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Closing in on the Peak

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Increasing sales of new and existing homes, improving consumer confidence and the start of a replacement cycle move the U.S. appliance market closer to record shipments.

In what was a mediocre year for many metals markets, demand from appliance manufacturers in 2016 was a decided exception. Appliance shipments enjoyed healthy growth last year, and industry watchers are expecting continued, if slower, gains in 2017.

Overall, domestic appliance shipments enjoyed a 3.3 percent increase in 2016. The six primary appliance sectors—washers, dryers, dishwashers, refrigerators, ranges and ovens—saw growth of 5.6 percent, mostly across the board. Of the major product groups, only cooking units suffered a decline in 2016, and that drop was negligible (see chart).

Home Appliances Chart

However, the sales gains were not uniform throughout the year. A sluggish third quarter was followed by a robust fourth, with some of those appliance sales spilling over into the first quarter of 2017. “We ended the year with a lot of momentum,” says Evan Barrington, an industry analyst with the Stevenson Company, Louisville, Ky. “Overall, the industry was up significantly in 2016.”

The appliance industry’s strength is not surprising, given the various drivers at play. As always, home appliance sales are tied to the residential construction market, which continues its slow-growth mode. Housing starts grew 4.9 percent to 1.16 million units in 2016, with nearly all that growth in the single-family sector.

Economists with the National Association of Home Builders predict a similar trend for the next two years. The trade group forecasts housing starts will grow to 1.24 million units this year and to 1.33 million in 2018, predominantly single-family homes. The multifamily sector appears to have peaked in 2015.

While not as closely correlated to appliance sales as new home starts, the sale of existing homes also serves as a driver. In 2016, existing home sales rose to their highest level since the recession. “If five households move into a new existing home, four are going to focus on other things. But the fifth will decide it’s a good time to upgrade the kitchen,” Barrington says. “Some people incorporate the cost of new appliances into the mortgage.” Also working in the appliance market’s favor is a consumer who’s spending more freely than GDP would suggest. The decline in unemployment and the first signs of real wage growth have given consumers more confidence, and boosted discretionary sales.

The other key to the appliance sector’s strength relates back to the previous boom. The industry set all-time shipment rates in 2005, shortly before the housing bubble burst. Many of the appliances purchased then are 10-12 years old and near the end of their useful life. “Replacement demand ought to be pretty reasonable,” Barrington says.

Taken together, all these market factors suggest that appliance makers—and their metals suppliers—can count on at least another few years of solid growth.

During their fourth-quarter conference call with investors and analysts, Whirlpool executives projected 4-6 percent industry growth in 2017, “behind housing, real wage growth and improvements in unemployment,” said Jeff Fettig, chairman and CEO of the Benton Harbor, Mich.-based appliance leader. Whirlpool’s projections are in line with Barrington’s prediction of 3-4 percent growth this year.

Members of the Association of Home Appliance Manufacturers trade group believe 2018 will be the year the industry finally gets back to the record levels of 2005.

Hovering over the appliance industry—indeed, over all manufacturing sectors—is uncertainty about possible new Trump administration policies. Some changes are unquestionably welcomed, such as a softening of the regulatory environment for businesses.

AHAM is hopeful the new administration will ease some of the tighter energy-efficiency demands placed on appliance makers. “Under the previous administration, we had serial rulemaking, even on the same product. Refrigerators have been revised four times, and they are as energy efficient as they possibly can get, using less electricity than a 50-watt lightbulb,” says Jill Notini, vice president of communications and marketing for Washington-based AHAM.

However, she cautions, the industry does not want to see appliance guidelines disappear. The standards, along with competition, have driven innovation in product quality and efficiency. The absence of national standards would invite states to pick up the slack on a patchwork basis. “California is always out front and they’d love to be setting their own standards, which would be different from Florida or Ohio,” she says.

The industry is keeping a close eye on the Trump administration’s action on trade and imports, even if industry watchers don’t yet have a strong sense of what ultimately will take place. “It’s important to watch, but it’s too early to make a call as to what’s going to happen,” Barrington says.

Appliance manufacturing is a global industry with complex supply chains. Domestic players have operations both in the states, Mexico and elsewhere around the globe, while foreign producers also have made headway in establishing domestic beachheads, to varying degrees. Much of the foreign investment by appliance makers predates the presidential election, but having a U.S. presence could prove beneficial in the event tariffs are imposed on imports.

In 2016, Chinese firm Haier purchased the appliance business from GE. The company still operates under the GE name, with little change in operations, though it gives Haier a much larger presence in the U.S. Fellow Chinese producer Midea opened a research and development center in Louisville, Ky., in 2016, part of its effort to expand its market presence in North America.

Korean appliance giants LG Electronics and Samsung have made moves in the U.S. Late in 2016, Samsung acquired Dacor, a maker of luxury home appliances based in California. “If we look at who is growing market share, the Korean brands have been very successful,” Barrington says. “And it’s not just a price play. They have a lot of good products, too.”

Among domestic players, the financially challenged Sears Co. is weighing the option of selling off some of its most notable brands, including appliance leader Kenmore.

Domestic appliance makers were heartened by an International Trade Commission ruling in July that affirmed they were being materially injured by the large number of unfairly priced imported washers from China. Commerce department duties will be forthcoming.

Whirlpool also anticipates some relief on the currency front, especially in the back half of the year, once the one-year anniversary of Brexit has been reached. The strong U.S. dollar gives an advantage to foreign competitors and inhibits U.S. exports. Domestic manufacturers would benefit from greater parity with the euro.

The trend toward domestic sourcing is not just evident in the machines themselves, but their components. Craig Mathiason, executive vice president at Jemison Metals, Birmingham, Ala., says his company has already seen a shift toward U.S. metal suppliers. “The European recovery seems to be what is driving a change from euro-sourcing to domestic, more so than the trade cases.”

On the materials front, the news continues to be good for specialty metals suppliers. “Stainless is still a timeless and popular appliance finish among designers and their clients,” says Jack Palazzolo, vice president of marketing for Sub-Zero Group, Madison, Wis.

Additionally, a relatively new development is even more promising for the material. Several appliance makers, including LG, Samsung and Whirlpool-brand KitchenAid, have been aggressively marketing a full line of “black stainless.” Rather than the traditional silvery shine, the stainless is coated with a darker finish using a handful of different techniques, depending on the manufacturer.

“There seems to be a lot of interest in that,” says Barrington. “If anything, that will make stainless more popular.” Others contend the material will simply replace traditional 304 alloy sales, with little overall gain for the specialty metals supply chain.

Less positive for metals suppliers are a couple of other trends. Sub-Zero’s Palazzolo notes that more consumers are seeking out smaller appliances that can fit into more compact kitchens, a possible result of the greater move toward urbanization among millennials. Young consumers also tend to be more interested in energy efficiency.

“Metal suppliers may not like it, but there is also a trend toward more glass,” adds Jim Estill, CEO of Danby Appliances, Guelph, Ontario. For example, some new designs for upright washing machines incorporate glass lids.

The other major trend in consumer preference is toward “smart” appliances. Manufacturers of all types are making their latest roll-outs capable of connecting to various devices or the Internet. The growing popularity of voice-controlled automation through such devices as Google Home and Amazon Alexa is pushing the technology forward. “Connectivity has found its hook in the consumer market through voice control,” says AHAM’s Notini.

Still, new features and new materials can only promote appliance demand so much. The industry still remains largely dependent on the housing market. “We continue to have a lot of innovation in the industry with new products that capture the consumer’s attention. That helps, but in most cases people don’t buy a new refrigerator because they see something flashy,” says Barrington.