Good deal or bad deal?
Fabricators will have to ‘deal’ with growing manufacturing sectors in 2007
January 9, 2007
Productivity rates continue to climb. Profits for manufacturing companies have been rising since the fourth quarter of 2001. A backlog of new capital goods orders is taking place, and shipments have been lagging orders over the past year. Things are shaping up for a good 2007.
She takes awhile to get going, but when she's in full swing, she's hard to slow down. This isn't a story about grandma after she takes a few sips of the holiday hooch at the family Christmas party. This is about the U.S. manufacturing industry, which is as robust as she's been in a long time.
Productivity rates continue to climb. Profits for manufacturing companies have been rising since the fourth quarter of 2001. A backlog of new capital goods orders is taking place, and shipments have been lagging orders over the past year. Things are shaping up for a good 2007, according to William Strauss, senior economist and economic adviser, Federal Reserve Bank of Chicago.
"The U.S. economy will continue to grow, but probably at a more moderate rate than what we have seen," Strauss said. He foresees U.S. gross domestic product (GDP) growth of 2.9 percent to 3 percent, but he predicts the manufacturing industry will outperform overall economic growth.
Last year proved to be a good one for manufacturing segments, even after a very sluggish start following one of the most devastating hurricane seasons ever in 2005. The short-lived crisis related to skyrocketing oil prices didn't even slow down manufacturing growth, and in fact may have proven beneficial for manufacturers in the long run as the price per barrel of oil reached a point that sparked energy exploration projects all over the world.
Barring something unexpected such as a terrorist attack or a natural disaster, Strauss predicts very little chance of a recession in 2007.
So what's the deal with specific manufacturing segments in the new year? Let's take a closer look at how they shape up for the metal fabricating community in 2007.
Automotive:
Big Three and Asian Four
Everyone has heard the stories, so it should come as no surprise that the U.S. automotive industry is in a period of transition. The past year was slightly slower than 2005, when U.S. factories pumped out 15.8 million cars to feed the buying frenzy stirred up by dealerships' aggressive discounting. However, while the Big Three suffered plant closings, factory slowdowns, and inventory buildup, the Asian Four — Toyota, Honda, Renault/Nissan, and Hyundai — kept moving cars.
Michael Robinet, vice president, global forecast services, CSM Worldwide, said DaimlerChrysler, Ford, and GM have made progress in becoming more flexible and being able to respond more quickly to consumers' ever-changing tastes, but they still lag the Asian companies that have established manufacturing presences in the U.S. (Korean automaker Kia has committed to building a plant in Georgia, which should be up and running in 2009). Robinet added that the Big Three are burdened with huge legacy costs related to highly paid older workers and thousands of retirees who have huge pensions owed them.
Figure 1
Automotive OEM output in North America is expected to jump to 16.9 million units by 2011. Toyota, Honda, Renault/Nissan, and Hyundai will account for much of the production growth.
Source: CSM Worldwide.
The good news is that the North American automotive market continues to grow. CSM Worldwide predicts a volume gain of 1.3 million units by 2011 (see Figure 1).
Of course, discussion of the automotive industry wouldn't be complete without discussion of the supply chain. Unfortunately, the picture at the Tier 1 level of the automotive industry is more shocking than at the OEM level.
The evidence is in the list of recent bankruptcies of companies with more than $100 million in assets. Ranked in order of revenues, they include:
- Delphi in 2005
- Dana in 2006
- Federal-Mogul in 2001
- Collins & Aikman in 2005
- Tower Automotive in 2005
- Meridian Automotive Systems in 2005
- EaglePicher in 2005
- Amcast in 2004
Dave Andrea, vice president, business development, Original Equipment Suppliers Association, said that in no other recent economic cycle have so many of the top 150 suppliers to North American automotive OEMs filed for bankruptcy protection. The supply base has had to contend not only with high legacy costs associated with benefits, but also with production cuts at the OEM level and demands for further cost reductions from its customers.
What's the deal? It's a bad deal for the Big Three and its suppliers, unless their products spark a new fascination for consumers. There's hope with CSM Worldwide predicting 8 percent North American production growth by 2011, but the Asian Four are expected to account for most of that volume gain.
Figure 2
If the U.S. airlines are making money, the industry as a whole must be doing well. The prosperity is expected to continue over the next nine years as the industry grows in value to $140 billion.
Source: Teal Group Corp.
Aerospace:
Small World, Long Hauls
How fitting that the stars are aligned for the aerospace industry.
"This is a fantastic market. This is the first time in 20 years where the civilian and military markets are firing on both cylinders," said Richard Aboulafia, vice president, analysis, Teal Group Corp.
Large-jet orders, those made by Boeing and Airbus, reached 2,077 units in 2006. Aboulafia said companies are buying jets because of newfound profits and confidence in the future. In all likelihood, those orders will translate into about 850-900 planes being delivered over the next several years.
In 2005 Boeing accounted for just over 55 percent of the jetliner market — or $23.3 billion of the $42.2 billion market—and expected to grab more as Airbus struggled to deliver its next — generation superjetliner.
In other areas of aerospace, Aboulafia expected the regional jet market to continue to decline, as airplane manufacturers Bombardier and Embraer retreat from the 30- to 50-seat plane market, and the business jet market to expand to 1,300 units in 2007 with the surge in profits for U.S. companies.
The military market, meanwhile, is headed toward huge growth as the world's warplanes continue to age. The market is expected to reach $11 billion in 2014, almost double the market value in 2005.
For an overall picture of the aerospace market, see Figure 2.
Does this matter to metal fabricators in light of the news that Boeing's new 787 will comprise almost 50 percent composite materials? Are metal airplanes a thing of the past?
Drew Magill, director of marketing, Boeing Commercial Airplanes, said not to worry. Boeing has tripled its consumption of aluminum plate over the last three years, especially for planes such as the popular 737. Even the 787 requires a significant amount of metal for parts such as a 244-pound aluminum extruded beam chord or an 18-lb. machined extruded bar for the nose wheel well aft bulkhead beam.
What's the deal? Magill said the world commercial fleet will more than double over the next 20 years to 35,970 planes. More people with more money will want to see more of the world. That means more business for more metal fabricators.
Figure 3
By 2011 sales of Class 8 commercial vehicles is expected to grow to 260,000 units in the U.S., 36,000 in Canada, and 19,000 in Mexico.
Source: Ward’s Communications and Economic Planning Associates Inc.
Commercial Transportation: Off-road Trip
What goes up must come down, particularly when new emission standards are concerned. Well, the emissions stay up, but sales of Class 8 trucks come tumbling down in 2007 because most companies purchased 2006 models to avoid the added cost of pollution-fighting equipment on this year's models.
Peter Toja, president, Economic Planning Associates, expects North American sales of Class 8 vehicles to drop by more than 100,000 units, to 233,000, in 2007 (see Figure 3).
The market for Class 4-7 trucks will slow down a bit in 2007, according to Toja. He suggests that U.S. sales for the trucks will fall to 247,000 units in 2007 from 256,000 units in 2006.
What's the deal? If this were a story only about heavy trucks, a bad deal it would be. But more than 250,000 trailers and 76,000 railcars and platforms will be delivered in 2007, both just a little less than 2006 figures, and that number is expected to stay fairly consistent as the truck market rebounds over the next five years. From an entire market perspective, that's a good deal.
Heavy Equipment:
An International Story
As economies in Asia come of age, demand for raw materials increases tremendously. That demand has translated into a very busy heavy-equipment sector in recent years.
As an example, look back to 2005, when the market for loader/backhoes increased by 15 percent, much to the surprise of many heavy-equipment manufacturers. Look at the numbers more closely and learn that the loader/backhoes market in Latin America grew by 47 percent.
Eli Lustgarten, president, ESL Consultants LLC, and senior vice president, Longbow Securities, said the heavy-mining sector will buoy an already healthy construction equipment sector. Sales of heavy equipment in North America will grow by 5 percent in 2007, coming off 10 percent growth in 2006.
Figure 4
Sales of large farm tractors in 2007 will improve when compared with 2006, but still lag the robust years of 2004 and 2005 when approximately 20,000 units were sold each year.
Source: Longbow Securities.
The story is not as good for farm equipment. Although farm income is expected to be near current record levels, about $250 billion according to Lustgarten, farmers are cautious about buying new equipment. Fears of higher energy costs and doubts about whether government farm subsidies will continue are depressing farm equipment sales. In addition, Lustgarten said tax incentives for small farmers, which enabled them to write off as much as 82 percent of the cost of equipment purchased in the first year, helped to drive 2004 purchases, but don't exist today (see Figure 4).
What's the deal? Lustgarten believes the heavy-equipment market will grow aggressively in Latin America, 5 percent to 10 percent, and in Asia and Africa , 10 percent to 15 percent, in 2007. That offsets the moderate growth in the farm sector, and that's a good deal.
Appliance:
What Housing Slowdown?
By now everyone has heard about the housing slowdown. But when the slowdown is coming off record highs, that's still a lot of houses being built.
In reality, housing starts have less influence on appliance sales now than they did several years ago. Neil Cline, manager, economic forecasting, Whirlpool Corp., said that overall U.S. economic growth and housing starts are less cyclical than they used to be, and as a result, the appliance industry is not as cyclical. The industry has been successful in developing new products, such as stainless steel appliances and white goods that look like more expensive built-in models, which have drawn the interest of homeowners and their pocketbooks.
Figure 5
A residential housing construction slowdown won’t slow appliance sales. Shipments of washers, dryers, dishwashers, refrigerators, freezers, and ranges are expected to climb again in 2007, giving the industry seven consecutive years of growth.
Source: Association of Home Appliance Manufacturers.
Cline added that the most effective leading indicator for appliance sales is the relationship between interest rates and the housing cycle. As long as the interest rates stay below historical high averages, housing starts should be strong enough to fuel healthy appliance sales. (See Figure 5.)
What's the deal? It's a good deal as shipments for dishwashers, dryers, freezers, ranges, refrigerators, and washers reach 49 million units in 2007, an increase of almost 1 million units from 2006.
Construction:
Building Backup
The residential and nonresidential construction sectors had a dramatic change in fortunes in 2006. Supported by low interest rates, the residential construction industry exploded from 2001 to 2005, but slowed down in 2006 when mortgage rates started creeping up. But as that sector cools, nonresidential construction is picking up steam. State tax bases are growing, and companies are adding workers who need a roof over their head while they work. That's good news for structural steel fabricators, because the nonresidential sector consumes much more steel and requires more fabricating services than the residential sector.
James Haughey, director, research and analytics, and chief economist, Reed Construction Data, said plenty of economic drivers look good for nonresidential construction:
- Exports are growing twice as fast as the domestic economy, and those goods to be exported need to be housed before shipment.
- Companies are enjoying increased after-tax profit margins.
- State and local budgets show above-average budget balances.
- Manufacturing capacity has risen above 80 percent, the point at which companies start hiring more people.
- The retail industry is enjoying a vacancy rate of 9.9 percent, the lowest in four decades.
- The office vacancy rate is falling as well from the buildup that occurred before the Internet bubble burst.
"Most of the good news is yet to come," Haughey said.
Construction of lodging, office, public, and retail buildings is expected to be up in 2007. Only the manufacturing sector is expected to slow down when compared with the previous year, according to Haughey.
What's the deal? Reed Construction Data projects that total construction spending, not adjusted for inflation, will increase by 5.2 percent in 2007 and 6.7 percent in 2008. That's not huge growth, but in an industry that is still on the way up, that's a good deal.
The Big Deal
The growth of some of these manufacturing segments may not be huge, but most economists see any growth as a good thing. The major point is that the U.S. may have averted a traditional recession with what many consider to be a "soft landing" in 2007.
Time will tell if the economists are right. But don't expect metal fabricators to wait around for the final judgment. They have demanding manufacturing customers to deal with.
Dan DavisEditor in Chief,
FMA Communications Inc.
Dan Davis has covered the North American manufacturing industry since 1992. He enjoys meeting managers and shop owners and finding out how they are fabricating a living in today's marketplace.
dand@thefabricator.com
TAGS: aerospace, aerospace industry, agricultural machinery, appliance industry, automotive industry, construction industry, economic analysis, forcasting, heavy equipment, structural steel
833 Featherstone Rd. 
