Facing Challenges Head On: Site Selection for the Metals Industry
31 Oct, 2006By: Suzanne Davis
The metals industry, a very diverse sector of the U.S. economy, impacts a broad spectrum of products, services and geographic regions. From steel production using iron ore or scrap, to durable goods like appliances and automotives, to high tech uses in aerospace and medical devices, the industry is integral in products we use every day.
The metals industry is facing a number of challenges due to changing demographics, emerging technologies, political events and the emergence of a true global economy. While the U.S. continues to be a leader in the metals industry, some sectors are seeing intense competition from developing countries. These challenges make it necessary for companies in this competitive industry to evaluate their operations carefully, investigating new ways to achieve greater efficiency and to take advantage of new market opportunities.
The explosive growth of Asia, especially China and India, is radically changing the industry. Construction projects in China such as airports, railroads, hotels and office buildings, are on fast track schedules and demand enormous quantities of steel. In some parts of China, it is almost as if entire modern communities are being built from scratch. As consumers in Asia become more affluent, they demand more cars, washers and dryers, soft drinks, and other products that incorporate metals in their manufacturing process. This rising demand is enticing companies to locate metals manufacturing facilities closer to these growing markets. This shift of geographic location will have an impact on metals facilities in the U.S.
Increased demand is driving up prices of raw materials, at least in the short run. Iron ore prices rose 19% to a record high this year. Mini-mills, which use scrap metal instead of iron ore as a raw material, are becoming increasingly popular. At the same time, high energy costs are having a negative impact on profitability in the industry. Traditional steel mills and mini-mills use enormous amounts of energy, as do operations like metal casting and stamping. Because most metals applications rely on heat at some point in their process, margins are reduced as natural gas and electricity prices rise.
The intensity of recent hurricanes in the U.S. has focused public and political attention on the environment and global warming. It is anticipated that more stringent environmental regulations regarding air quality and energy use could be put in place to address these concerns. In the long run, these types of regulations could impact the industry. Recycling, already one of the industry’s strengths, will become increasingly important.
New uses of metals in nanotechnology, medical devices, aerospace applications and communications/computer technology will create new demand for very high quality uses. Companies can search for new niches in emerging markets.
Faced with rising prices and changing demand, metals companies need to carefully evaluate their business opportunities to ensure they are well positioned to capture their fair share of the market. Smart manufacturers will reevaluate their manufacturing operations, consider consolidations and new locations, and increase efficiencies to stay competitive. For small to medium sized manufacturers in the U.S., investment in land and buildings can be up to 50% of fixed assets. When these numbers are evaluated, it becomes clear that strategic location decisions can have a real bottom-line impact on a metals manufacturing facility.
When considering strategic location decisions, metals industry executives should also keep in mind the potential positive impact of their facility on a community. The metals industry has many attributes that make it attractive to communities searching for economic development opportunities. Workers, especially in the high tech sectors, are generally skilled and well-trained, which means that employees are paid an above average wage. The industry makes significant investments in plant and equipment, with technological improvements and new product developments constantly demanding new investments. These on-going investments add to the tax base of the local community. Additionally, many metals facilities utilize specialized, heavy equipment that is much more difficult to relocate than a data center or customer care operation, making communities more likely to invest in needed infrastructure and public improvements. All of these factors combine to make metals operations attractive from a community economic development standpoint. This fact should be kept in mind as new locations are considered and financial assistance and incentives are pursued. Incentives, offered at the state and local level, can help offset the upfront costs of a new facility, making a good project even better. Positioning the project to receive incentives should be a consideration as the site search is completed.
How to Complete a Successful Site Search
First, a company should evaluate current facilities and ensure that there is truly a need to consider a new location. In today’s market, every efficiency should be squeezed out of existing facilities before a new real estate option is considered. An internal audit of customer opportunities, utilization of current equipment and labor, available capacities at other manufacturing locations, supplier factors and operating costs should be conducted.
Once it is determined that a new location is optimal, the company should decide what broad geographic regions meet the needs of the project and allow access to both suppliers and customers. The broad regions will be narrowed as the process moves forward, based on the criteria for success defined below.
Before making any inquiries regarding potential sites, a company should make decisions regarding certain variables that will impact the search. Carefully defining the project parameters for key items such as labor, utility use, and transportation needs will make the project go more smoothly. The more accurate this information is on the front end of the project, the higher the likelihood of a good location decision. Making decisions regarding these items upfront will ensure that good information is shared with community representatives and real estate and economic development professionals during the search.
Labor is a key component of any operation and in the metals industry, it is especially important. A determination of the number of workers, skill levels, desired educational background and experience level must be made early, because these requirements will impact many other aspects of the location decision.
Number of workers: The number of workers needed to run the operation, by shift, will impact the location decision. If locating in rural area, the company must be sure that there is a sufficient labor force in the area from which to draw. If locating in an urban area, will there be so much competition for labor that desired employment numbers will be difficult to reach and maintain?
Educational background: Are there sufficient workers in the area with the right level of educational attainment? Statistics are readily available from local economic development offices to ascertain the formal education levels of area workers. It is more difficult to determine the practical experience of the workforce and the number of workers that have experience with metal castings equipment, for example. Workers must have a strong basic education that enables them to learn the necessary skills for the appropriate sector of the metals industry.
Demographics: Is the area gaining or losing population? Are income levels projected in increase? What is the racial mix of the area population? All of these factors will increase the future availability of labor.
Union vs. non-union: The unionization rate of the labor force is another important consideration. If the company is non-union in existing locations, it may want to carefully consider the implications of locating in a heavily unionized area. Many traditional steel mills are union, while mini-mills are often non-union. Workers in the metals sector in a given community may have distinct preferences regarding unionization.
Average wages: The company must decide where they desire to fall on the local pay scale. Do they want to pay at the average level of similar size manufacturing operations or do they want to be an employer of choice and start employees at a wage above the local average? Benefits should also be considered when comparing compensation in different communities. Given the high cost of healthcare, a good medical plan can be worth more than a couple of dollars an hour in wages.
As mentioned earlier, metals manufacturing operations are typically energy intensive. Based on the anticipated product mix at the new facility and the equipment to be used, the company should define expected use of electricity, natural gas and water. Expected wastewater to be produced by the plant should also be considered. Telecommunications needs should also be defined.
Certain assumptions can be made about utility costs in broad regions of the U.S. For example, electricity is typically more expensive in the northeast. However, variables such as peak usage and load factor can drastically impact the cost of electricity. Reliability is another factor to consider. If accurate utility usage numbers, load factors and reliability requirements can be provided to local providers, accurate estimates of cost going forward can be produced. In some cases, utilities will provide special rates for new manufacturing facilities as an incentive to attract the load to their service territory. Utilities are major players in economic development in most communities throughout the U.S.
Documentation of utility infrastructure should also be requested. The company should make sure that adequate capacity of all utilities is available in the community and that the necessary pipes or lines are in place to deliver the utility to the plant. If not, the cost of this infrastructure should be part of the incentive package requested by the company of the local community.
Water and wastewater are typically provided by community owned utilities. It can be difficult to obtain good projected cost estimates from these organizations, as they are often understaffed and have less sophisticated resources. Good usage estimates are especially important in these cases. In addition, accurate assessments of the composition of sediment in the wastewater from the plant will be needed. Many water treatment plants will not have adequate capacity to treat wastewater with significant amounts of metals. Water needs for both process and fire protection use should be considered.
High speed internet and fiber optic service are infrastructure items that cannot be taken for granted, especially in more rural areas. With the increasing reliance on the internet and electronic data transfer, the availability, cost and reliability of these services should be determined.
It is often cost effective for metals operations to receive raw materials by rail. Rail-served sites are becoming more scarce in the U.S. and if rail is required, may significantly reduce the number of viable sites. The need for rail, including the anticipated number of cars per day, should be prominently highlighted in the site requirements provided to local economic development and real estate professionals. Early in the process, communication should be established with the rail service provider.
With trucking dominating shipping in the US, a careful evaluation of highway access should be made for every project. The location of suppliers and customers should be mapped and estimated driving times determined. An estimate of traffic impacts and highway congestion should be made. Additionally, a community’s tolerance for increased truck traffic should be gauged and truck routes determined.
Real Estate Options
Existing building or greenfield site? Is the company willing to consider retrofitting an existing industrial building to meet their needs, or do the project parameters demand a build-to-suit facility? An existing building can be a more economical choice, especially if a community has an empty building that they can’t fill. The increase in tax base caused by the building renovations and new equipment, combined with the psychological impact of filling a large empty building, may be incentive to provide an attractive financial deal to the company.
A greenfield site may be more desirable for a specialized facility that has new technology and specific building attributes needed to support equipment. This could be especially true for metals companies that supply the medical devices industry and need clean rooms or FDA approvals. The company should also consider whether to lease or own the facility. Many real estate developers will provide attractive options for build-to-suit projects.
Whether considering an existing building or new construction, the company must define building parameters such as square footage, ceiling heights, thickness of floors, number and placement of truck docks, rail access, utility ingress and egress, building height, parking ratios, office space vs. production space, and image.
Once the basic project requirements are clearly defined, the company should start the process of identifying and evaluating potential communities. The company can do the search using their own personnel, or they can engage a consultant to assist them. Using a professional site selection firm can take the burden of receiving and evaluating information from many communities off the company, allowing them to focus on the project itself.
State governments and regional and local economic development organizations will provide real estate and community options based on the project parameters provided by the company. While it is fairly straightforward to evaluate the real estate, utility and labor data, a company must also consider the tax structure and long-term operating costs associated with a location, the attitude of government toward business and development, the image of the community and the proximity of similar firms, competitors and suppliers. The last factor is especially interesting for metals firms. Unlike other industries, metals companies often desire to be located close to related facilities. In some cases, facilities may be co-located, such as a pickling plant and a steel mill. The local economic development organization can help provide information about local industry operations and facilitate introductions if necessary.
Once the potential communities have been narrowed to the top 2-3, the company should request incentive commitments. Incentives such as tax credits, property tax abatements, training funds, infrastructure assistance and attractive financing options may be committed to the project by state and local governments. As mentioned above, no amount of incentives can make a bad location profitable. But, a good location can be further enhanced and reach profitability more quickly with a strong incentive package. As incentives are negotiated, the company should understand the reporting requirements of each program. Millions of dollars in incentives are forfeited each year by companies that do not meet the ongoing administrative requirements.
Finding a new location for a metals facility is a labor-intensive process, but it can pay huge dividends in increased productivity and profitability. Detailed planning and clear definitions of the project requirements will help ensure a successful location. With the significant changes taking place in the industry, firms will continue to seek new locations to serve their customers efficiently.