extrusions - Bar - Shapes - Tube - Pipe
• Wire

From Flat Cast Slab:
• Plate
• Sheet
• Strip
• Flat Bar

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