Sparks of life in US fab shops

But in light of increased activity toward the end of last year—especially from fabricators serving the energy sector—there could be “some positive movement” in the first half of 2010.

Currently, however, Joe DiCesare, vice president of sales for FHS Inc, Lakeland, Florida, describes business from metal fabricators as stagnant. “Nothing is happening and it could be 2011 before things turn around in any significant way. Right now people are trying to hold onto what they have and not placing new orders.”

According to Steve Bayerlein, president of Kenrich Industrial, Waukesha, Wisconsin, fabricators whose customers do not work on government contracts or the energy sector are having a very difficult time.

“There is a little transition under way, with somewhat of a positive shift in fabricators’ expectations of the future,” says Chris Kuehl, economic analyst for the Rockford, Illinois-based Fabricators & Manufacturers Association International (FMA). However, he cautions that this is a modest shift as fabricators continue to remain concerned about what will happen with the US economy.

While they remain very cautious and price conscious, there has been an increase in quoting activity, says Gary Cox, crane operations manager for CraneVeyor, South El Monte, California. “A lot of fabricators are preparing for once things improve. They are getting quotes for their future needs.”

Jeff McNeil marketing manager for Gorbel, Fishers, New York, observes that general companies’ crane purchases are connected to investments in new facilities, facility expansions and the addition of new product lines, which is why orders from fabricators are weak right now. “But what we are seeing is a lot of customers preparing for the upturn. While they might have the budget to do anything right now, they are looking at investing in lean manufacturing projects down the road. They are just not ready to pull the trigger yet.”

When will they be ready? “It depends on the market that they serve,” McNeil says, adding, “there are some shining stars,” but it is uneven, with fabricators who make components for wind turbines, solar panels and other alternative energy applications doing okay while those serving the construction and transportation markets haven’t been doing as well.

Bayerlein says that fabricators tied with government business are also having a little easier time, noting that he has sold new jib cranes to several suppliers to Oshkosh Corp, Oshkosh, Wisconsin, due to Oshkosh’s recent $1billion contract with the US Department of Defense to build a new line of armored vehicle—MATVs—designed for the mountains of Afghanistan.

Meanwhile, work for other manufacturers, including Peoria, Illinois, heavy equipment giant Caterpillar Inc, has been drying up. Caterpillar recently announced that approximately 2,500 of its previously laid off US employees would be permanently separated from the company.

Picking up

During the last few months things have generally started picking up again from fabricators, says McNeil. “Actually there had been a lot of inquiries from fabricators throughout the year, but actual order volume is starting to pick up now.”

“On the whole manufacturing has been weak,” says Larry Dunville, president of Dearborn Overhead Crane, Mishawaka, Indiana, who says that he had hoped that the investment tax credit program which was to expire at the end of 2009 would have helped more than it has. There were also hopes that the US government’s American Recovery and Reinvestment Act (ARRA) economic stimulus programme would have impacted manufacturers—and fabricators—more than it has to date. “So far stimulus money has only been used for roads and hasn’t translated to increased business for fabricators, even bridge fabricators,” he says.

“It is a big question as to how much of the economic stimulus money will make it through to the general economy and when,” says FMA’s Kuehl. “So far there hasn’t been much of an impact for manufacturers or fabricators, but it is my guess that there should be more of an impact starting in the second and third quarters.”

Pulfer agrees that the economic stimulus programme could start having an impact once the monies are actually freed up. “Currently less than half of the stimulus money has been spent. There is so much red tape involved with the ARRA programme and that has really slowed things down,” he says, observing that one of his customers was approved for stimulus money in spring 2009 and is still waiting for the money.

According to Bayerlein, the economic stimulus programme has begun to help some fabricators serving certain alternative energy sectors (such as wind power, solar power and ethanol and other biofuels) and who have government work, but has not—yet—helped those connected with more traditional manufacturing business.

There is hope that certain other action that the US government is considering—including using part of the unspent Troubled Assets Recovery Program (TARP) to help the private sector (particularly small businesses) and reauthorising the SAFETEA-LU (Safe, Accountable, Flexible Efficient Transportation Equity Act: A Legacy for Users) surface transportation law, which was set to expire at the end of 2009—will also have a positive effect on the metal fabrication business.

Kuehl says that while overall business has improved slightly for US fabricators recently, it has not increased enough yet to make much of a difference—especially in their capital equipment expenditures—given the massive declines they have suffered in the past year or so.

“The 5-6% increase in new orders is fairly minimal,” he says, especially since US fabrication business was off, on average, about 40% year-on-year in 2009 with fabricators’ capacity utilisation rates, even after improving somewhat, currently holding at about 60-70%, which is the lowest that they have been in 20-25 years.

Traditionally capacity utilisation rates of 80-85% are normal for US fabricators, who tend to increase their capital spending plans once their capacity rates reach 90% or higher.

“The industry is currently greater than 10% lower than traditional capacity utilisation levels,” which means there is not a lot of impetus to make large capital investments, including for overhead cranes, especially since, he says, “with the economic downturn people have gotten very conservative with their spending.”

As a result, according to FHS’ DiCesare, fabricators’ new crane orders were down about 65% in 2009. Crane maintenance and repair was also down, although not quite as much—about 35% year on year.

“Fabricators are only repairing cranes when they have to—only if they break down,” he says.  McNeil, however, notes that with companies producing less, their facilities are used less and the strain on their equipment, including their cranes, is less, so they don‘t need to do as much maintenance work on their cranes.

Cox notes that in some states, like California, there are requirements for quarterly inspections of cranes. As a result of these statutory requirements—as well as the desire to keep cranes running as they should—service and maintenance business is keeping up. Pulfer agrees, noting many fabricators have been, “putting band-aids on cranes rather than buying new ones,” and will likely continue to do so until they are confident that the economy is improving.

But there are certain ‘upbeat’ market forces that could help metal fabricators, says Kuehl. One at least short-term positive for the market is the fact that manufacturing inventories are currently quite low, which means that any increase in demand will almost immediately stimulate at least some increase of production. “Traditionally the sector tends to carry substantial inventory to help maintain market share and to maximise use of machines and labour. This creates a problem when trying to recover from a downturn. With too much inventory it takes time for demand to eat away at the level and permit new production. However the prolonged slump in demand and the collapse in global trade have generated significant drops in factory inventories,” Kuehl says, which means there will be no inventory to work through once demand rebounds.

Inventories contracted

According to the Institute of Supply Management (ISM) Manufacturing Report on Business, manufacturers’ inventories contracted at a faster rate in November 2009 than in October and for the eighth consecutive month respondents to the ISM survey felt their customers’ inventories were too low.

Kuehl says that it seems as if credit availability is starting to loosen up a little. “There is still less accessibility to credit than there had been but there isn’t the same lockdown as there had been earlier in 2009.” Pulfer says this could help, but the impact will be far from immediate. “It will be at least the summer before companies can start sticking the shovel in the ground, especially in the northern part of the country.”

At the same time, Kuehl says new order activity has been picking up, especially in the energy and energy efficiency sectors, as well as for health care applications. The construction and automotive sectors, however, remain concerned, with the construction market also pulling down certain related sectors, including heavy equipment and appliances.

On the plus side, more people are investing in wind energy and in other alternative energy projects and converting their facilities to become more energy efficient, says Kuehl. According to the American Wind Energy Association, the US wind energy industry installed 1,649MW of new power generating capacity in the third quarter; an amount higher than either the second quarter of 2009 or the third quarter of 2008. Year to date, however, wind turbine manufacturing was still lagging below 2008 levels. An increasing amount of the manufacture of these turbines and turbine components, however, are being produced in the United States, says Kuehl.

Likewise, the US biofuel industry continues to grow. The Renewable Fuels Association says that it expects that the US ethanol industry is poised to produce well in excess of 10 billion gallons of the biofuel in 2009, up from a then record 9 billion gallons in 2008, which, according, to Bayerlein, means continued need for ethanol tank fabrication.

While there was a short-lived blip in auto production due to a replenishment of dealer inventories that were worked down by the Cash for Clunkers scrappage programme, that market continues to be weak, Kuehl says, as does construction-related manufacturing, which Bayerlein says isn’t surprising given that the US housing market is still down and that commercial construction “is the next shoe to drop.”

Anirban Basu, chief economist with the Associated Builders and Contractors Association, says that shoe has already begun to drop. He says that office, retail, and hotel and motel construction have been deeply impacted by the downturn. Given the high vacancy rates there, construction is not likely to return anytime soon. Other non-residential construction sectors that have held up better, such as manufacturing, are likely to start to slip as existing projects are completed and there are few new projects to replace them with.  Basu is more optimistic about the public works or infrastructure construction sector, which should see a low double digit increase in 2010 helped by a combination of ARRA funds and the highway bill.

“Next year the economic stimulus should have more of an impact on infrastructure construction and the energy sector,” says Kuehl. “And as it makes an appearance it should have a positive impact on fabricators’ business.” But will it result in increased capital investment? That is still uncertain, given that, at least at this point it has resulted in more job maintenance than job creation.

“I’m encouraged by predictions by the Material Handling Industry of America that material handling equipment are forecast to grow 2-3.5% in 2010 and that the latest report of leading economic indicators shows about 3% growth,” says Dearborn’s Dunville. “My biggest fear is that instead of a ‘V’ or a ‘U’ recovery that we see a ‘W’ or a double dip recession. I just hope that in 2010 some of the quotes we’ve been receiving from fabricators start turning into orders.”

Cox, however, says he doesn’t believe that many of them will do so until later in the year. “Cranes and other capital equipment tends to lag the rest of the economy, both going down and coming back up. Fabricators need to feel confident that there is a true improvement in the economy before they invest in new cranes,” he says.

Any growth, according to Pulfer will likely be, “slow and arduous,” but that is actually good, as it is more sustainable and easier to manage than a spurt in demand.  “There could be a marked improvement in 2010, but that is just because it is going from nothing to something, not that demand from fabricators is necessarily all that good.”