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Market Outlook: Appliances

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Appliance Metals: a Bright Light in the Darkness By Dan Markham, Senior Editor Demand for appliances—and the metals used to make them—is getting a boost from increasing new-home starts, robust replacement and innovative new products. While weak pricing and declining demand is an issue for many metals sectors, those serving North America’s appliance manufacturers are relatively free of such worries. The market for refrigerators, laundry and cooking devices has been on the uptick for the past several years, with no reason to believe 2016 will be any different. “We’re still underneath the 30-year growth rate trend in the United States, so we still have pent-up demand,” said Whirlpool Chairman Jeff Fettig during his company’s year-end conference call. “All the drivers of demand—replacement, new housing, existing home sales and discretionary spending—are going in the right direction.” Whirlpool, the world’s largest appliance manufacturer, reported a 5 percent increase in its net sales in 2015, consistent with the rest of the industry. The Benton Harbor, Mich.-based company forecasts growth of 5 percent for the foreseeable future. “I would still refer to the U.S. as in the midpoint of a long-term recovery cycle,” said Marc Bitzer, president and CEO of Whirlpool. In 2015, U.S. appliance shipments jumped by 8.1 percent to 72.5 million units, reports the Association of Home Appliance Manufacturers. The increases were across the board. Shipments of AHAM 6 products, which include ranges, clothes washers and dryers, refrigerators, freezers and dishwashers, climbed 10.3 percent. The increase has pushed the appliance market close to its peak years of the mid-2000s. Total AHAM 6 shipments reached 47 million units in 2006. “We’re still not where we were in the record years, but this is the highest we’ve been since then. There’s a lot of exciting things happening in the appliance space,” says Jill Notini, vice president of communications and marketing for Washington-based AHAM. All signs point to further gains in 2016. The most noteworthy is the upward trajectory in new home starts, always a leading indicator for appliance sales. In 2015, the U.S. saw 1.1 million new-home starts, a 10.7 percent improvement from 2014, according to data from the National Association of Home Builders. The housing market remains well below the peak of 2005 when more than 2.0 million new homes were constructed, leaving plenty of room for continued growth. NAHB Chief Economist David Crowe forecasts housing starts will increase to 1.25 million in 2016. Most of that growth will come on the single-family side; multifamily housing projects are already well above the historical norm of 340,000 starts per year. NAHB forecasts 400,000 multifamily projects in 2016, which is also good for home appliance sales. “We still have strong demand for millennials to move into rentals, but we’re starting to see the oldest millennials ready to buy a house. We’re counting on a few more of those,” Crowe says. Still, the major demographic influx of first-time buyers is not yet ready to hit the market, leaving further room for growth in the coming years. The lending environment is favorable, despite the recent hike in interest rates. “The real issue around mortgages is not how much they cost, but if you qualify,” Crowe says. “There’s a little loosening going on. Not loose like we saw in the boom period, but there’s more willingness by lenders to move up the line that separates qualifying from non-qualifying.” Another significant marker for the market is the time elapsed since the last spike. “We had a surge in industry shipments from about 2004 to 2007, and these units are now getting to be 10 years old or so, which is nearing time for replacement. I expect growth to slow modestly over the coming years, but as long as housing continues to expand the appliance market should benefit,” says Evan Barrington, vice president of The Stevenson Co., a market research firm in Louisville, Ky. Barrington forecasts growth of 4 percent for the U.S. appliance market this year. The picture is not as rosy in Canada, he says, where the economy is taking a beating from the record low oil and gas prices. Appliance shipments declined 6.2 percent in 2015. On the other hand, Canadian housing starts have held up fairly well. Generally speaking, the U.S. market is the global appliance industry’s best hope. Whirlpool’s forecasts call for flat to minimal growth in Europe, Africa, the Middle East and Asia, and significant declines in Latin America. Metals distributors who sell to appliance makers and their parts suppliers offer similarly upbeat views of the domestic market. “Our business has definitely picked up. We’ve seen a constant increase in what we see as appliance orders: ranges, ovens, water heaters, refrigeration and air conditioners,” says Jeff Terrell, national sales manager for Pacesetter Steel Service, Kennesaw, Ga. In fact, air conditioners and humidifiers saw big growth in shipments in 2015, according to AHAM. “Activity in the appliance sector remains strong,” agrees Dave Yundt, vice president and director of stainless products for Main Steel Polishing Co., Elk Grove, Ill. “It was a good year in 2015, and everything we’re seeing says the same about 2016. Our customers feel volumes will remain pretty strong, with hopefully some improvement.” It’s not just sales and shipments that are cause for optimism. A few other trends in material usage bode well for the metals industry. Stainless steel remains the chief beneficiary of a strong appliance market, and it couldn’t come at a better time. “I don’t think there’s any question the appliance market has been a bright spot for stainless producers over the last several years, with the growth and consistency of supply,” Yundt says. Consumers are still keen on the material’s visual appearance, but manufacturers are also finding more ways to take advantage of its other attributes. “Stainless steel usage in appliance continues to grow as consumers recognize not only the aesthetic appeal of stainless, but also its durability, corrosion resistance and ability to quickly and easily clean—all factors that continue to drive consumer preference of stainless steel,” says Brian Schultz, director of strategic accounts for Outokumpu Stainless, Bannockburn, Ill. Use of stainless in dishwasher tubs has grown, Notini says, as manufacturers take advantage of its corrosion-resistance and other features. It can now be found in 43 percent of the tubs of all new dishwasher shipments, taking market share from porcelain, ceramics and other nonmetallic products. “Stainless continues to hold and maybe grow in popularity, and we’re not seeing anything that suggests it’s going to change,” Yundt says. “It’s for functional reasons that it’s going in the interiors. That’s going to continue to be a positive for the bright anneal market.” Metal usage in appliances will also grow as the manufacturers introduce new technology and more high-tech features, including connectivity between appliances and the smart grid or Internet. “That’s not a future trend. It’s happening now,” Notini says. Such innovations add to demand beyond the traditional drivers of new-home purchases, remodeling and replacement. “The majority of appliances are purchased as replacements, under pressure, either because the old appliance has died or is too costly to repair. More and more we are seeing consumers upgrade to a more innovative or energy-efficient appliance before their old appliance dies,” she says. Technology enhancements are not the only drivers. Many consumers are looking for appliances that are simply larger than previous models. “Bigger is better,” says Tony Dowling, vice president of sales and marketing for Elmira Stove Works, a manufacturer of kitchen appliances based in Elmira, Ontario. “We’re seeing more of the six-burner ranges, 36 inches and beyond, as opposed to the traditional 30-inch boxes. The same with refrigerators.” Larger units, of course, require more metal to make. Elmira Stove Works is also part of another fashion trend: the desire for colorful appliances to replace the white, black or stainless models in vogue in recent years. Harking back to the designs from the 1950s and earlier, companies such as Elmira and Big Chill specialize in stoves and refrigerators in a range of bright colors. Even the larger, mainstream manufacturers are offering more color options. That’s good news for suppliers of coil coated steels. “We’re in the color business, either antique rich colors or pastel 1950s kind of appliances. Even the high-end manufacturers are exploring, if not pushing, colors. It appeals to a segment of the market that doesn’t want what everyone else has,” Dowling says. While appliance makers are benefitting from the current low price for most metal inputs, those costs don’t have much effect on the market. “The steel itself is such a small component of the value we add to the appliances,” says Paul Storch, CEO of Summit Appliance, Bronx, N.Y. “Stable prices are obviously good, but we don’t see the fluctuation of metals prices as material to our business.” The price of carbon steel, stainless and copper is far more likely to be significant on lower-end appliances, products that sell between $600 and $1,000, says Dowling. Of course, he adds, “it’s always nice to get your inputs cheaper, as long as the quality is there.” Yundt says manufacturers have already addressed cost concerns by moving from 300 series stainless to the cheaper ferritics in some products. “They did a good job moving out of the 300 series to minimize the cost of stainless. What they’re seeing right now is giving them price relief, but I don’t know that it’s going to influence demand or drive decision making.” Pacesetter’s Terrell says the only change he’s seen in procurement in response to volatile metals pricing is a move by OEMs seeking shorter contracts. “That causes some challenges on our end in forecasting and projecting,” he says. Consolidation of the U.S. appliance industry took another step in January when China’s Haier Group acquired the appliance business of General Electric in a $5.4 billion deal expected to close at mid-year. “Haier has a good track record of acquisitions and managing brands. It has a stated focus to grow in the U.S., build its manufacturing presence here and to invest further in the business,” says GE Chairman and CEO Jeff Immelt. Barrington says the transaction makes sense for a number of reasons. “GE corporate has wanted to sell the appliance business for several years, as it just doesn’t fit into their priorities as a business. On the other hand, Haier has been looking to enter the U.S. market in a big way for some time. So the GE-Haier combination works in the interest of both companies. But I don’t think this is part of a larger trend. There’s not much more consolidation in the U.S. appliance industry that could get past the regulators.”