Dealing with the Energy Drain.

It seems we've entered another era when we're to be reminded that "life isn't fair" is one of the world's greatest truisms. Talk about taking a kick to the head when you're already face-first on the floor.

What I'm talking about are the skyrocketing energy costs that manufacturers must shoulder, with few places to maneuver. The much-softened demand for castings this year was going to be rocky enough on its own accord, without the intervention of a cost largely outside of the foundry's sphere of control.

Several Midwestern foundry execs tell me that current natural gas costs shot up as much as 5 times over the last few months, throwing overhead cost factors completely out of whack. Considering that the Dept. of Energy (which notes that metalcasting is among the most energy-intensive of industries) estimates that energy costs constitute 5% of the sales price of a casting, this is no small expense. It's hitting everybody--AFS' own gas cost per therm in January was 2.5 times higher than a year ago--but manufacturing (which consumes more than one-fourth of all natural gas) is really feeling the sting.

The National Assn. of Manufacturers (NAM) recently reported that the rise in fuel prices is reducing manufacturers' profits by 14%, namely because only 10% of firms have been able to pass on more than 25% of the higher expense to their customers. NAM calculates that rising energy prices cost the economy $115 billion in 2000 (or a full GDP percentage point).

News releases from the North American Die Casting Assn. and the Steel Founders' Society of America state that many metalcasters are applying energy surcharges. In mid-February, Internet issued a statement that it was immediately implementing a surcharge on all domestic shipments to help offset the dramatic increases in natural gas prices. The foundry group's energy costs as a percentage of sales doubled since last year and is now at 6.8%.

From what I gather, the ability to pass these costs on may be the very difference between profitability and disaster for many operations. The timing couldn't be worse for those foundries that already stomached the squeeze of mandated price reductions only to face an unforeseen peak in energy costs.

Applying a first-time energy surcharge may be a precarious decision for some, especially when available capacity rates and the threat of imports are not exactly working in foundries' favor. But as one iron foundry president (who claims one-third of his customers flat-out refused to pay the surcharge) said, "We realize that some customers will go elsewhere, but we have to make money."

Factored accurately and communicated with the appropriate data, the temporary surcharge is a reasonable response. It's a far more appropriate practice than the latest purchasing trend, in which some buyers are taking the 5% reduction off the invoice price themselves before submitting payment--often without so much as a phone call.

If you elect not to apply such a surcharge, do the math on the savings you're "giving" customers. When that next price reduction letter arrives (and we know it will), you'll be armed with a history of cost-savings--easily exceeding the percentage demanded by the letter--to debate your point.

If you need to feel better about your situation, call your foundry brethren out on the West Coast who are dealing with more than one energy crisis. Foundries have had to send entire shifts back home because they suddenly get word that their power is being interrupted that day. Things are so bad that at least one aluminum smelter has curtailed production to 10% of capacity because it could make more money reselling its allocated power. Incidentally, the California Cast Metals Assn. is looking into arranging a distributed power generation deal for its foundries.

While energy relief has to be on the horizon, it'll likely be at a new, higher plateau than what we're used to. Hopefully, we'll see casting shipment gains in the power generation industries, as well as the broader effects that could accompany new energy source exploration and construction. In the meantime, we must work at what we can control--reducing energy waste and inefficiency (particularly scrap/remelt costs) and improving costing system accuracy. If you've exhausted every known opportunity to remove costs, some hard choices must be made, particularly on accounts that were marginally profitable before energy shot up.

It seems better to take the lumps on your own terms, rather than allow yourself to endure what, for some operations, could amount to a slow demise.

Michael J. Lessiter