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MCN Outlook 2013 Survey Post-Election Pessimism Colors Forecast By Tim Triplett, Editor-in-Chief Results from the latest Metal Center News Outlook Survey show that recent events on the economic and political fronts have taken a toll on industry attitudes. Fully 70 percent of respondents said the results of the election made them feel more pessimistic about the economy, while only 4 percent felt more optimistic. Twenty-six percent felt about the same regarding the economy’s prospects post-election. That attitude obviously affected MCN’s 2013 Optimism Index, which dipped to a reading of 4.0 from last year’s 4.5. Since hitting a low of 3.5 in 2009, the index had been on the upswing, registering 4.1 in 2010, 4.3 in 2011 and 4.5 in 2012. To calculate the index, MCN asks respondents to rate their prospects for the coming year on a 1-to-6 scale, with 1, 2 and 3 on the pessimistic half and 4, 5 and 6 on the optimistic half. In the latest survey, only 66 percent of respondents place themselves on the optimistic half of the scale, down from the 89 percent who characterized themselves as optimists last year. Changes in optimism levels among industry decision-makers tend to correlate to their forecasts for growth, purchasing, compensation and capital spending. The more pessimistic they feel, the less ambitious their plans. The lingering economic uncertainty appears to have dampened service centers’ forecasts for sales in 2013. Only about 65 percent predict an increase. Twenty-five percent expect sales levels to remain about the same, while 10 percent forecast declines. Averaging all the responses yields a forecast for about a 4 percent gain in service center sales this year. That’s down from last year’s 6.5 percent prediction. Asked to predict the direction of steel prices in 2013, about 50 percent of respondents expect prices to increase, while 10 percent expect prices to decline and 40 percent expect them to remain about the same. Averaging all the responses yields a forecast for about a 3 percent gain in steel prices this year. For comparison, in last year’s survey, service center executives forecast a 5.8 percent increase in the price of steel in 2012. In actuality, the price of hot-band began the year around $750 a ton and finished the year below $650 a ton. A few basic conclusions can be drawn from these figures: This year’s more modest forecast probably reflects the higher degree of pessimism in the marketplace. Metals prices are highly volatile and highly unpredictable, and service center executives are in no position to predict them. As middlemen, they have no pricing power and are at the mercy of larger forces both upstream and downstream. In the aluminum market, 56 percent of respondents expect an increase in prices and 6 percent a decrease, while 38 percent see them staying about the same. In the copper market, 50 percent forecast an increase in prices, while just 10 percent expect a decrease. Forty percent see little change. (Note, the sample size was too small to calculate the degree of change.) To buffer themselves from the volatility of metals pricing, service centers continue to increase their value-added service offerings. Revenues from such processing services as sawing, slitting, laser cutting, and even welding and parts fabrication, are more manageable and predictable. How much do service centers add value? About 30 percent of respondents consider themselves strictly distributors; another 30 percent offer basic value-added services such as sawing and shearing. But nearly one-third offer extensive processing, from first-step part production to full-on fabrication. The typical/median service center/processor responding to this survey derives 20 percent of his revenues from the value-added side of the business. The trend toward more value-added processing by distributors has spurred capital spending in the past two decades, but concerns about the economy may limit spending next year. Only 28 percent plan to spend more in 2013 than they did in 2012, while 34 percent plan to spend about the same. About 38 percent of respondents plan to spend less on new equipment this year. The typical/median capital budget is in the $100,000-$250,000 range. Hopefully, the pessimistic sentiment that is coloring attitudes toward 2013 will improve once Congress has safely steered the economy away from the fiscal cliff.