Forecast '14...with a Healthy Hint of Skepticism
By Dan Markham, Senior Editor
Though most major end markets for metals are projected to improve in 2013, economists expect only tepid GDP growth, puzzling industry watcher Vince Pappalardo.
As a market analyst, Vince Pappalardo keeps a close eye on all the prognostications for the metals industry and those for the economy at large. Right now, he said, the two don’t appear to add up.
Pappalardo, managing director of the metals industry group for Chicago financial advisory firm Stout Risius Ross, delivered his forecasts for five key service center business segments during December's Association of Steel Distributors regional meeting in Chicago. The consensus outlook for automotive, construction, energy, heavy equipment and aerospace is uniformly positive, he said, ranging from merely improving to gangbusters. Yet, the economic growth for the economy as a whole over the next two years will struggle to hit 3.0 percent. In other words, nothing extraordinary, historically speaking.
"This is where I step back. If the economy is only going to grow at 3 percent, how are these other segments going to grow so well?" Pappalardo asked. "There’s a huge disconnect. Some of these end market projections seem awfully rosy to me."
With that caveat, Pappalardo dug into his own forecasts for the various end markets, leading with automotive. Vehicle production plummeted during the 2009 downturn, but began growing again in 2011 and has nearly returned to pre-recession levels of 15-16 million units.
One reason is a shift in the trade balance that’s expected to accelerate over the next six years. For years, North American vehicle sales exceeded domestic production; imports were needed to make up the difference. Starting in 2010, the U.S. became a net exporter. "In 2020, they expect two million vehicles to be exported out of the United States," Pappalardo said. Europe and South America are the most likely destinations. But for these ambitious export figures to materialize, Pappalardo said, the dollar will have to stay relatively weak, which is not necessarily healthy for the economy as a whole.
Also positive for the domestic supply chain is the trend toward local sourcing of materials. "New domestic" automakers such as Toyota and Honda originally built assembly plants in the U.S., but continued to source parts from overseas. That's no longer the case, representing a major opportunity for metals suppliers. "They're not just going to assemble here, they're going to produce here. They've got parts coming back that were outsourced to Brazil and Venezuela," he said.
One negative for steel distributors is the increased use of aluminum parts by such major carmakers as BMW, GM and Ford to make vehicles lighter and more fuel efficient. Notably, Ford plans to release its popular F-150 pickup with an aluminum skin. "That's a major change. They will take over some market share," Pappalardo said.
Increased exports are expected to boost the various heavy equipment markets, as well, he continued. In the developing world, countries such as Brazil, India and China are not just growing their economies, but overhauling the way they farm their land. Thus, world demand for agricultural equipment is forecast to increase 6.8 percent annually through 2016.
Moreover, domestic manufacturers of ag and other heavy equipment have found they are now so reliant on value-added services from their supply base that shipping finished goods overseas, rather than producing them there, makes more financial sense.
North America's most promising end-use market is the energy segment, Pappalardo said. For the steel supply chain, increased domestic oil and gas production presents opportunities on several fronts--as a source of a key raw material, as a destination for pipe and tube products, and as a customer base for many other related steel applications.
For North America to become a net exporter of oil and gas products, as expected, it will require a major investment in the infrastructure to convert natural gas into a liquefied product that can be shipped overseas. Such an investment would be a boon to the domestic steel industry, he noted.
Construction continues to lag the recovery. Building activity in both the residential and nonresidential segments has not matched the financial activity around them. "The stock prices have come back, but there isn't a lot of construction going on. People may trading on the future, but there’s a bit of a disconnect there, too."
For homebuilding and commercial construction, it's not a question of if the market will take off, but when, he said. Housing starts are up significantly, albeit from low levels, and architectural billings have finally shown some consistent month-to-month gains. So, since commercial typically follows residential, it is logical to expect a jump in nonresidential construction in the next 6-9 months.
Still, Pappalardo expressed skepticism over the most enthusiastic projections for some nonresidential segments. Such double-digit growth forecasts are truly inconsistent with more tempered projections for GDP growth, he said.
Although it consumes more nonferrous than ferrous metals, the robust aerospace sector also holds promise for steel producers and distributors. While the defense portion of the business will lag, the commercial side will keep growing, with airplane builders following their automotive counterparts in a continued quest for more efficient machines, he said.
Even if all of these industries experience the hoped-for growth, that doesn’t mean steel distributors can expect to ride their coattails to profitability. Service centers must become better at identifying not just the right markets, but the right customers, Pappalardo said.
"End markets are important, but you have to remember your customer is more important. Even in markets where it looks like there's a lot of growth, you'll still find customers going bankrupt. There are winners and losers in every industry," he said.