Metals Industry Creates Challenges and Opportunities
19 Nov, 2010By: Ed McCallum
Sometimes Less Can Be Better
The metals industry shows both difficulty and promise in the near term. From a geographic perspective, the Asia-Pacific region is experiencing higher production and consumption of metals, especially China and India. On a per capita basis, both of these countries are moving more in line with United States and European levels, which could double the metal demand in the long term. China has experienced significant growth in recent years, and capacity has exceeded demand, which could potentially result in the country increasing its metal exports. But if the world economy continues to improve steadily, the demand, and consequently the price for metal, will increase both domestically and abroad. The reluctance to invest in both mining and metal production in the United States could further affect both supply and demand, which will in turn have significant impact on metalworking. As a consequence, there will be increased pressure on manufacturers to try to reduce inefficiencies and cost where there is little left to squeeze out in order to remain competitive. The metals industry is cyclical, highly competitive, and historically has been characterized by irregular capacity profiles. Investment to modernize and automate is no longer an option; it is a requirement to remain competitive. However, for manufacturers thinking about establishing facilities in new locations, cost reductions can also be achieved with smart energy management, worker skills, advanced manufacturing practices, and astute examination of tax treatment.
Obviously, energy requirements vary considerably from company to company within the metals industry. For example, there are significant differences in the energy requirements of a steel mill, casting operation, melting process, or a rolling/finishing operation compared to a forming, cutting, coating, or joining/assembly manufacturing facility. For the former grouping, the cost per kilowatt hour outweighs almost every other consideration with the possible exception of freight costs – depending on the customer base being served. The average retail price of electricity to industrial customers as of October 14, 2010, for the continental United States ranged from 3.94 to 14.78 cents per kilowatt , a multiple of 3.75. Recent experience with one of our clients demonstrates that hydro generated power can approach 2.5 cents per kilowatt, for almost a 6.0 multiplier. This represents a huge savings for an energy intensive company. Of course, reliability and quality are extremely important site selection characteristics - especially if an interruption disrupts a continuous manufacturing process. Such an event could result in not only inventory losses, but also cause severe and very expensive damage to machinery and equipment. Irregular power spikes could affect the quality of precision operations such as machining, forming, or extrusion operations where close tolerances are required. If this is not enough to be concerned about, it is also important to understand the power provider’s fuel mix and generation source for the future. Even if “cap and trade” legislation does not become a reality, understanding the market pressures that will affect power generation, transmission, distribution, and ultimately the cost of connecting into a reliable network needs to be considered. Most utility companies provide engineering consulting services for free to help answer these questions, as well as economic development riders for the first few years of operation to help optimize energy consumption as well as reduce cost. However, it would be an error to assume they all have the same resources or expertise.
The recent recession has impacted manufacturing in general, but it has significantly impacted the metals industry. Reduced demand for products has forced manufacturers to consider a two-pronged approach for cost reduction. One focused on cost reduction through leaner operations that reduced employment and outsourced as many non-core functions as possible. The other included the use of automation to increase efficiency and throughput. Unfortunately, the combined impact of these two actions reduced employment considerably and ultimately some jobs are permanently lost. In fact, according to the United States Department of Labor’s Bureau of Labor Statistics, employment of machinists will decrease by 5 percent from 2008 to 2018 with tool and die-makers decreasing by almost 8 percent during the same time period. While this is not a welcomed situation, the positive is that the remaining industries are taking measures to remain competitive – and hopefully federal tax policy will support these initiatives. One can only speculate if an agreement will be reached between the House and the Senate to facilitate continued investment with the passage of the proposed business stimulus package that allows businesses to expense 100 percent of the cost of machinery and equipment acquired between September 8, 2010, and January 1, 2012. While reports suggest that the research tax credit could become a permanent credit, this is uncertain at present as well. Hopefully, by the time this article is published, this will be history. Nevertheless, the combination of becoming leaner and automation has changed the skills and knowledge of not only the incumbent workforce, but also future hires that will be required as well. This reality has major implications for workforce development. Some states have realized the impending demand that will be forthcoming and have taken the appropriate steps with increased funding for apprenticeship programs, certification programs, and cooperative initiatives with corporations in the private sector to push vocation options into secondary school curriculum as early as possible. Others have not realized this forthcoming demand, and this disparity is not only apparent in the amount of funding that has been made available, but also in the call to action responses with the state and local educational institutions, particularly with community college systems. A cavalier approach toward a site selection, that assumes workforce training initiatives are the same throughout the country, would be a fatal flaw and ultimately doom a project.
The adoption of advanced manufacturing practices is as much a commitment by the local community to make sure that it is embraces the philosophy, as it is a management practice that is implemented within the organization. This is especially true in the metals industry where the diversity of metalworking is especially pronounced. For operations where high levels of production and throughput are required (such as stamping, forming, CNC machining, etc., in the automotive industry), the manufacturer is seeking a community that understands the impact that their decisions have on efficient operations. Efficient transportation corridors, reliable utilities, prompt permitting response times, flexible workforce development programs, and the recruitment/promotion of industrial support services are attributes that well run economic development organizations teamed with enlightened county/city management teams understand. These attributes are no less important for specialty machine shops or fabrication operations that require a similar set of attributes; they are just at different levels of support. A recent example for one of our clients included performing outsourcing due diligence to identify and qualify suppliers capable of fabricating housing units for the manufacturing facility. To the community’s credit, they understood that the site development configuration and infrastructure requests of our client were not simply the whims of the engineering team; instead, they were very important considerations that maximized product flow and minimized cost. Even a signalized intersection that promotes smooth traffic flow is often more than just a convenience.
As mentioned previously regarding investment tax credits at the federal level, state and communities tax burdens should be scrutinized closely. Depending on the type of metalworking operation, the investment can be quite large, and as a consequence, one-time sales tax can sometimes be onerous. Although in most states and communities, machinery and equipment is usually exempt (or refunded) from sales tax, in many locations, property taxes are not - unless relief is available by abatements enabled by statute or by special financing mechanisms. In addition, it is also important to understand what credits, if any, are applicable upon investment or expansion that can be applied against corporate income taxes including how long these can be carried forward. Keep in mind there is no free lunch when it comes to workforce development and training, which begins with the K-12 education systems. Communities offering tax exemptions that tap into revenue sources intended for education may very well undermine the very foundation of their labor force of the future.
According to the Bureau of Labor Statistics, Numerical Tool and Process Control Programmers (SOC Code 514012) and Tool and Die Makers (SOC Code 514111) mean hourly wages approached $24.00 per hour with median wages closer to $30.00 per hour. These jobs command this wage level because of skill and knowledge required to perform these duties. While the number of jobs in metalworking will probably decrease over time, the demand for highly skilled capable employees will not. Automation is increasing the complexity of operators and will also increase the difficulty of finding trained and qualified workers in this field. Manufacturers considering either an expansion or a new location should make sure they understand what impact either an existing or future location can have for ongoing cost. This is no less of an opportunity and a challenge for communities wanting to retain or recruit them.
No matter how the economy rebounds, the metal industry will have a different look in the future. It is important to recognize the changes that are occurring in this industry and be able to adapt to these changes. Companies in the metal working industry need to start planning immediately for these changes if they have not already begun to. It is also important for communities to work with their existing industries to make sure they are meeting the needs of these companies in terms of future workforce, as well as tax burdens. In fact, to enact the necessary changes to remain competitive it will take the concerted efforts of the public and private sector working in tandem to accomplish this.
 Department of Energy, U.S. Energy Information Administration, Report No.: DOE/EIA-0226 (2010/10), http://www.eia.doe.gov/cneaf/electricity/epm/table5_5_b.html