Hot topic: North American nonferrous foundries that will survive into the future will need efficiency and a little bit of luck.

The foundry industry may be one of the segments of the recycling industry that receives very little fanfare. However, while foundries on average may consume smaller amounts of material, taken together these businesses make up a significant portion of the market for scrap metal.

However, their numbers, health and viability are being challenged by a host of issues, most outside their control.

Fighting against volatile energy prices and stiff competition from Chinese markets (as well as from a number of other Asian countries), foundries seem to be in the center of a perfect storm, one that may take some time to subside.

HANGING ON. While many nonferrous foundries continue to seek out marker share, the overall number of foundries continues to dwindle. According to a representative from the American Foundry Society, Des Plaines, Ill., there are about 2,700 ferrous and nonferrous foundries in the U.S., a number that has declined steadily.

Jim Simonelli, managing director for the California Cast Metal Association (CCMA), an El Dorado Hills-based association of California nonferrous foundries, says that the number of foundries in California has also declined sharply over the past few decades. He estimates that there are roughly 300 nonferrous foundries in California now. This is a far cry from the more than 2,000 foundries that once were located in the stale.

The sharp decline is mirrored in other areas of the country. One nonferrous foundry operator in Connecticut says, "I can count on two hands the number of nonferrous foundries in the state."

One of the biggest concerns, and one that is galvanizing both sides in the upcoming presidential election, is the decline in overall manufacturing jobs in the U.S. The problems for the nonferrous foundry business are, in many ways, a microcosm of the difficulty in maintaining a manufacturing base in the country.

Simonelli ticks off a number of concerns affecting members of the CCMA: "Workers' compensation, high energy costs, environmental regulations are all big concerns," he notes.

Tim Vecchiarelli, with Yankee Casting, an Enfield, Conn., nonferrous foundry, also notes that workers compensation, health care and energy costs make it more difficult for companies such as his to compete.

To accent his point, he notes the following: "This is the first year we paid more for workers compensation than we did for raw materials."

Tim Strelitz, with California Metal-X, a Los Angeles-based brass and copper foundry, is more succinct when he says that the biggest problems confronting the nonferrous foundry business are the "excessive costs [and] outrageous lawsuits that manufacturers have to deal with."

A SCRAP OVER SCRAP. While these are big issues for nonferrous foundries, Simonelli notes that the volatile scrap market also is taking a toll on the industry. "Only a few months ago, scrap was only a blip on the radar screen." Now, as China has soared in its intake of all types of nonferrous metals (as well as ferrous metals), foundries are smuggling with having in pay much more for the raw material.

Don Van Hid, with Techni-Cast, a South Gate, Calif., ferrous and nonferrous foundry, says it is difficult when some Chinese buyers are willing to pay what he sees as above-market prices, and pay immediately. Meanwhile, TechniCast continues to pay what it considers market price and pay within 30 days. He notes that even with short payment schedules, it is extremely difficult to beat payment programs by Chinese buyers.

While many nonferrous foundry operators feel that prices will likely ease up sometime later this year, the rapid scrap price increase is creating the twin problem of declining availability and higher prices for the material that can be purchased.

Simonelli points out that while U.S. nonferrous foundries deal with material heading offshore because of strong buying by Chinese consumers, other countries are either imposing or considering imposing restrictions on the outflow of scrap metal.

Strelitz says that the Chinese government has been very aggressive in inducing businesses to come to China. He also points to die steep discrepancy, between the London Metal Exchange and the Shanghai Commodity Exchange price for copper. The spread makes it very difficult for U.S. companies to compete with these price differences.

South Korea recently announced plans to restrict the flow of scrap metal from its borders as a way to address the difficulty consumers within that nation have had with higher raw material prices.

NOT SO GOLDEN. While soaring scrap prices are taking a toll on the overall foundry business, in California there are additional issues that are adding to the overall misery: Workers compensation claims and higher energy costs.

Van Hiel says that the costs have become so prohibitive that more and more businesses, not just foundries, are moving out of the Golden State. While the well-publicized problems in California are driving many businesses out of the state, high-energy costs are creating problems in other regions of the country as well.

Many states are seeing an exodus of foundries to slates with less expensive energy costs.

In California, the high cost of energy has created extreme difficulties with energy consumers as they confront higher costs and a state agency that makes it difficult to seek out better prices.

While California competes with other states to retain business, it also competes with other nations. Environmental regulations often put U.S. foundries at a major disadvantage with foundries overseas. Van Hid notes that while he approves of regulations to guarantee a clean environment, the costs of this can be exorbitant.

According to Simonelli, the cost to ensure that a foundry is in environmental compliance makes up a significant amount of a company's operating expenditure.

Ryan Moore, executive director of membership services for the Non-ferrous Founders Society, Park Ridge, Ill., says that the U.S. nonferrous foundry business is operating on an uneven playing field. He ticks off several costs that are borne by U.S. operators that are barely a consideration in many other countries: health care, energy costs, environmental and workplace safety costs, among others. "Costs are high, high, high. We need to talk about tort reform.

These operational cost--an ongoing set of line items--are joined by the current high scrap costs. Moore notes that scrap prices have soared. "In the last three months, copper has gone up around 30 percent, while aluminum also has climbed significantly."

While the foundry business seems a bleak place to be, foundry operators note that at least they are seeing an improvement in end markets. The auto industry is starting to purchase more components and material, while some foundries say that the aerospace industry, once one of the hardest hit industries, is starting to gain some strength.

However, despite these improvements in markets, Moore says that there still needs to be a lot more improvement before the industry gets to the production level it was at several years ago.

MACRO-ECONOMIC PROBLEMS.

When confronted with such a wide range of concerns, nonferrous foundry executives note that many of the biggest problems are ones with which all manufacturers in the U.S. are struggling.

In addition to high insurance and energy costs, the trade imbalance continues to show record deficits, highlighting the difficulties U.S. manufacturers are having with competing for business offshore. (Even a weaker dollar has not yet helped, although the statistical effects could be lagging.)

While the economy appears to be gaining some traction, nonferrous foundries are not overly bullish on their long-term viability. Several foundry sources say that due to unrelenting pressure from offshore businesses, it is becoming more difficult to compete head on.

Several foundry sources say that they believe maintaining environmental regulations are important. However, most foundry executives can also cite examples when Environmental Protection Agency or Occupational Health and Safety Administration officials have made it extremely difficult to operate.

Like the ferrous foundry business, the nonferrous foundry business is highly dependent on scrap metal as a raw material. And, with the surging price and shortage of supply, it becomes an even more daunting task to compete at both the front end with purchasing the material, and the back end with trying to push through higher prices, especially when competing against offshore competitors who can undercut their prices.

Moore says that a pickup in demand for some of the nonferrous products, with aluminum seeming to be bouncing higher than copper, is one circumstance that can provide a bit of relief to struggling foundries.

However, despite the modest improvement, he notes that markets am still way down from markets of several years ago, and any full recovery is still far off.

Another sign of hope for the nonferrous foundry business is the greater attention being brought to the plight of the manufacturing sector. As a growing chorus of politicians, business and labor leaders decry the exodus of this sector of the economy, programs could be put in place that could either slow or stem the flow of foundry business to outside the U.S.

Strelirz points out that while the business is a challenge, the way to survive is to change with the times. "If people want to survive, they have to throw out the old assumptions and recognize change. We have made serious changes in bow we do our business. It is the only way to stay in business."

FINDING A STRATEGY

While domestic foundries often find out they can't compete with the low cost structure of some Chinese operations, one thing they are looking to do is become more customer-centric. Another step some foundries are taking is finding niche markets where they can survive.

Another step, one foundry executive notes, is to find a way to work with the Chinese Interests. At the same time, he acknowledges that the Chinese market continues to make inroads into the foundry business in the U.S., making it more difficult to compete.

Tim Vecchiarelli of Yankee Casting, Enfield, Conn., says that lots of customers have gone to China, where they don't have to pay to cover many of the costs that nonferrous foundries in the U.S. have.

To compensate for the difficulty with competing with Chinese businesses head-to-head, Vecchiarelli says that his company is seeking out specialty niche markets in which It can operate. It is many of the larger foundries that have closed in light of their inability to compete head-to-head with business from overseas, he notes.

"Our niche is small-volume, engineered products," Vecchlarelli notes. Additionally, the company keeps inventories low so it isn't too extended.

Don Van Hiel of Techni-Cast, South Gate, Calif., says his company also has been able to withstand some of the market pressures by being diversified. The company sells into a wide range of markets, including the petrochemical, marine, aerospace and food industries, among others. At the same time, the company, as well as other foundries, have been able to push through several price Increases to offset higher raw material prices.

Meanwhile, many of the larger foundries, especially ferrous foundries, find themselves losing large accounts and feeling a major pinch in their businesses.

The author is senior editor and Internet editor of Recycling Today. He can be contacted at [e-mail].