By Tom Stundza — Users of metal parts went into a buying funk last summer when the manufacturing recession bloomed. Purchasing activity fell further this spring when the domestic auto industry imploded. What’s ahead? Buyers say they plan no immediate pickup in bookings. Only 20% of metallics buyers plan to boost purchasing in the near future. So, less than 9% of the buyers of castings, forgings and other parts see price increases anytime soon.
The Institute of Supply Management now expects a 22.7% plunge in capital investment for U.S. factories this year, more than three times worse than its previous projection issued in December of a 6.7% decline. And, since they have severely downgraded their projections for economic activity and investment during 2009, metal parts industry executives are adjusting operations and employment to keep their heads above water and also now are discussing a “leaner supply base” when the pickup in demand finally occurs.
Durable goods manufacturing should see the brunt of the contraction this year, with a drop of 16.8%, forecasts economists Tom Runiewicz at the IHS Global Insights offices in Eddystone, Pa. So, early forecasts suggest an 18% decline in cast metal parts at 10.2 million tons in 2009. When powder metal parts and forgings are added to the mix, the 12.89 million-ton market will be 31% below the cyclical peak year of 2007 when sales were 18.59 million tons.
The lack of capital goods manufacturing growth in the later months of 2008 and this year has stunted the purchasing of key metal parts. In terms of dollars, purchasing in the engineered-components marketplace jumped by about 16% to $50 billion, mostly because the steel price spike that inflated the cost of forgings and some ferrous castings. This year, the dollar volume could fall by as much as 11% to $45 billion—partly because of reduced tonnage and partly because of deflated costs of metallics.
Note that after two straight years of an average of 10 weeks for deliveries, leadtimes slipped to an average 9.4 weeks in 2008 and are sliding toward 7 weeks so far this year. A series of buyer surveys finds that none of these products are delivery hot buttons so far this year. Ken Kirgin of market researcher Stratecasts Inc. in Ft. Myers, Fla., isn’t surprised, noting that most end-use sectors “are experiencing losses in demand” for iron, steel and nonferrous metals castings, noting that poor sales have gone beyond automotive and housing starts.
And looking forward, economists now believe the metal casting, forging and sintering industry won’t match 2007–2008 tonnage and sales volume for two or three years. And that may end up shrinking the supply base, a probable shakeout among the makers of cast, forged and metal sintered components. “We probably will lose around 100 of the nation’s 2,130 metalcasting shops, and 300,000 to 400,000 annual tons of the industry’s current 14.6 million tons of annual capacity,” says Alfred Spada, director of marketing at the American Foundry Society in Schaumburg, Ill.
Just last month, Elmira Pattern & Foundry in Elmira Heights, N.Y., an 80-year-old specialist in aluminum castings, halted production and is going out of business, a victim to the economic slowdown. Die caster Quad City Die Casting of Moline, Ill., will close permanently three plants on July 12. Quad City’s main plant (aluminum and magnesium castings) is in Moline and it also has plants in Red Oak, Iowa (aluminum and magnesium) and Davenport, Iowa (zinc die castings). These parts range from 5–20 lbs.
In an interview, Spada says he isn’t surprised at these events, noting that “the typical metalcasting firm saw business start to slide last autumn with activity bottoming out in the February-March timeframe of this year.” That’s because almost a third of the supply base ships into automotive, which has been a disaster, with big purchasing declines also evident from manufacturers of heavy trucks, railroad cars, agricultural equipment and various off-road vehicles and machines.
Note that a major player in the production of aerospace and industrial forgings, castings and fasteners, Precision Castparts Corp. of Portland, Ore., says it “faced strong headwinds” in its fiscal fourth quarter ended March 29 where its net income fell 6.7% to $260.3 million from $279 million a year earlier on sales that slid 9.2% to $1.6 billion from $1.77 billion. CEO Mark Donegan says operating earnings by its forged products business were down 12.1 % to $162.2 million on a 16.3% decline in sales to $678 million, while operating earnings by its investment cast products business slipped 1.1% to $143.4 million on a 6.7% drop in sales to $540.1 million.
In this environment, “castings prices have come down dramatically this year,” says a buyer in Springfield, Ill. That’s also true for other metal parts since their prices are dependent upon the market prices for the metal mill products, which has come off the mid-2008 spike to cyclical lows in early 2009.
“Indeed, these are challenging times that are forcing die casters to make tough business and financial decisions to endure,” says Daniel L. Twarog, president of the North American Die Casting Association (NADCA) in Wheeling, Ill. “While some die casters have seen an increase in business activity due to sourcing returning to the U.S., a larger number still need to weather the demand downturn.”
The current state of U.S. die casters is very precarious, says Twarog in an interview, who agrees that a smaller, more agile supply base will emerge from the recession. That’s because the current downward purchasing trend will continue through 2009 and probably halfway through 2010. This also is the outlook of Richard Pfingstler, president of the Powder Metallurgy Parts Association in Princeton, N.J. “I’d love to say that business will turn around in the fourth quarter of this year but we’ll be lucky to see the bottom at that time.”
Pfingstler, who also is president of Atlas Pressed Metals in DuBois, Pa., adds: “It’s no secret that the biggest user of powder metal parts is the automotive industry, and it’s no secret that its purchasing has been down for months.” Weak sales to General Motors and Chrysler and the prolonged American Axle strike in the first half affected early 2008 sales, followed by the steep decline in overall automotive assembly by all producers in the second half. The latest blows to metal parts suppliers in 2009 have been the nine-week assembly shutdown at half of the North American plants of General Motors and that firm’s decision to phase out the Pontiac brand. Also: The bankruptcy of Chrysler that has shut its plants for at least two months, pending completion of the proposed sale of principal assets to a new company as part of its bankruptcy proceedings.
Metals parts makers also are seeing sales drop this year because of the reduced activity by producers of heavy trucks and off road vehicles and the reduced manufacturing of oil and gas drilling equipment and petrochemicals industry machinery. Kirgin at Stratecasts says other business-depressing factors include the expected drop-off in medium to heavy truck and trailer production to about 190,000 units this year and a 40,000-unit slide for railroad freight cars.
Meanwhile, IHS Global Insight analyst Kenneth Kremar in New York says “traditional manufacturing is having a rough time, as consumers rein in spending, corporate America cuts capital spending, and export markets falter as the global recession deepens.” Upshot: Traditional manufacturing, a key market for metal parts, is slated to contract by 11.7% this year. Looking at the production of industrial machinery, which fell 14.6% in 2008, Kremar says assembly is slated to drop an additional 23.2% this year. Production of construction machinery is now slated to decline 26.2% in 2009.
In this economic environment, steep declines already have been recorded in the early months of 2009 for powder metal parts sales, which dropped by an estimated 8% to 10% in 2008. “The market has been as weak as feared,” a metal powder supplier writes to clients. “Demand for finished products made of our powder was very low.” Moreover, weak demand in late 2008 means that inventories have remain unusually high, cutting into sales of new powders.
Pfingstler says in an interview that 70% of the sales of the 100 or so powder metal parts firms are auto-related. But, if anything, this recession has proven that non-automotive markets aren’t recession-proof, either. He cites reduced shipments to makers of lock hardware, garden tractors, snowmobiles, power tools, appliances, cell phones, sporting arms, oil and gas equipment, aircraft engines and surgical equipment. This matches with a report from Kremar at Global Insight that farm-sector capital spending will drift down over the near term and lawn and garden equipment will not rebound until housing turns the corner. He projects that production of farm and garden equipment is slated to decline 10.2% this year.
“Castings from China are past due,” reports a procurement executive at a Wisconsin firm that manufactures door securements for truck trailers, specialty trailers, and intermodal containers. Twarog of the NADCA believes these kinds of reports will “bring good news on the horizon” for the die-cast parts industry as well.
A survey of his trade group’s membership found 78% reporting business coming back from overseas during the last two quarters. Why? “Three main reasons,” he says in an interview, “concerns about part quality, fewer late deliveries because of the close proximity of customers and regional suppliers, and the cost disadvantage of overseas logistics.”
Stroh Die Casting in Milwaukee, recently has been seeing interest from original equipment manufacturers (OEMs) wanting to bring some components back because of offshore quality issues. “One company has talked to us about bringing some parts back — particularly plated or painted parts,” says Andy Stroh, sales manager. Also, “poor packaging results in parts getting damaged during shipment.”
Stroh Die Casting has been tooling up an aluminum die-cast part that previously was made in China for a customer in Green Bay, Wis., “The customer had quality issues with the part and difficulties relaying part changes effectively,” says the sales manager. “That’s why we got the work—because of our proximity to the customer, understanding of their needs and our willingness to build the new tool quickly.”
Chicago White Metal Casting in Bensenville, Ill., won back some business because of both offshore quality issues and proximity to their customer, says its president, Eric Treiber. “We have, within the last year, produced castings that were previously sourced offshore,” he says. “It is our understanding that two magnesium castings we produce, which were previously sourced offshore, were brought back to the U.S. for reasons of quality and proximity of the supply base.”
Twarog says in a press release that manufacturing logistical issues with offshore sourcing have become more prevalent. “The simple fact is that the distance between OEMs and their offshore suppliers makes it too costly and time-consuming for them,” he explains. “Also, heightened shipping costs and longer cycle times reduce, and in some instances negate, the cost savings of sourcing offshore.”
In a NADCA white paper, member Burl Finkelstein says his company, Kason Industries in Newman, Ga., recently brought back about 500,000 zinc castings that were made in China. “This occurred for several reasons,” he says. “Metal costs fluctuated in China, and suppliers would not take orders at prices that had previously made them competitive. Adding increased transportation costs, you can see how the trend changed. At our plant, we remained tooled and had machine capacity at our U.S. plant to be able to absorb the work without any capital outlay.”
In the white paper, Mel Hand, general manager of Los Angeles Die Casting in Commerce, Calif., says his high pressure aluminum die castings house has taken some engineering and fabricating initiatives to become a supplier of choice to its regional customer base. “As issues arise, we are better positioned and better equipped to offer engineering support,” he says. “Not only can we turnaround a part quicker, but we can produce a better quality part.”