Seeing the light: after struggling along with other manufacturers during the first part of this decade, foundries are seeing an improved environment. However, challenges still loom.

After a brutal period, ferrous foundries are seeing a rejuvenated market. However, smart operators realize that to thrive over the long term will require investments to ensure that they remain viable when the next a downturn hits.

During the first several years of this decade, the foundry business has suffered from the same problems that many other companies affiliated with the scrap recycling industry have faced: slack markets, slumping prices and surging markets outside North America.

As a result, a slew of foundries closed down in light of their inability to compete. However, the markets have strengthened throughout the last several quarters, which, many hope, will give many hard-pressed foundries the opportunity to clean up their balance sheets and to improve their operations.

ECONOMIC IMPROVEMENTS. Steve Livingston, president of Strategic Materials, a South Gate, Calif.-based stainless and carbon steel foundry, says his company has seen a definite improvement in market conditions throughout the past 18 months. Prices have improved, demand continues to grow, and the foundry business is much healthier than it has been.

While the foundry business is healthier now than it has been in many years, other foundry executives say that after sustaining serious losses for many years, some of these same companies are only now starting to recoup their looses from the leaner times.

The improvement can be attributed to an overall improvement in the global economy, Livingston says. For Strategic Materials, which makes pumping valves, the offshore business market has been good. With orders to the Middle East, South America and the Far East, Livingston's company has been able to grow.

While Strategic Materials has flourished during the past several years, Livingston isn't resting on his laurels. While markets are healthy, one of the advantages Strategic Materials holds is that its product line is geared toward a niche market. And, even more beneficial to the company, its orders are much smaller, making it less feasible for large foundries to go after the business, he says.

Despite presently being sheltered from significant competition in light of the smaller size of the shipments, foundries that have been able to carve out a niche are still aware that it is only a matter of time before greater attention is turned toward many of these smaller markets.

While the turnaround in the foundry business has been significant, other factors are working in the United States' favor. Jim Simonelli, executive director for the California Cast Metals Association, El Dorado Hills, Calif., says, "Our biggest advantage is that the U.S. remains the largest consumer of goods in the world. And for product runs that have short turnaround time, we are in the backyard of the customers."

Livingston agrees. "What really helps our business is the response time. We can respond to customers quickly."

TURNAROUND SPECIALISTS. Simonelli adds that a key strategy for domestic ferrous foundries is to work closely with their customers. "Stay close to the customer and cater to their needs. Consistently remind the customer about value-added aspects of the product," he says.

"Second, one must under stand its competition, its goals, strengths and weaknesses. This was easy when the competition was across the city or state line," Simonelli adds. "But when the competition is across the world, it is easy to let this issue slide."

Other foundry officials echo many of these statements. While price is always a large issue for buyers, the ability to quickly ship products is a major selling point. When comparing the foundry business in the United States against foundries in other countries, domestic companies cite the much shorter lead times. "Our lead times are much better," one foundry executive says.

While developing a closer working relationship with customers is a wise step, it's not always an easy one to carry out. "Customers demand a lot. It is often a one-sided equation," one source says. "We need to re-establish our value to the company. We need to provide the value-added service to our customers.

In addition to the relative speed in which U.S. foundries can get products to their consumers, many of the foundries that have survived the shakeout have invested money to make their operations more technologically savvy. This also is giving many of the domestic foundries an advantage over foreign competitors.

Finally, another benefit for some foundries that seek business offshore has been the weakening U.S. dollar.

While in a macro sense a declining dollar is a tricky proposition in the world market, the cheaper U.S. dollar makes U.S. products more reasonable.

One caveat to the weaker dollar is the special case of the Chinese currency, which, some say, is unfairly pegging to the U.S. dollar. Some economists say this move has undervalued the Chinese Yuan by as much as 40 percent.

Alfred Spada, of the Schaumburg, Ill.-based American Foundry Society Marketing Division, sees steady-to-strong growth throughout the different segments of the foundry business. He forecasts that overall shipments will likely increase 11 percent during the next four years. If this forecast proves accurate, it will be the strongest market in 25 years.

Spada adds that his association is forecasting the export of significantly more ductile iron pipe around the world in light of better global economics.

Michael Emericks, with Pacific Steel, a Berkley, Calif., iron and steel foundry, also sees a decent turnaround in the foundry business. However, while many foundries are now seeing some decent market conditions, the improvement has followed what he terms "the perfect storm" for an extended period of time.

"We have come through 10 terrible years, Emericks says. "The market shook out many of the weaker players."

While the foundry business is rebounding nicely, the number of iron and steel foundries still in operation have declined. At the present time, there is an estimated 800 iron and steel metal casters operating right now, a far cry from several years ago.

Pacific Steel also recognizes that operating in a single market can often lead to serious problems. "You have to diversify your product line. You can't put all your eggs in one basket," Emericks says.

However, while many foundries have diversified to include a much wider swath of products, the reality is that when there is a downturn in manufacturing, "there is little you can do," Emericks adds.

IMPEDIMENTS TO OVERCOME. While the iron and steel foundry business has been enjoying a bit of a rebound, it hasn't been without its problems. One such area of concern has been the soaring price of ferrous scrap. As the foundry business has rebounded, so has the scrap recycling industry. Despite a recent retrenching of ferrous scrap prices, the levels are still far higher than they were several years ago. The result has been that foundries are paying much more for raw material than in previous years.

"Obviously, this adds costs to the end product, which in the end falls in the lap of the customers," Simonelli notes.

Foundries have been passing along surcharges to their customers to offset the higher scrap metal prices they are paying. While some consumers grumble about the surcharges, most are aware of the situation and end up accepting the charge.

However, some companies have locked in long-term contracts that do not provide for the price flexibility that is needed. For those companies, the challenges of offsetting higher ferrous scrap prices becomes even more daunting.

Another strategy some foundries may employ is to move between different grades of scrap. Daniel Pflaum of Gamma-Tech LLC, Cincinnati, is quoted in an article that appeared in Modern Casting magazine as saying, "While prices are soaring, switching to a lower grade of scrap can help ease part of the strain."

Pflaum continues, "Foundries tend to get locked into a charge percent, and for good reason. But times like these require you to revisit those mixtures. You have to communicate with your supply base to see what they have available."

Emericks says the rise in scrap prices is "huge." He says that in discussions with various scrap dealers, Pacific Steel asks how long prices will remain so high. The scrap dealers, however, say that hat they are also operating in an uncertain market.

While being able to pass on higher prices to consumers can offset a portion of the higher scrap prices, a growing concern is the possibility of less ferrous scrap being available for domestic foundries. One foundry official asks his supplier, "How about some loyalty." A number of foundry officials have said that in the present situation, a scrap supplier will shift gears and reallocate material from a domestic buyer to an offshore source if the price is right.

Simonelli says that busy foundries are sometimes concerned about scrap availablity.

Emericks says that Pacific Steel has been able to get enough material, though he also points out that it is a challenging business. "We have a very good purchasing manager. But," he adds, "we can't even go to one scrap dealer." What his company does is try to develop working relationships with a much larger pool of suppliers so that if one shifts tonnage away from his foundry, the company can obtain material from another source.

While there are some inherent advantages to U.S. foundry business, foundries in the United States face some significant disadvantages when competing with operations in many other countries.

Most foundry executives contacted point to the huge disparity between labor costs in the United States and those in many countries that directly compet with U.S. foundries.

"Nearly all of our foreign competition has lower average worker wages, minimal environmental restrictions, government assistance and currency differences weighing against us.

While acknowledging that many European countries have similar cost structures, the areas of greatest concern outside the United States--China and India--have a major advantage in labor and environmental regulations.

Emericks ticks off some of the challenges confronting the foundry business in California. "Consistency in rulemaking is the overriding factor. Whether it is air, water or otherwise, lawmakers need to realistically pace themselves. I've seen regulations that include proposed reductions as high as 98 percent, when the average reduction over the last 10 years was 25 percent.

"Facilities cannot drastically change their operations to include dramatic, immediate operational changes," Emerick continues, "We will always have challenges with environmental regulations. But when the changes become drastic, then they threaten our existence."

The forecast for the ferrous foundry business is fairly promising, at least in the next year or so. However, plenty of caution is being expressed.

Spada says that while times are good now, a downturn is inevitable in the future. He says companies need to take steps now to give them the chance to ride it out.

For foundries that have been able to survive in the feast-or-famine business, now is the time to gear up for a time when markets become more daunting.

FOUNDRY PLEADS GUILTY TO CHARGES

Tyler Pipe Co., a division of McWane Inc., has agreed to plead guilty to two felony counts. The company will pay a criminal fine of $4.5 million and must upgrade its iron foundry near Tyler, Texas, resulting from illegal construction and operation of a cupola at the plant.

From December 1998 through January 1999, Tyler Pipe razed its old south plant cupola and replaced it with a new cupola. Under the Clean Air Act's prevention of significant deterioration provisions, Tyler Pipe was required to apply to the Texas Commission on Environmental Quality (TCEQ) for permission to construct and operate the new cupola. The act would have required pollution from the new cupola to be controlled using the best available control technology. Instead, Tyler Pipe concealed the construction of the new cupola from the TCEQ and connected its new cupola to the existing pollution control device, a water scrubber designed and built in the 1960s.

Tyler Pipe must apply for a Clean Air Act Title V permit, however, in its Title V permit application the company claimed that the south plant cupola had not been modified since 1971 and was not subject to Title V requirements.

Pursuant to a plea agreement filed with the court, Tyler Pipe will be subject to probation for a period of five years, during which it will be required to upgrade a number of structures regulated under the Clean Air Act. The upgrades are estimated to cost approximately $12 million.

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