thing down either. As Kuehl wrote in November in FMA’s “Fabrinomics” e-newsletter, “The consumer is not engaged, at least not to the extent that would be
preferred … Still, the consumer may be cutting back on a lot of things, but cars
and trucks would not be in that list. The fact that gas has fallen in price has been
a tonic to the industry.”
According to an August report from WardsAuto, North American light-vehicle
production is set to exceed 20 million vehicles for the first time, and sales are
forecast to continue their upward march. The publication predicts U.S. auto
sales for 2016 at 17. 3 million units, up from 17 million in 2015. Indeed, the
growth in automotive and other sectors may be large enough to spur a modest
increase in steel prices, according to the World Steel Association’s short-range
Moreover, some fabricators report that sales of recreational vehicles and all-terrain vehicles (ATVs) are up. Cheap food also has opened up opportunities in
sectors like food processing.
Meanwhile, the National Association of Home Builders is projecting single-family home production to increase 27 percent in 2016, after an increase of 11
percent in 2015. With that increase comes a higher demand in home appliances.
In third-quarter earnings calls, both Whirlpool Corp. and Electrolux AB reported
some of their greatest profits were being made in the U.S.
At the same time, the rising dollar has been putting the pressure on exports.
And in October the Institute for Supply Management’s PMI® fell to 50.1—just
barely in positive territory, and the lowest reading in two years. As Lindsey Pie-
gza, chief economist at Stifel Nicolaus & Co., told The Wall Street Journal, “Tepid
overseas demand, a strong U.S. dollar, and a sizable inventory overhang have
created the perfect storm for U.S. manufacturers.”
Still, the Credit Managers’ Index, published by the National Association of
Credit Management, increased to nearly 54 in October. Kuehl, who puts togeth-
er this index, said that the CMI tends to be a good predictor of where the PMI
will be several months down the road. Judging by the October numbers, busier
times may be ahead.
For those in custom metal fabrication, 2015 has proven the worth of customer
diversification, especially because troubles in some areas have fueled opportunities in others. SPM, for instance, could have had a disastrous year, but its business related to telecommunications as well as commercial construction in the
region is up, so the fabricator held on and is now poised for moderate growth
“We’ve been pretty flat this year,” said Jared Lotzer, vice president of sales
for BTD, a large contract fabricator based in Detroit Lakes, Minn. “And that’s a
positive place to be, considering the state of the oil and gas and agriculture markets.” The fabricator is projecting between 5 and 10 percent growth next year,
not because of growth in agriculture or oil and gas, but due to market share
growth in other areas.
Considering all this, the 2016 economic forecast paints two very different pictures, one of commodities and another of everything else.
A Mixed Bag
These two pictures might explain some data about ordering activity and operating levels. Throughout 2015, fabricators have reported a mix of new-order-activity trends. In FMA’s “Forming & Fabricating Job Shop Consumption Report,”
about as many said new-order activity was expanding as was decreasing (see
It’s a mixed bag that’s also reflected in the “2016 Capital Spending Forecast”
from FMA. More than 61 percent of respondents said they predict their operating levels will be higher than they were in 2015; that’s down slightly from last
year, when almost 65 percent predicted increased operating levels. Meanwhile,
4. 4 percent said they expect operating levels to decline in 2016, the lowest percentage of decline reported since the recession (see Figure 2).
The current plunge in metal prices is occurring in part because of lower demand
globally, and in part because of mill consolidation. “The big consolidation [of the
mills] we’ve seen recently has left just a few large players, and they don’t feel the
price pressure that they might have 10 years ago,” Kuehl said. “A decade ago they
wouldn’t be protecting market share at all costs.” Today, though, is different.
Through its annual “Financial Ratios & Operational Benchmarking Survey,”
FMA tracks direct material costs as a percentage of sales. The costs vary widely,
depending on the nature of the work in terms of size (from piece parts to large
industrial projects) and volume. But on average, the direct material costs have
remained at around 35 percent of sales for the past three years, despite the rapid
decline in metal prices. This may indicate that fabricators in general aren’t
benefiting from the drop in metal prices. It also may imply increased pricing
pressure, with lower prices offsetting any gains from spending less on material.
Still, customers may not be demanding lower prices just because of lower
metal prices. According to Ryan Raber, vice president of sales and marketing for