FMA Annual Meeting Recap: Positive signs ahead for metal fabrication industry

It's Day 2 of recapping the 2021 FMA Virtual Annual Meeting. During the Economic Outlook presentation, economist Chris Kuehl said the metal fabrication industry is continuing to head into positive territory despite obvious pandemic challenges. Getty Images

Editor's Note: This is the second part of our FMA Annual Meeting Recap blog series. Check out Part 1, Part 3, Part 4, Part 5, and Part 6.

Armada Corporate Intelligence publishes its monthly “Armada Strategic Intelligence System” (ASIS), which delves into the various sectors of manufacturing, including fabricated metal products, electronics, appliances, automotive, and aerospace.

As Chris Kuehl, managing director of Armada Corporate Intelligence, showed during his "Economic Outlook" presentation at the 2021 FMA Virtual Annual Meeting, every manufacturing sector tracked in that report has a positive outlook for 2021. Fabricated metal alone is expected to be up 9.7% by the end of the year. “The fact that every sector ends the year in positive territory is extremely good news.”

Kuehl didn’t gloss over the challenges, including concerns over inflation thanks largely to dramatic increases in the money supply over the past year. “The idea now is to push money into the economy,” Kuehl said, “but the fear is that it may have come too late … The economy is already recovering. So if you dump a bunch of money into the economy now, consumers [who really don’t need it] may indeed spend it and the economy will overheat. When the economy overheats, you get inflation.”

A related concern is the rising U.S. debt, but Kuehl put that debt in perspective. “If the [early 2021] stimulus package comes through, then the total amount of money the government has pushed into the economy since the pandemic began will be about $6 trillion. Well, China has contributed almost four times that amount. We’ve been obsessed with our debt-to-GDP ratio. It’s at 110%, and ideally it shouldn’t be more than 60%. China’s is 280% of GDP. They are spending money as aggressively as they can to get the economy back on its feet. China can support that spending if lots of investment continues to go into China. But should that investment be interrupted, China would be in trouble immediately. Their debt is a lot more fragile than ours, since it is so dependent on international investment.”

Other concerns relate to the supply chain and inventory. “The supply chain issues are one of the huge inhibitions out there,” Kuehl said. “And we have some ridiculous behaviors going on because there was such a disruption of the supply chain last year. Between 10% and 15% of the containers coming into the ports now were supposed to hit the ports last November.”

Of course, the recent shortages come after a year when, thanks to all the pandemic-induced disruptions, inventories vastly mismatched sales. “Metrics related to inventory-to-sales ratios are finally calming down,” Kuehl explained. “Last year people were caught flat-footed. Everyone had far more inventory than they knew what to do with, because demand just vanished. But demand has slowly come back, those inventories are slowly working down, and we’re starting to get back to a normal pattern.”

Capital spending is on the rise, too, especially in the small-business arena, where most of the country’s metal fabrication takes place. According to the most recent “Forming & Fabricating Job Shop Consumption Report” published by FMA, small fabricators especially have shifted strategies. “Small businesses were not doing capex last year,” Kuehl said. “Almost all the data we looked at showed delays in capital spending. But as we began this year, data showed that almost everybody was improving their capex predictions. They are all looking to buy more machinery, hire more people, and expand their capability in the hunt for more market share.”

Kuehl continued with more positive metrics from transportation, with positive index readings in rail, trucking, and even air cargo. “Air cargo was really down for a long time now. But now it’s way up, and there’s a reason for that. The medical sector is in a hurry. Everything being shipped around the pandemic, whether it’s protective gear, vials, or anything else, is going by air.”

He added that economic predictions from large banks and think tanks are extremely robust. “The big banks are confident. They all think we’re going to see [2021 GDP] growth rates of around 6.4%. Some think tanks are a little less enthusiastic and predict between a 4.5% and 5% growth rate. Given that the traditional rate is 2.5%, predicted growth is at least double that, which is to be expected since we’re coming off extreme lows.”

Chris Kuehl, managing director of Armada Corporate Intelligence; Phil Bell, president of Steel Manufacturers Association (SMA)

That doesn’t mean dramatic improvements across all sectors, however. Because of the pandemic recession's unique nature, the recovery may come in fits and starts for some industry segments, creating a kind of "jagged V" recovery for some.

Steel Industry Perspective

Kuehl echoed many of the positive comments that came from fellow speaker Phil Bell, president of the Steel Manufacturers Association (SMA), Washington, D.C. “On a macro level, we expect the economy to improve in 2021. In fact, there’s a good chance we’ll get close to being at pre-pandemic levels,” Bell said during the Annual Meeting's "Steel Market Update" presentation.

Many areas of the metal manufacturing economy have shown resilience, but weak spots remain, especially in the energy markets. “When we look at the energy market, oil country tubular goods continue to have a tough road ahead,” Bell said. “There’s already sufficient inventory here in the U.S. Much of it was imported and is sitting in yards and docks across the country …. Most experts think we’re still five to 10 years away before we have a healthy OCTG market.”

Bell also pointed to soft spending in nonresidential construction, a sector that until recently had been somewhat healthy, as contracts initiated in 2020 continued to move forward, taking advantage of the low-interest-rate environment of 2020. 2021 spending remains soft because of various factors, Bell said, “one of them being the lack of a long-term, well-funded, comprehensive infrastructure investment program.” He added that, to spur the recovery, there might be a bipartisan agreement on infrastructure spending in the near future.

Not surprisingly, the forecast for carbon steel remains strong. According to Bell, SMA predicts demand to be up by 8.1% in 2021. He also expects mill capacity utilization to average in the low-70% range for the year.

Bell also described the steel industry’s aggressive investment in technology, one that is likely to change the competitive landscape among the mills for decades. “Over the next three years there’s going to be more than $13 billion in investment … [This includes] phenomenal growth and investment of electric arc furnace (EAF) steel producing. Most of these projects, even by traditionally integrated steel producers like ArcelorMittal and U.S. Steel, are EAF investments.” Bell added that, after a decade of robust growth, EAF represents almost 70% of all steel production in the U.S.

With all this capacity coming online, why are steel prices so high? As Bell explained, “A lot of folks thought by now that steel prices would be dropping through the floor. Anyone who looks at current indices knows that’s not even close to being true.”

In truth, Bell said, the situation is a little more complicated. First, mills that modernize can out-compete less efficient mills, which in turn removes some capacity from the market. Displaced imports, thanks to Section 232 tariffs and other facets of trade policy, also reduce capacity. Finally, some capacity is “exiting” the market, a broad term Bell used to describe producers shifting gears to produce different products. “An integrated producer might decide that, instead of making flat-rolled steel, it might behoove the company to make pig iron for the domestic market, or to make slabs for slab processors and rerollers.”