1990 metalcasting forecast: solid performance for another year.

1990 Metalcasting Forecast: Solid Performance for Another Year

The 1980s has been a decade of dramatic structural change for manufacturing, for our industry and, more importantly, for the North American economy as a whole. Fortunately, the decade ends on a considerably brihter note than it began.

Since the "industrial depression" of the early 1980s, a prolonged period of broad economic recovery and growth has set in. In fact, for the economy as a whole, North America has experienced (and is still experiencing) the longest upswing in the business cycle of the postwar period, with overall economic growth in the range of 5% per year over the last several years.

During the last three years in particular, these macroeconomic changes combined with positive economic events to increase activity markedly in the manufacturing sector of North America's economy. Of course, the foundry industry prospered too. Two key factors were the "drivers" of this upswing in economic growth.

The first, and by far the most important of these drivers, was exports. Fueled by the depreciation of the dollar in the period from 1985 to 1987, exports of our customers' products rose sharply in 1988 and early 1989. In fact, exports rose 20% in 1988, and the spill-over into 1989 enabled the manufacturing sector to achieve an expected increase in exports of almost 13% over 1988 levels.

To meet the increased demand from overseas, investments in plant and equipment also increased sharply during 1987 and '88. These investments were the second key factor in our industry's growth -- and in the broad-based growth that manufacturing experienced during this time.

But in mid-1988, the tide began to turn. The dollar began to appreciate (an 8% increase in the dollar's value was recorded during the period from mid-1988 to mid-1989), and by the third quarter of 1989 the seeds were sown for an increase in imports relative to exports, for a return to conditions of excess supply, and for an end to manufacturing's "boomlet".

And end it did. As we all know, the last quarter of 1989 was quite a departure from our industry's performance of the previous 18 months. For most of us, orders slowed, backlogs began to dwindle and the old fears of recession were rekindled.

But let us not misinterpret what has happened over the past few months, or over the past few years. Yes, growth in the last weeks of 1989 slowed and business softened -- but only in comparison to 1988, which was something of an aberration.

Looking at them in their proper respective, the final days of 1989 are revealed not as the end of the world, but simply as a return to "normalcy"--to the relatively steady state situation we left in the period from 1985 to 1987.

Economic Outlook

ACMA sees the 1990-1992 period as a return to the performance and growth levels of 1985-1987. In our view, 1990 will not be as bad as many now fear, but will nonetheless return us to the days of "economic vulnerability", a time when talk of shakeout and recession is strong.

For the economy as a whole, 1990 will likely be a year characterized by continued modest economic expansion and sluggish performance in the manufacturing sector. It seems to us that the threat of recession, though not totally removed, is nonetheless remote.

In the manufacturing sector, the combination of excess capacity, appreciation of the dollar (making an increase in imports likely) and weak exports will make 1990 a somewhat dismal year, particularly in the first half. Export growth will slow, we believe, and imports will indeed rise. Thus the balance of international trade will work to depress growth in 1990.

Specifically, ACMA forecasts GNP growth at 2%, compared with a pojected 3% rate in 1989. Consumer price inflation, thanks to a tougher Fed, should be in the 4.5-5% range. Producer prices, reflecting the basic economy's slowdown, will show a substantially lower rate of growth, with many commodity prices remaining nearly flat.

Talk of recession will be widespread and most likely will peak in the second quarter of 1990. But even though the economy continues to be very fragile, ACMA does not believe that a near-term recession is likely. The key here is inflation. If our forecast is incorrect and interest rates and inflation are not kept in check (both at home and abroad), worldwide tightening of monetary policy could potentially lead to a global recession. But even so, it would not happen, by our reckoning, until 1991.

The most likely scenario, we believe, points toward a renewed decline of the dollar, mildly stimulating Fed policies, and manageable rates of inflation. We conclude, therefore, that at the macroeconomic level, a mediocre 1990 will be followed by a stronger period of overall economic growth in 1991 and 1992.

The Foundry Industry

Overall, 1990 should be an above average year for the foundry industry: better than 1987, but not as good as 1988. In fact, 1990 should be nearly identical to 1989 for most of us.

Specifically, ACMA forecasts total demand for metal castings to be down only minimally (less than 1%) in 1990, after more than a 4% rise from 1987 to 1989 (Fig. 1). Not surprisingly, foundries tied to the automotive industry--and to passenger car production in particular--will be the major downside exception (Fig. 2).

As Fig. 3A illustrates, iron casting demand, we believe, will drop 1% or so in 1990 from its 1989 level (which was down over 3% from 1988). For producers of gray iron, demand for automotive-related castings, we predict, will drop by more than 2.5%. Ingot molds will continue their ever-so-slow demise, as demand in 1990 dips another 7%. On the plus side, we expect demand for gray iron municipal castings to be up about 2%. In addition, the heavy truck market for gray iron should be up about 6% over 1989 levels.

ACMA predicts that total demand for ductile iron castings will remain basically unchanged in 1990. An expected 1% decrease in demand for automotive (i.e., passenger car) castings will, we feel, be offset by increases in demand for pressure pipe (a 2% increase is expected) and ductile iron castings for heavy trucks (a 7% increase is projected).

Demand for malleable iron castings is forecast to fall by about 6% in 1990, continuing its long-term trend down. A decline of 4% is expected in automobile-related demand, and losses should be sustained in several other key market segments as well.

Steel's big year was 1989, up 17% over 1988. (It should be noted that this enormous percentage increase was over a severely depressed base.) Still, carbon steel producers should see their business in 1990 remain very near 1989 levels, with railroad casting suppliers forecasted to be among the few downside exceptions (off a projected 2%). For producers of high alloy steel castings, 1990 should be a repeat of 1989 (Fig. 3B).

As shown in Fig. 3C, demand for aluminum castings should be up slightly in 1990, over both 1989 and 1988 levels. An increase of less than 1% is expected overall. The automotive (3.5%), aerospace (2%) and business equipment (2.5%) segments should show the strongest growth. The home appliance segment is the biggest potential loser, as ACMA project a 6% decline.

Most producers of copper-base castings will see little change in 1990 over 1989. However, led by a projected 3% drop in demand from valve makers, the metal in total should see its market shrink by about 3.5% in 1990 (Fig. 3C).

Capacity

The productive capacity of the North American foundry industry has never been measured accurately, and it may never be. Nonetheless, we can say without hesitation that excess capacity exists in our industry, that it has existed for years and that it is on the order of 15-25%. Worse yet, recent (and unusually large) investments in additional capacity are just now coming on stream--just at the wrong time.

The fact of excess capacity is one of North American manufacturing's most pressing structural problems, as it is in the foundry industry. As we see it, the consequences of excess capacity have been damaging for a long time.

First among these consequences is that despite periodic and substantial increases in demand, excess capacity has played havoc with the ability of even our industry's best to make a profit. This is so because excess capacity breeds price cutting, and encourages weak foundries to sell at or below cost "just to keep the plant running."

The second key consequence of our industry's capacity imbalance is that it has created two distinct classes of foundries. In effect, the past decad has seen the emergence of foundry industry "haves" and "have nots".

The "haves" generally are well managed, produce high quality products, offer an array of value adding services, and invest in plant, equipment, and people to increase efficiency and productivity. Th "have nots" generally do poorly financially because they compete on price, cannot seem to make a high-quality product consistently, and are the inevitable victims of shakeouts.

Given the extent of the capacity glut and the impending return to "normal" levels of demand, we believe that the demise of the "have not" class will not just continue, but accelerate in the early 1990s. However, programs both at ACMA and in the industry give us some degree of confidence in our ability to "grow into our capacity" to some extent over the longer term.

As an industry, then, we seem to be addressing the problem of excess capacity and approaching a solution "from both directions." Hopefully this will lead to a faster and more profitable cure.

1990 and Beyond

Many foundry managers have notoriously short memories and equally short outlooks. This fact is central to our industry's interpretation of recent economic developments and business conditions.

From our vantage point in late 1989, we are for the most part looking back on 1988 and early 1989 with nostalgia for the "good old days." We also are worrying furiously about the recent softening in orders and erosion of our backlogs.

But we must not wait for the good old days to return because they are gone forever. And we must not allow perceptions or expectations to obscure the facts.

Despite the inevitable letdown after our rather exceptional 1988, 1990 should be a good year for the foundry industry. The main trouble spot, we believe, will be the gray iron passenger car segment.

Looking ahead, we're fairly pessimistic about 1991. All signs, at least for the moment, seem to point toward a genuine slowdown. But we believe 1992 will see an upturn to stronger performance--performance about on a par with 1990.