Companies are focusing on measures to improve internal operations because of the continued uncertainty in global markets
May 2013 - Numbers released in mid-April out of China epitomized the global market’s complexity. On April 15, Beijing announced the Chinese economy grew by 7.7 percent in the first quarter, which was lower than many analysts’ predictions and slower than the 7.8 percent growth in 2012.
China’s previously staggering growth likely will be softer in the future, “which should place some downward pressure on materials levels,” says Aaron Rutstein, VP/risk analyst manager at Euler Hermes North America, a provider of trade credit insurance. “However, the Chinese government has a vested interest in maintaining employment, so oversupply will remain an issue. Most steel that is produced in China is consumed in China; however, some may find its way here and put pressure on the domestic market. As China consumes the majority of the world’s seaborne coal, the primary effect of a weaker China will be lower-cost raw materials.”
In other parts of the globe, Europe continues to struggle. In 2012, crude steel production in the European Union was 168 million metric tons, a 5 percent decrease from 2011, according to statistics from Eurofer, which represents 100 percent of the steel production in the European Union. Steel consumption in the region also decreased as a result of “weakening activity in the steel-using industries in the EU,” noted Eurofer in a report. “These negative trends look set to remain in force in 2013; only in the final quarter of the year is consumption seen stabilizing at the year-earlier level.”
“Persistent weakness in Europe is resulting in supply in search of a market, which will threaten the domestic markets if imports become more robust,” Rutstein says. “If the euro gets weaker, it becomes more attractive to U.S. companies to source materials from overseas.”
“The eurozone has an overwhelming challenge ahead of it in dealing with significant overcapacity and a generally low level of manufacturing activity in their ‘home markets,’” says a spokesperson from SSAB, a producer of steel, including high-strength grades, with headquarters in Stockholm. “This will have an impact across the globe as both issues play themselves out over the next year or more. Many forecasts project it will take years to adjust and correct to the new market model in Europe.”
Executives at metals companies are approaching decisions with a great deal of forethought because of the lack of robust economic growth. “While there have been signs of market recovery this year, there also has been volatility and a lack of clarity that makes a cautious approach seem to be a wise choice,” says the spokesperson from SSAB. “The main concern is the volatility in economic activity and, in particular, the pricing of commodities that is often a general indicator of manufacturing activity.”
Self-improvement
Facing volatility head on means metals companies may see lower prices and lower profits. “They’re going to have to focus on operational efficiencies and taking costs out of their business,” Rutstein says. “Metals customers are also feeling the effects of sluggish growth, and the negative impact on profitability means credit quality may be deteriorating,” he continues. “Thus, metals companies need to be more aware of the potential risks within their client base. This means protecting your business against nonpayment of your debts or accounts receivable through a product like trade credit insurance.”
PwC’s 16th Annual Global CEO Survey pointed out that CEOs are “targeting pockets of opportunity, concentrating on the customer and improving operational effectiveness.” Seventy percent of the surveyed metals CEOs said they would make changes to increase capital investment this year, and 72 percent said there will be changes at their companies over the next 12 months with regard to M&A, joint ventures or strategic alliances.
“The most prevalent thing we’ve seen happen over the past year [among metals companies] is what I would describe as a look inward,” says PwC’s U.S. metals industry leader Sean Hoover, who is based in Pittsburgh. “Our metals clients are investing in and trying to improve operational effectiveness. With the softness in pricing for both aluminum and steel, they’re trying to focus on what they can control, which is the cost side of the equation and trying to best position themselves for when the markets finally end up rebounding.”
Hoover says companies also are focusing on broadening their customer base, and although “there’s not a whole lot in the way of traditional transactions, I think we’re expecting to see a little bit more around other types of arrangements, like supply agreements with mining companies, alliances with power companies and joint venture activity.”
According to the PwC survey, approximately one-third of metals CEOs are worried about supply chain disruptions, and sector CEOs are working closely with partners and diversifying their supply chains. Eighty-six percent of metals CEOs said supply chain partners are influencing their business strategy. Many of them plan to increase their efforts to engage the value chain. In addition, 58 percent of metals CEOs said they’re diversifying their supply chain and working with more partners across geographies.
“One consistent theme across aluminum and steel is a focus on new product development and partnering with customers to develop the types of products that the customers are demanding,” Hoover says. “There’s a lot of push for lighter-weight, higher-strength and more fuel-efficient metals, and we see a lot of R&D going in to new types of alloys to meet that customer demand.”
“The most effective supply chain eliminates redundant or inefficient links while delivering maximum value and the highest level of service to our customers in the most efficient way,” adds the spokesperson from SSAB. “We look to partner with others who add value beyond what we can do as a supplier, and we look to partner with market leaders so that we are supplying the best possible value to the customer. We strengthen those relationships by pursuing continuous improvement and a culture of excellence in our own business culture.”
Because of this focus on investment and improving internal operations, steel and other metals companies will be ready to take advantage of an increase in demand. They already have an in-demand product. “Steel has a great story to tell,” says the SSAB spokesperson. “The story is focused around technology, innovation and sustainability. Steel is an eco-friendly solution to many manufacturing and design challenges. Because of its great versatility and the recyclable nature of the product, steel is tomorrow’s answer to the future’s problems.” MM
SECURING INPUTS
The cost of energy and raw materials is a big concern for CEOs in the metals industry, according to PwC’s 16th Annual Global CEO Survey. The results showed 84 percent of metals CEOs see the cost of energy and raw materials as a potential problem, compared to just 52 percent of the total surveyed companies. The report found that more than two-fifths of metals CEOs think securing natural resources should be a government priority, and almost as many say they plan to increase their own investments in this area.
“With respect to raw materials, the cost and availability of scrap, iron ore and ‘iron unit substitutes’ will always remain a top priority for steel producers,” notes a spokesperson from SSAB, Stockholm.
“Steel producers are looking to enhance backward integration to gain control of raw materials supplies, and they are also taking advantage of new technologies to help contain costs, such as direct reduced iron,” says Aaron Rutstein, VP/risk analyst manager at Euler Hermes North America. “However, most mills lack the resources to take on large capital expenditures given the weakness in their balance sheets and ongoing concerns about economic growth.”
Sean Hoover, U.S. metals industry leader at PwC, says although M&A activity is down, a lot of companies still have a vertical integration strategy, “so they’re always on the lookout for an opportunity to secure their raw materials. We also see companies attacking it through other means, such as alliances with power companies and joint ventures to construct power generation facilities.”
“Producers who get their energy from natural gas companies who are more oriented toward the spot market could benefit,” Rutstein says. “However, companies who are locked up in longer-term deals will continue to see problems due to higher-than-average energy costs. In the near-term, Euler Hermes expects the downward trend to continue in scrap and ore through the end of the summer. We expect to see some relief but not enough to offset some of the operational challenges that metals companies are currently facing.”
DIGITAL MANUFACTURING'S GROWTH POTENTIAL
The emerging digital manufacturing market has “immense potential” for growth during the next decade, according to Frost & Sullivan. The market earned revenues of $704.2 million in 2012 and is estimated to reach $928 million in 2016.
According to Siemens, a provider of product lifecycle management software, “digital manufacturing is the use of an integrated, computer-based system comprised of simulation, 3-D visualization, analytics and various collaboration tools to create product and manufacturing process definitions simultaneously.”
Karthik Sundaram, a senior research analyst for Frost & Sullivan Industrial Automation and Process Control, says the global product lifecycle management market, which includes an array of solutions under authoring and analysis tools and collaborative product definitions management, has been growing at a rapid pace in the last few years.
“At Frost & Sullivan, our focus on PLM began with a global research exercise in 2011,” Sundaram says. “In the course of this research, we realized that the dynamics of the global PLM landscape were changing rapidly and a new product area was gaining prominence. Digital manufacturing, an offshoot under the PDM segment, was this new area that was increasingly becoming an entity in itself. This led us to pursue global digital manufacturing research in 2012, enabling us to gain significant insights on the future of this nascent market.”
Some of the end-use markets that benefit from digital manufacturing include automotive and transportation, aerospace and defense, machinery and industrial, high-tech and electronics, and consumer packaged goods. Digital manufacturing applications can compress time to market, promote new product innovation, decrease operational expenditures, establish lean and flexible manufacturing, and facilitate integration between multiple enterprise disciplines.
Developed economies and large enterprises are driving most of the growth in digital manufacturing; however, Sundaram says, “eventually, we believe digital manufacturing will lose its luxury tag and reinvent itself from an advanced solution into one that can be adopted by all sections of the end-user community. Unfortunately, in the current context, digital manufacturing is conceived to be a solution tailor-made for large enterprises with high production output.”
Companies that will benefit the most from investing in digital manufacturing are those that have a high rate of innovation in their industry, collect intelligence from their supply chain to create good products and spend a significant amount of capital on manufacturing process planning. Sundaram says it is imperative for vendors to conceive product strategies that can match the needs of small- and medium-sized businesses, both in terms of cost and application.
“End users in the small to medium segments and emerging markets have yet to fully comprehend the benefits that can be accrued from a digital manufacturing investment,” Sundaram says. “The future of this market rests squarely on emerging markets and small and medium-end businesses. If vendors can tap the full potential of these segments, we are well on our way to see the dawn of a new product that will change the nature of industrial operation that we see today.”
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