Two different metals industries adapt to a challenging economy
January 10, 2002
Steel is looking at some uncertain times, to say the least, but aluminum industry professionals see a little more to smile about if general economic conditions improve.
As the U.S. economy continues to slow, steel and aluminum producers are looking for the bottom of the market.
While gross domestic product (GDP) growth was exhilarating in recent years, we all knew it was unsustainable, and market results are bearing out those fears. However, low commodity prices are not all bad news for fabricators.
For the first half of 2001, U.S. steel shipments were down 11.8 percent from the same period in 2000, according to data issued by the American Iron and Steel Institute (AISI, www.steel.org). Steel imports for the first half of 2001 were 13.1 million metric tons, a decrease of 5.4 million metric tons from the first half of 2000. The largest commodity decreases were in hot-rolled sheets, blooms, billets and slabs, and plates in coils.
The U.S. Department of Commerce (www.doc.gov) reported that more than 20 U.S. steelmakers filed for Chapter 11 bankruptcy protection in the past two years, many blaming their financial situations on low prices resulting from less expensive imported steel. In October Bethlehem Steel Corp., the third-largest steelmaker in the U.S., sought bankruptcy-court protection.
Mill shipments within major market classifications showed construction products for builders, developers, and general contractors were up 2.1 percent in the first half of 2001, and oil and gas were up 6.5 percent. Mill shipments to the key automotive market declined 18.7 percent, while machinery, industrial equipment, and tools declined 20 percent compared to the same period in 2000.
However, steel still remains one of the most politicized commodities on earth.
"Every country in the world thinks it needs a steel industry," said Leif Eriksen, research director of process industries at AMR Research Inc. (www.amrresearch.com) in Boston. "Steel plants and capacity are often created for political, not economic, reasons. The steel industry will forever be in a cycle of survival, not robust growth or profitability."
To remain competitive, the domestic steel industry petitioned the U.S. International Trade Commission (ITC, www.usitc.gov), seeking protection under Section 201 of the Trade Act of 1974, which was enacted to monitor steel imports and their effect on the U.S. steel industry. The ITC found injury to 12 different products and was split on four more. It is awaiting President Bush's decision on tariffs and quotas on those products, which probably will be handed down in mid-February.
For now, U.S producers' reduced shipments and low prices continue to keep their steel prices depressed.
Currently Canada and Mexico, partners in the North American Free Trade Agreement (NAFTA), are exempt from trade restrictions applied to other foreign suppliers of steel wire rod. The ITC reported that steel wire rod imports are undermining the effectiveness of import relief granted in 2000 by former President Clinton.
"Even with more use of high-tech composite materials that have their origin in plastics more than metals, metals still have their role," Eriksen said. If U.S. economic forces come into play, the steel industry may be different, with more entrepreneurial midsized companies, but there always will be a steel industry in the U.S.
So, steelmakers must find innovative ways to compete. U.S. Steel LLC (www.ussteel.com), for example, developed a high-strength, low-alloy Dual-TenTMsteel that demonstrates improved performance in deep-draw and stretch-forming stamping operations.
"Traditional high-strength, low-alloy can't make complicated shapes," said Jody Shaw, manager of technical marketing at U.S. Steel. Dual-Ten is designed to meet automakers' requirement for lightweight vehicles, using less material to accomplish the same goal.
Mike Juddo, director of product technology for U.S. Steel, added, "Customers may view this 100-year-old industry in a traditional way, but we are moving beyond the limitations of how steel is used today. We want people to look at the steel industry as more than a commodity."
The steel industry could get a significant boost in early 2002 if the ITC determines that foreign imports are injurious. Relief could come in the form of a duty, a quota, a tariff-rate quota, or trade adjustment assistance.
For more than a century the U.S. aluminum industry has led the global market with advances in technology, product development, and marketing. The U.S. Dept. of Energy (DOE) cites aluminum as the "industry of the future," according to Sara Dillich of DOE's Office of Industrial Technologies (www.energy.gov).
The DOE reports the U.S. aluminum industry employs more than 143,000 people, contributing more than $30 billion to the U.S. GDP. Energy represents a large share — 21 percent — of the value of shipments for primary aluminum, giving a competitive advantage to offshore producers that have access to low-cost electricity.
The importance of the U.S. manufacturing industry and the outlook for aluminum are enhanced by efforts to rebuild and step up the military in the wake of September's terrorism in the U.S.
Yet reliance on just-in-time (JIT) deliveries of parts and components for assembly lines means that auto production is at risk when terrorism and economic forces hamper truck and air freight.
Building and construction sectors remain reasonably strong. However, other markets, such as manufacturing, trucks and transportation, machinery, computers, and communications equipment, are very weak.
"Aluminum is positioned for growth in 2002," said Tom Stundza, Purchasing Magazine, who was a speaker at the National Aluminum Association of Distributors (NAAD, www.naad.org) aluminum forecasting conference in Chicago, held just two days after the attacks on the Pentagon and World Trade Center. "There is no doubt that production in defense markets will grow."
In the short term, as companies do in belt-tightening times, aluminum industry members look to inventory management as a key to cost control. "Both new orders and shipments for capital goods have been falling since September 2000, leading to rough times in manufacturing," Stundza said.
In addition to what might be unprecedented growth in defense spending, vehicle sales in 2001 were down 300,000 units through August compared to 2000, but stronger than expected based on purchasing managers' reports of expansion. For 2001, according to Stundza, the first eight months of the year were the third-best year in automotive history.
Even with some economic bright spots, the outlook for aluminum smelting is bleak. Last year saw drastic cutbacks in aluminum smelting in the Pacific Northwest, as fabricators' demand for ingot crashed. Higher natural gas prices will further strain production costs for smelters in the Northwest.
"It's important to note that while the U.S. reduced aluminum production in 2000, the rest of the world hasn't," Stundza said. "Purchasing has slowed, and any recovery in 2002 will be muted. If we see a 2 or 2.5 percent growth in GDP, it could contribute to an industry growth rate of perhaps 5 percent, as raw materials improve along with GDP."
Reflecting on the causes of the slowdown, Tim Hayes of BB&T Capital Markets (www.bbandt.com) in Richmond, Va., cited the decline in consumer spending and higher interest rates, equity prices, and energy prices as causing a shift in consumption.
The Aluminum Association Inc. (www.aluminum.org) in Washington, D.C., noted declines during the first half of 2001 in mill shipments and orders, exports, and auto production. Yet aluminum producers managed to carry a profit from 2000 into the first half of 2001. Aluminum represented 47.7 percent of the metal sales mix in 2000, a 24 percent increase over 1999.
While most in the industry see aluminum positioned for growth in 2002 after a flat year in 2001, world conditions may depress the U.S. economy enough to delay any improvement in that metal.
A tight economy is sure to present its challenges, but steel and aluminum producers can use the opportunity to make improvements in productivity and planning, looking closely at raw materials, both grades and suppliers, and at inventory management.
"Even pioneers in supply chain management did a poor job of predicting the current downturn," said Eriksen. "Better knowledge management techniques allow companies to better predict supply and demand, to deal proactively with industry cycles."
Helen Gallagher is a freelance writer based in Chicago and can be reached at email@example.com.
The thefabricator.com gratefully acknowledges the following sources used in preparing this article:
AMR Research Inc., 2 Oliver St., Fifth Floor, Boston, MA 02109-4925, phone 617-542-6600, fax 617-542-5670, Web site www.amrresearch.com.BB&T Capital Markets Group, a division of Scott & Stringfellow Inc., 909 E. Main St., Richmond, VA 23219, phone 804-643-1811, fax 804-644-8241, Web site www.bbandt.com.
Purchasing Magazine, 275 Washington St., Newton, MA 02458, phone 617-964-3030, fax 617-558-4327, Web site www.purchasing.com.
U.S. Department of Energy, 1000 Independence Ave. S.W., Washington, DC 20585, phone 202-586-7925, fax 202-586-4403, Web site www.energy.gov.
U.S. International Trade Commission, 500 E St. S.W., Washington, DC 20436, phone 202-205-2000, fax 202-205-2104, Web site www.usitc.gov.
U.S. Steel Corp., 600 Grant St. Pittsburgh, PA 15219-4776, phone 412- 433-1121, fax 412-433-6847, Web site www.ussteel.com.