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issue: January 2010 APPLIANCE Magazine

Cover Story: Materials and Components Forecast
Coming Out of the Trough


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David Simpson, contributing editor

 With economies improving, savings from lower commodity prices may be a thing of the past.

PolyOne’s material solutions for the appliance industry include Geon FX Metal, a metallic vinyl compound for consoles and other appearance parts, as well as OnForce LFT, a long-glass-fiber compound for structural parts such as this washing machine spindle.

What a difference a year makes. Late in 2008 and early in 2009, demand for many metals and other commodities plummeted as economies around the world suffered a sharp downturn. Although commodity suppliers reduced output, prices often followed demand. For downstream users, including the appliance industry and its suppliers, lower commodity prices at least offered some potential cost savings during tough times.

Many companies benefited. For instance, Electrolux (Stockholm) reported margins of over 8% in 2009’s third quarter. Says Hans Stråberg, president and CEO, a “cyclical trough in commodity prices and maintained prices have been decisive for our earnings improvement. Other contributing factors are a better product mix and significant cost reductions.”

Unfortunately, the cyclical relief appears to have been short-lived. The world economy, while not exactly thriving, is showing signs of life. In anticipation of better economic output, many commodity prices as well as oil and natural gas have been bid up to levels well above their recent lows. There is a question about whether these prices are sustainable in the short term. Longer-term, more-vigorous economic output is likely to make rock-bottom commodity prices a thing of the past.

Metals

Steel production in developed countries was especially hard hit by the recession. In the European Union, estimated 2009 apparent steel usage was down 32.6%, after 2008 was down 8.2%. In October, the World Steel Association forecast apparent steel usage in 2010 would be up 12.4%. The NAFTA region (U.S., Canada, Mexico) had similar numbers. On the other hand, China’s apparent steel use in 2009 was expected to increase by 18.8%, thanks in part to government stimulus. China is estimated to be responsible for 47.7% of world steel apparent use.

In an October Ferrous Round-Table meeting in Amsterdam, Holland, the Bureau of International Recycling discussed the strength and sustainability of the economic upturn. According to guest speaker Thomas Ludwig, PhD, CEO of German steel distributor Klöckner & Co. SE, the real demand for steel has shown no signs of a major recovery and could remain at low levels for some time. Without a rapid improvement in real demand, steel prices are likely to remain highly volatile in coming years, he said.

Highlighting China as “the wildcard” in his industry outlook, he argued that fears of the country becoming a major steel exporter are unfounded. He also suggested that the worst of the global crisis “is behind us” and that the long de-stocking phase in the steel sector is at an end.

One turning point may have been reached in North America. According to the Metal Service Center Institute, U.S. centers’ steel inventories peaked at 11 million tons in August 2008 and did not rise again until September 2009, when they rose to 5.79 million tons. However, that figure is still 45.7% lower than a year ago. September steel shipments from U.S. centers were down 31.4% from the previous year, indicating a long way to full recovery.

Surcharges can add considerably to the cost of steel. For some common types of stainless steel, nickel has been a major source of surcharges. But nickel prices, which were over $50,000 a metric ton on the London Metal Exchange (LME) in mid-2007, had dipped below $10,000 as recently as last April. They had recovered to over $17,000 in November. LME futures prices out through 27 months indicate a similar level.

Copper has been another metal with a recent volatile history. LME prices reached around $9000 a metric ton in mid-2008, putting at risk copper gutters on homes and churches. The recession pushed copper below $3000 toward the end of 2008. It had recovered to around $6500 in November, despite large global inventories. LME futures indicate a level between $6000 and $7000 through the following 27 months.

Aluminum sheet pricing has stabilized after a dramatic decline in late 2008 when the base metal price dropped along with other commodity products. “In North America, the mill picture continues to be affected by industry rationalization and consolidation,” says J. Michael Murphy, sales and marketing manager, industrial products, Alcoa North American Rolled Products (Lancaster, PA, U.S.; www.alcoa.com). “Alcoa idled its rolling mill in Texarkana, TX, in May of 2009 and all North American rolling mills are currently operating at reduced capacity, with a reluctance to ‘crew up’ to higher capacities until there is solid evidence of an economic recovery. In addition, we see less import metal into North America as the weakened U.S. dollar makes selling here less attractive.

“Today there is not nearly as much industry rolling capacity as a few years ago,” says Murphy. “This has resulted in relative conversion price stability, even as demand for many aluminum sheet metal products has been down more than 30% in 2009, according to the Aluminum Association. While Alcoa does not provide formal pricing guidance, for the next year most industry analysts agree that LME prices have likely bottomed out. As far as North American mills, there is adequate industry capacity, barring further closings. However, the real issue in 2010 is whether mills will see enough sustained demand improvement to add additional crews.”

Die casting makes use of aluminum, zinc, magnesium, and some copper. “Material pricing for die castings is coming off a historical low (2008–2009) and rising at a greater rate than the overall economy,” says Daniel Twarog, president, North American Die Casting Association (www.diecasting.org). “The demand for material and die castings has been increasing at a greater rate in Asia than in Europe or the U.S. In this past year, there has been a surplus of material and die casting capacity, despite the significant contraction of the industry over the past 18 months. Demand has been weak. This has kept die casting prices low.

“In the fourth quarter of 2010, there will be an increase in demand for material and die castings. Some estimates put the demand up by 10% over the previous quarter. Die casting prices will start to rise by the third quarter of 2010 as demand will outpace supply. All during this period, material prices will increase. Material price increases are expected to continue through 2010.”

Powder metallurgy uses a variety of metals such as iron, steel, and copper. “Part pricing is heavily affected by scrap pricing,” points out Jim Dale, vice president, member and industry relations, Metal Powder Industries Federation (www.mpif.org). “Recently the scrap market has been down, but it has been up and down a lot in the last three to four years. Our members have had to price their parts accordingly. Powder and part availability is not an issue, due to the state of the economy, especially the automotive sector.”

Plastics

Into 2008, plastics pricing had been on an upward trajectory for several years, and availability of some materials was spotty. Oil and natural gas, used as feedstocks for chemicals and in processing and transporting the materials, hit high levels in 2008. Some pricing pressure came off with the onset of the recession and the relative oil and gas cost declines.

Looking at engineering plastics, demand in the last year was down as much as 50% in the automotive market and 15–20% in the consumer industrial market, reports Gavin Jewell, sector development leader, BASF Engineering Plastics (Wyandotte, MI, U.S.; www.basf.com). “This falling demand was matched by a throttling back in production by plastic manufacturers in order to take fixed cost out of their operations and to avoid excessive inventories.

“With sales on appliances down 15–20% over the last year, sales on existing programs were affected accordingly. That said, we were able to make up a fair amount of this volume through new program closes. This came mostly through continued replacement of thermoset parts and painted metal assemblies with engineering thermoplastics, especially on ranges and ovens. This was driven by appliance manufacturers’ even stronger desire for cost reduction during these times. In the fourth quarter, orders on existing appliance programs began to pick up due to depletion of excess inventories and a slight increase in consumer demand.”

Jewell said the industry saw some pullback on plastic feedstocks at the end of 2008, but most resumed an upward trend in 2009 despite the U.S. downturn. “This was due mainly to continued strong demand out of Asia,” he explains. “Oil has increased steadily since January and is back to $80 per barrel as of November. The futures market is showing a slower but continual climb to $85 per barrel by November 2010. Natural gas, another main precursor and energy source for plastics production, in November is at $3.77 per mBtu with futures showing an increase to $5.76 per mBtu by November 2010.

“Going forward, as demand picks up, producers will readjust their output to keep up,” Jewell adds. “During this readjustment phase, manufacturers may see some longer lead times, especially on specialty grades.”

Glass

Glass prices have stabilized after a shortage in the summer and fall of 2008, reports Mark Delp, executive vice president of Schott Gemtron (Sweetwater, TN, U.S.; www.gemtron.net). Surcharges associated with natural gas and diesel fuel continue to fluctuate up and down on a quarterly basis.

“I have concerns that raw glass prices could rise and supply will decrease as there are a significant amount of North American furnaces that may need to be rebuilt in the next two years,” he adds. “Glass manufacturers could decide not to reinvest in these furnaces at this time. If this happens, it will cut into available supply, creating supply shortages and rising prices. It is an option to import from China, but the added logistics costs to land the product in North America have kept this option from being competitive.”

Since 2003, glass production in China has increased by more than $576 million—over 67%—according to a study by Dr. Usha Haley of Harvard University in Through the Chinese Looking Glass: Subsidies to China’s Glass Industry from 2004–08.

The Alliance for American Manufacturing (AAM) is urging the Obama Administration to address Chinese government subsidies to its domestic glass industry. In a letter to the administration, it states, “Our domestic glass industry is the most efficient in the world, but it cannot compete against production that is heavily subsidized by the Chinese government.” The AAM adds that the global overcapacity of glass products created by the explosive growth in Chinese production has led to U.S. “plant closing and thousands of lost jobs.”

The North American market for glass-ceramics used in cooking surfaces was down 12–15% in 2009, more than double the drop forecast a year ago, says Carlos Mendia, director of sales and marketing at Schott HomeTech North America Inc. (Louisville, KY, U.S.; www.schott.com). “Like other companies, we have adjusted our capacity to meet the reduced demand, and the last 18 to 24 months we have been working to lower our fixed costs. From talking to our customers, it sounds likely the market will stabilize in the next year. As far as material costs, they retreated for a while but are inching up again. We aren’t anticipating any pricing adjustments in 2010.”

Finishes

Powder coatings, which have an estimated 15% of the North American industrial coatings market, were not immune to the downturn. The impact was especially hard in the automotive and appliance areas. “For powder suppliers, the recession compounded a market in which there was probably a 50% oversupply of powder,” says Steve Houston, Powder Coating Institute (www.powdercoating.org) executive director. “There has been a low barrier to entry for powder producers. As a result, while there were 25 producers in the 1980s, today there are around 70, despite some consolidation.”

The average powder selling price began dropping year over year, mostly due to competition, starting in 2000 and continuing until 2005–06. “At that point there began a huge influx of raw material increases, which drove powder costs higher,” Houston says. “In 2008 there began to be some flattening, especially because of lower petroleum costs. I expect we will see pricing down potentially as high as 1–2% in 2010, even further undervaluing powder coating technology in the industrial marketplace.”

Despite the recession, observes Brad Devine, sales and marketing manager, Ferro Corp., Industrial Coatings Group, Porcelain Enamel Division (Cleveland, OH, U.S.; www.ferro.com), “Raw materials used for porcelain enamel coating products increased over 20% in late 2008 and early 2009 (excluding cobalt and nickel) and have since leveled off in the second half of 2009. In spite of actively purchasing raw materials on a worldwide basis, Ferro has experienced significant cost increases since late 2008 for borate, phosphate, potassium, soda, fluorine, zircon, manganese, nitrates, nitrites, silica, feldspar, and many other raw materials critical to the production of porcelain enamel coatings. Several of these raw materials increased 100% or more. The cost benefit many industries experienced during 2009 from the decreased cost of oil-based products (paint, plastic, etc.) has not significantly affected porcelain enamel costs as they are mainly produced from inorganic raw materials not closely tied to the price of oil.

“On a positive note,” he adds, “the costs for important components of porcelain enamel, cobalt and nickel, have decreased significantly this year, mainly due to the poor economic conditions. The cost savings were immediately passed along to customers via the monthly metals surcharge that has been in effect for several years.

“We are currently projecting an overall raw material increase of 8–12% for 2010,” he predicts. “As usual, metals pricing can be highly volatile depending on economic conditions and other market factors. By controlling internal costs, Ferro was able to delay a planned September 1 price increase, but I expect a 4–8% price increase to be necessary by the first quarter of 2010 due to these raw material cost increases. Nickel and cobalt metal surcharges already in effect will continue as long as these markets remain highly volatile. We continue to control our own internal costs by investing in process and equipment improvements to increase productivity.”

Indeed, internal costs and productivity have also been a focus with appliance producers. For instance, besides Electrolux, mentioned above, Whirlpool Corp. (Benton Harbor, MI, U.S.) notes that its 8% third-quarter profit improvement compared with third quarter 2008 was impacted by “cost reduction and productivity initiatives.” In an environment in which commodity prices appear to be volatile and unpredictable, it may be a very smart move to continue to keep focused on the costs you can control.

 

Waring recently switched to Eastman’s Tritan copolyester for its commercial-grade blenders because of its toughness, dishwasher durability, and clarity. The commercial blenders have 48- or 64-oz blender jars made with the copolyester material.

Stainless steel has found a strong market in kitchen appliances. Stainless steels are distinguished from carbon steel by their content of chromium and, in certain cases, nickel. Adding chromium to carbon steel makes it more resistant to rust and stain, and adding nickel to chromium stainless steel enhances the mechanical properties of the steel. Photo taken at the Ulgine ALZ production site in Genk, Belgium. Photo courtesy of ArcelorMittal (Luxembourg).

SABIC Innovative Plastics (Pittsfield, MA, U.S.) has launched Lexan polycarbonate HFD specialty copolymer resins, a material innovation that gives customers high melt flow without traditional decreases in toughness; and improved ductility without impacting melt flow. Plastics suppliers continue to develop new properties with the hope of expanding their materials’ markets.

 

 

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