The appliance market has all the fixin’s for another satisfying year. The recipe for success: a healthy economy, surprisingly strong new-home construction, nascent hurricane rebuilding, energy-efficient machine designs and consumers willing to pay for aesthetics as well as functionality.

By Myra Pinkham,
Contributing Editor

Sidebars and Tables:

• U.S. Major Home Appliance Shipments

Despite fears of weakening housing starts and creeping interest rates, most experts expect demand for major appliances to remain strong through 2006—good news for metals suppliers. Indeed, high energy prices are compelling some consumers to buy new, more energy efficient appliances even before the old ones break down.

“Demand for appliances held up quite well all through last year,” says industry consultant Evan W. Barrington, vice president of the Stevenson Co., Louisville, Ky. Sales of major kitchen and laundry machines grew 2.4 percent in 2005 following an 8.3 percent increase in 2004.

Though it appears the growth rate slowed, those figures are misleading because a price increase announced for January 2005 pulled some appliance sales into 2004. “Adjusting for that, there continues to be an upward trend,” he says.

And that upward trend is likely to continue through this year, according to projections by the Washington, D.C.-based Assoc-iation of Home Appliance Manufacturers. AHAM predicts that industry shipments of all major home appliances will reach 81.9 million units in 2006, up 2.5 percent from the 79.9 million units shipped in 2005. Shipments of the AHAM 6 appliances (washers, dryers, dishwashers, refrigerators, and free-standing and built-in ranges) are forecast to increase by 2.1 percent this year, to 47.6 million units (see chart).

While admitting it is too early to tell just how well steel sales to appliance makers will fare this year, the first quarter was on pace with 2005, says Katie Benchina, marketing manager at Thyssen-Krupp Stainless North America’s Chicago-based Mexinox USA unit. Mexinox saw about a 15 percent increase of sales into the appliance market in 2005.

2004 and 2005 were very good years for the appliance industry, says Kim Freeman, spokeswoman for GE Consumer and Industrial, Louisville, Ky., attributing this success to strong new housing starts and low interest rates. Obviously, new homes require new appliances.

According to the U.S. Commerce Department, sales of new single-family homes hit a record 1.282 million in 2005, up 6.6 percent from the previous annual record of 1.203 million set in 2004.

David Pressly, president of the National Association of Home Builders, expects the pace of new-home construction to slow this year. “Builders are quite realistic about the future of the market and expect to see an easing of sales in 2006,” he says.

Figures for January housing starts surprised even the homebuilders, however, increasing 12.8 percent from December 2005 and 2.8 percent from a year earlier, to an annualized rate of 1.819 million homes. January’s surge was mainly due to unusually warm winter weather, which allowed crews to continue working on more homes, says David Seiders, NAHB’s chief economist. “Market fundamentals suggest that this pace of activity will be hard to sustain,” he adds. “NAHB’s survey of single-family builders points toward some cooling in the coming months, largely because of affordability conditions.”

Sales of both new and existing homes have set records for five consecutive years, despite continual predictions of an inevitable slowdown, says Johnny Johnson, brand manager for Carrier Corp. in Indianapolis. But even if housing does finally slow this year, the appliance industry will still benefit from maintenance and replacement demand, Johnson says.

Rebuilding of the Gulf Coast damaged by last summer’s hurricanes should give a major boost to appliance sales—though how much, and when, is as unpredictable as the storms, say industry executives. Johnson reports that he has started to see the front end of new demand in the region, which should pick up as the year progresses.

Demand for low-end appliances doubled in the region during January, says Benchina of Mexinox, who expects more activity across the board in March and April.

The bulk of this demand, however, could still be six months to a year down the road, says Rick Blume, national sales and marketing manager for Nucor Corp., Charlotte, N.C. “People are still sorting out the damage.”

Meanwhile, appliance marketers are taking note of a new willingness by consumers to swap old appliances that are still working for the newest designs and technologies. “Consumers are taking advantage of the new appliances available,” says Stephen Duthie, spokesman for Whirlpool Corp. in Benton Harbor, Mich. “This is largely because they are more energy efficient, but also because of the styling, colors and other unique solutions.” Whirlpool, for example, has introduced a washing machine that releases a fabric freshener to ease wrinkles. The company also recently launched “a breakout strategy” to promote more rich colors, notably in its KitchenAid line.

“What you are seeing is more uniformity in both the appliance look and feel. Customers prefer one brand and all in one color. We are selling a lot of appliance suites for both new and renovated homes,” Duthie says.

Stainless steel has been a popular choice for providing a uniform, high-end finish to appliances, and that’s not likely to change anytime soon. “At some point people will get tired of stainless, but there are no signs of that happening yet,” says Barrington. “In fact, there has been some migration of stainless from the high end to more mainstream models.”

It is unlikely that stainless appliances will ever migrate to the low end of the market because stainless steel is just too expensive, adds Barrington. Finishes that bring the look of stainless steel to the kitchen, but at a lower cost, are growing in use. Some mimic stainless by placing a polymer or a laminate onto galvanized steel. One example, Freeman says, is GE’s CleanSteel, which not only looks like stainless, but does not show fingerprints and will hold magnets.

Some stainless steels, like AL Clean made by Allegheny Technologies Co. in Pittsburgh, virtually eliminate fingerprint smudges through the addition of an organic coating. Such stainless products have been used by European appliance makers, but haven’t taken off in the United States, at least not yet, says Jamie Bird, vice president of marketing for Richardson, Texas-based AM Appliance Group, which makes Asko brand dishwashers and laundry equipment.

Stainless steel with an embossed finish helps hide fingerprints, Benchina adds. ThyssenKrupp makes several embossed finishes, including one with
a linen look and another with a diamond pattern.

Besides its aesthetics, there are a number of advantages to using real stainless for appliance finishes, particularly its hygienic properties. “It is completely nonporous so it does not harbor germs. It is also more easily cleaned and is resistant to corrosion, even when scratched,” Benchina notes. With stainless prices stabilizing of late, more manufacturers are going back to “authentic stainless” rather than using some look-alike.

Stainless is finding more applications in laundry equipment, Bird adds, as there is a move to bring the laundry room closer to the living area. “That includes styles with stainless fronts or titanium painted to look like stainless.”
Inside washing machines and dishwashers, stainless adds durability and energy efficiency. Barrington notes that at the high end of the market, more appliances makers are using stainless parts, such as washer drums. In fact, about 17 percent of dishwashers now use stainless tubs, he says.

The high cost of energy is a huge driver of appliance demand. “Anything to reduce energy consumption gets people’s attention,” says John Zemon, stainless product manager for Atlas Steel Products Co. in Twinsburg, Ohio. This is particularly true for such energy-intensive appliances as furnaces and clothes dryers.

The Barton-Domenici Energy Policy Act of 2005 offers incentives that promote the use of more efficient appliances, says AHAM President Joseph McGuire. This legislation will increase the market penetration of products meeting and exceeding the act’s Energy Star criteria.

The act, which went into effect in January, requires, for example, that the energy efficiency of all air conditioning and heating pumps sold must be a minimum of 13 SEER (seasonal energy efficiency ratio), a 30 percent increase over the 10 SEER requirement that had been in place since 1992, notes Carrier’s Johnson. “Considering that approximately 50 percent of all energy used in a home is spent on heating and cooling, this will translate into significant energy savings.”

Front-loaded washing machines have also sparked consumer interest because of their efficient use of energy and water. While 98 percent of homes still have top-loaded units, about 15 percent of new washing machine purchases are now front-loaded units, says Bird. “Top-loaded machines use 40 to 50 gallons of water per cycle and largely use inefficient water heaters. Front-loaded washers use less than 10 gallons of water per cycle and use an internal water heater,” he explains. In addition, Duthie notes, the front-loaded machines have a higher capacity since they aren’t encumbered by an agitator. “That means fewer loads of wash, which also translates to water and electricity savings.”

Despite fairly strong consumer demand, the profit margins of appliance manufacturers continue to be squeezed by increased costs—including the cost of metals—and pressure by retailers to keep pricing down. “We are experiencing a lot of price pressure with the increased cost of such commodities as steel, copper, aluminum and plastics,” says Jane Deming, manager of marketing services for Friedrich Air Conditioning Co., San Antonio, Texas.

It is because of these rising commodity prices that the appliance industry—for the first time in a long time— increased prices last year. “We have worked hard to mitigate the impact of rising steel and other raw material costs on consumers by working aggressively to reduce operating costs within our business,” says GE’s Freeman. “However, despite our best efforts, we have had to increase prices to help offset the continuing escalation in the cost of raw materials.”

“In general, the price increase stuck, although no one got as much as they asked for,” Barrington says. “Pricing pressure now is not as great as it was this time last year, but it continues to be a concern.”

Realizing that customers are being squeezed by commodity price volatility, some stainless steel suppliers are encouraging appliance producers to consider switching to less volatile grades of stainless steel—grades that have little or no nickel.

Customers could save significantly on raw material surcharges by switching to a lower nickel grade, Zemon says. In February, the surcharge on 304 stainless, which is 8 percent nickel, was 51 cents per pound. In comparison, the surcharge on 201 stainless, which is 3.5 percent nickel, was 23 cents. Alloy 430, which has no nickel, carried a surcharge of just 12 cents.

Allegheny has really been pushing the switch to 201 stainless, says spokesman Dan Greenfield. It is actually stronger than 304 stainless, with nearly the corrosion resistance in most environments and similar bending, forming and drawing performance. Mexinox’s Benchina maintains that for most residential appliance applications where there is little molding or extreme forming, it is probably fine to use 430 stainless. “At least 35 percent of North American appliance manufacturers are using 430, and I see that conversion trend continuing,” she says, though appliance manufacturers are very cautious about switching materials, so the transition is likely to be a slow one.