Sometimes
Less Can Be
Better
Metals Industry Creates Challenges
and Opportunities
By Ed McCallum
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. (Continued on page 88)
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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
kilowatt1, 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
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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 twopronged 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
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lost. In fact, according to the United
States Department of Labor’s Bureau of
Labor Statistics, employment of machinists will decrease by five percent
from 2008 to 2018 with tool and diemakers decreasing by almost eight 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
(Continued on page 92)
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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 (Continued on page 94)
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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
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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 (Continued on page 96)
Continuous electrolytic tinning line
COPYRIGHT 2010 UNITED STATES STEEL.
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
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Seamless tubular products
COPYRIGHT 2010 UNITED STATES STEEL.
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. T&ID
1
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
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