Outlook Hints at Tougher 2008
By Tim Triplett, Editor-in-Chief
Service center executives were clearly concerned about the economy and its effect on demand for their products when surveyed by Metal Center News in October and November—and the economic news has gotten even worse since then. Thus the decline in optimism in this year’s MCN Outlook cover story might be even steeper were the survey taken today.
Since MCN’s poll, the nation’s unemployment rate crept up to 5 percent on weak December hiring. The price of oil topped $100 a barrel, an increase of nearly 75 percent vs. a year ago, accelerating concerns about inflation. The Institute for Supply Management reported that economic activity in the manufacturing sector, which had been surprisingly resilient, declined in December as New Orders, Production and Employment were all below the break-even mark. Industries close to the troubled housing sector appear to be struggling more than others. Some economists now place the risk of recession in 2008 at greater than 50 percent.
With that in mind, let’s hope that respondents to this year’s survey—which paints a weakening but certainly not disastrous picture—were not that far off in their forecast for the metals market in the coming year.
Overall, MCN’s 2008 Optimism Index of 4.3 shows about a 10 percent erosion in industry sentiment since its peak three years ago. This somewhat more bearish attitude is reflected in service center executives’ current forecasts for sales, profits and capital spending compared to last year.
Though industry shipments of both steel and aluminum declined in 2007, the majority of respondents to MCN’s survey predict their sales will increase in the coming year, by an average of 5.8 percent. This is down from an average sales-growth forecast of 7.3 percent by service center executives last year.
The service center industry has experienced several years of healthy profitability and is rooting for more of the same. Half of respondents expect profit levels to increase in 2008 by an average of 4.0 percent. Last year’s forecast for industry profitability was nearly the same at 4.1 percent.
Concerns about the economy and metals demand appear to be influencing service centers’ capital spending plans, especially at smaller companies. According to MCN’s findings, the average 2008 capital budget among small companies totals $66,300, about 11.0 percent less than last year. At midsize companies, the average capital budget is $243,300, 4.4 percent less. Large service centers, with $1.68 million in the average budget, plan to spend 4.5 percent less on capital upgrades this year.
Though metals prices remain at high levels compared with historical averages, service centers are wishing for more stable or growing price levels in the coming year. Executives forecast an increase in steel prices in 2008 averaging 4.4 percent, an uptick in aluminum prices of 2.2 percent and a similarly modest increase for copper at 2.7 percent.
Given the margin of error in MCN’s data, it’s not so much the exact figures that are important, but the trends they suggest. It looks like most in the service center industry are hoping that stabilizing metals prices and some belt tightening will get them through a tough 2008.
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