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issue: January 2008 APPLIANCE Magazine

Forecast
Materials Forecast 2009: Unfulfilled Hopes


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by David Simpson, Contributing Editor

High oil prices and strong Asian economies exert pressure on commodity supply and pricing.

Representative of the international nature of the steel industry, I/N Tek and I/N Kote (New Carlisle, IN, U.S.) is a joint venture of ArcelorMittal and Nippon Steel. The machine is part of the overall finishing process and loops the steel that is moving through the line. This allows operators to stop the line at either end without stopping the overall line. When the line is stopped at either end, the steel is stored until the line is restarted.

For many appliance companies, 2007 began with the hope that commodity prices were near a peak and that there would be some price stabilization or declines. Although prices of some materials, like zinc, copper, and aluminum, have firmed or moderated, they are the exception. Appliance companies are continuing to pay more for commodities.

A major reason for the escalation is that supply simply cannot keep up with demand. Outside the United States, manufacturing growth continues, especially in Asia. Meanwhile, new mines and materials-processing capabilities have not been enough to keep up. Getting the materials where they are needed is also a problem. The cost of shipping raw materials across oceans has reached an all-time high.

A key factor is oil. Few expected to see oil near $100 a barrel, a figure approached in late 2007. Higher oil prices affect everything from commodity processing to transportation to feed stocks for plastics. One U.S. supplier, when asked about what is influencing his materials market, told APPLIANCE: “Oil, oil, oil, the drop in the real estate market, and did I mention oil and energy?”

What happens to commodities in 2008 largely depends on economic activity. The United States is experiencing a downturn, triggered in part by a housing credit crisis. In the past, a U.S. slump would bring down commodity prices. But today’s world economy is far less U.S.-centric. As long as economies in Asia and other parts of the world continue to perform well, any overall commodity price drops are unlikely. Likewise, oil and natural gas prices are largely being driven by increased usage outside the United States.

Lanxess is continuing its strategy of marketing ABS materials in customer-specific colors. It has opened a Color Excellence Center in Dormagen, Germany, which includes a global color database.

Mixed Metals Message

The International Iron and Steel Institute (IISI) estimated steel consumption worldwide last year to be up 6.8%. The IISI forecast the same 6.8% rate increase for 2008. Brisk growth in China, as well as India, Russia, and Brazil, has driven this increase. China consumes 35% of the world’s steel; Chinese consumption was expected to grow 11.4% in 2007 and 11.5% in 2008. For the NAFTA market, the estimate was for a 4.9% drop in consumption in 2007, but a turnaround to a 4.0% increase this year.

In the second half of last year, the weak U.S. economy produced some moderation in domestic prices, notably for flat-rolled steel. However, this may simply be a pause. Reports are that many companies purchased extra steel late in 2006 and early 2007 to avoid expected price increases. As inventories are depleted and companies negotiate new contracts, demand will likely increase and prices with them. Imports are not likely to rise much to fill the demand due to the weakness of the dollar and the strength of other markets.

Steel producers worldwide face increasing costs from oil and gas, but also from iron ore—short supply means prices are expected to jump 30–50%. Coal and coke are also expected to get more costly. Even steel scrap is up. Nucor Corp. (Charlotte, NC, U.S.) reports the average scrap and scrap substitute cost per ton used increased 11% in the first nine months of 2007.

Stainless steel is a special case. Steel suppliers have been adding surcharges depending on content. Nickel surcharges reached a high around the middle of 2007. However, by year’s end, nickel had declined below the January 2007 figure. Nickel future prices at the London Metal Exchange (LME) suggest a further price drop in coming months.

High prices have affected the stainless-steel grades that some customers purchase, points out Dylan Altieri, marketing manager, Denman & Davis, a Clifton, NJ, U.S. service center. “Customers and mills are looking into duplex grades of stainless steel, with less nickel and more chromium. In some cases, the mills are developing new grades with unique metallurgical chemistries. Properties can be the same, or at least pretty close, with a reduced cost.”

Other metals commonly used in the appliance industry are copper, zinc, and aluminum. In November 2007, zinc had dropped sharply, sitting at $1.37 a pound, compared with $2.19 a year before. Copper was at $3.25 a pound, similar to $3.23 a year before and down from more than $3.70 around midyear. LME figures suggest further declines in zinc and copper.

Aluminum was not much changed in November, sitting at $1.16 a pound, compared with $1.21 a year before. In North America, there has been an adequate supply of flat-rolled aluminum products, says J. Michael Murphy, sales and marketing manager, industrial products, at Alcoa North American Rolled Products (Lancaster, PA, U.S.). He anticipates adequate supply in 2008. This is true even though imports may soften further due to the weak U.S. dollar and high freight costs.

Alcoa is seeing a strong pull for new aluminum applications in consumer electronics due to its look, feel, functionality, and environmental benefits. Murphy observes that current LME aluminum pricing is about 2.5% higher one year into the future.

Refrigerants face constant scrutiny due to concerns about their environmental effects. Here, DuPont’s Barbara Minor, senior engineer, conducts a thermal stability test on one of the company’s alternative refrigerants.

Petroleum and Plastics

Plastics using oil and natural gas as feedstocks have naturally been affected by the high, volatile prices. Availability has varied as producers have sometimes struggled to keep up with demand, especially in expanding Asian markets.

“Even though demand has slowed somewhat in the United States, overall global demand, Asia especially, has remained very strong,” points out Gavin Jewell, market sector leader, BASF Engineering Plastics Business in North America (Mt. Olive, NJ, U.S.). “This, combined with the weaker dollar, has had the effect of utilizing what might have been some excess North American capacity for the plastics industry. Strong demand with the continuing increase in all hydrocarbon-based feedstocks like oil and natural gas means the trend in pricing for 2008 will most likely be upward.”

Ferro Corp. (Cleveland, OH, U.S.) has combined its plastic colorants, filled and reinforced plastics, and polymer alloys into what is now called Engineered Polymer Products (EPP). Availability of these products has been good, observes Jim Kolenc, business director, EPP. “As for pricing, while we have made considerable progress reducing the cost structure of our business to ensure best-possible pricing of our products for customers, there continues to be upward pricing pressure. Both the major cost components (resin, pigments, energy) and minor factors (transportation, packaging) have escalated throughout the year—a situation that is forecast to continue into 2008.

“As long as the export market remains strong, polymer producers will continue to use it to leverage the situation in the form of higher prices to the domestic market. Consolidation of the resin supply base and high energy prices have not helped the situation. These cost increases must be passed through to the market in the form of higher selling prices. I can see a situation where failure to recover cost increases would cause margin compression within the supply chain serving the appliance industry. That could impact availability from those that have not been proactive [by] reducing the overall cost of running their business.” says Kolenc.

Profits Are Possible

Although the supply chain is under stress and costs are up, many appliance companies—including Electrolux AB (Stockholm), A. O. Smith Corp. (Milwaukee, WI, U.S.), and American Standard Companies Inc. (Piscataway, NJ, U.S.)—have been reporting decent income and profits. Even Whirlpool, faced with more than a half-billion in increased materials costs in 2007 and a lagging U.S. market, reported $175 million in earnings and net sales of $4.8 billion in the third quarter. True, it is challenging managing with today’s commodity situation, but it’s certainly not impossible. 

 

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