Metals & Manufacturing Outlook for October 2018 by Manufacturing Outlook

GOODBYE NAFTA HELLO USMCA PAGE 26

METALS OUTLOOK PAGE 10

ITâ&#x20AC;&#x2122;S ALL ABOUT PERSPECTIVE PAGE 30

SEPTEMBER Brought to you by

ISM PMI:

59.8%

Released October 1st The Full Report Page 32

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Metals & Manufacturing Outlook / October 2018

PUBLISHERS STATEMENT

CONTENTS

TABLE OF CONTENTS

MANUFACTURING OUTLOOK

ASIA OUTLOOK

PUBLISHER’S STATEMENT

September brings more stagnation

Publisher LEWIS A WEISS

Editor in Chief TIM GRADY

NORTH AMERICAN OUTLOOK

SOUTH AMERICA OUTLOOK

Manufacturing in the US, Canada and Mexico

Spotlight on Brazil

METALS OUTLOOK

GLOBAL PMI OUTLOOK

A global look at manufacturing

The cost, making and treating of metals

by Norbert Ore

AEROSPACE OUTLOOK

THE SKILLS GAP ISN’T THE ONLY WORKFORCE CHALLENGE

Turkey’s F-35 dealt

14 AUTOMOTIVE OUTLOOK Harley looks to Europe

16 ISSUES OUTLOOK

by Andrea Olson

26 GOODBY NAFTA HELLO USMCA

In depth look at the new trade deal

30 IT’S ALL ABOUT PERSPECTIVE

The skills gap persists

by Andrea Olson

ENERGY OUTLOOK

THE CREDIT MANAGER’S INDEX

Gas turbine power palnts in Iraq

by Chris Kuehl

EURO OUTLOOK

THE ISM REPORT

A look at what’s happening in Europe

The Manufacturing ROB

Creative Director CRAIG ROVERE Contributing Writers ROYCE LOWE TIM GRADY NORBERT ORE ANDREA OLSON CHRIS KUEHL Production Manager LINDA HOPLER Current Circulation 45,200 Advertising ADVERTISE@MFGTALKRADIO.COM Editorial Office MANUFACTURING BROADCASTING CORPORATION 75 LANE ROAD FAIRFIELD, NJ 07004 (973) 808-8300

Open call for Contributing Writers for new and existing content. Let’s start a conversation – Contact us at editorialdept@mmoezine.com or visit mfgtalkradio.com/writer for more information. © 2018 MBC – Manufacturing Broadcasting Corporation. No part of this publication may be reproduced or used in any form without the prior written permission of the publisher. Metals & Manufacturing Outlook is a registered trademark of MBC.

More good news rains down on manufacturing which continues its 30-month expansion with a manufacturing Purchasing Manager’s Index Report on Business® reading of 59.8 and new orders at 61.8. While some would say that New Orders fell 3.3 points, one must recognize that the report measures the activity above or below 50 – the tipping point for expansion over contraction. So these numbers are rolling up very favorably month-by-month in 2018. It is less a matter of how high they can go, and more of a matter of how long will it last. For those answers, you can listen to Manufacturing Talk Radio, which I host with Tim Grady, where we interview people who follow the numbers day in and day out. Dr. Chris Kuehl, noted economist with a sense of humor (which is unusual for any economist) and a partner in Armada Corporate Intelligence that works with the Fabricators and Manufacturers Association International, the Forgings Industry Association, the National Association of Credit Managers, and many others, foretells of continuing readings above 50 with a possible short softening in 2019. Norbert Ore, our Senior International Correspondent who is the Director of Industry Surveys with Strategas Research Partners, also reports that around the world most economies are doing well. No one is falling down a flight of stairs into recession, and those countries that have struggled are struggling less as all ships are lifted on an incoming tide. Don’t miss Tim Fiore’s report on air with us at the first of every month, followed a few days later by Anthony Nieves, the experts from the Institute for Supply Management who do a deep dive into the Manufacturing Report on Business® and Non-Manufacturing Report on Business® each month – a depth of discussion you won’t hear anywhere else. Manufacturing Talk Radio is a solid source about the heartbeat of American manufacturing from the C-Suite to the shop floor, out the door and across the country by rail or road. Manufacturing companies in the U.S. are very active either building new plants, expanding existing ones, or adding a second or third shift to keep up with demand. Transportation remains a difficulty, with a shortage of trucks and drivers that is slowly resolving; albeit, more slowly than a booming economy would like. But it isn’t a matter of getting your goods or not; it is just a matter of later rather than sooner at present. And then there is the people issue with the U.S. Dept. of Labor reporting over a half million vacant jobs and climbing, a gap that is expected to widen to three or four fold that number as the baby boomers continue to retire and the following generations wonder if college or career is the better choice. Right now, the crystal ball says “a career in manufacturing”. The good news is that we don’t have to talk about any bad news, save tariffs, which get lots of headlines but are almost taken in stride these days. Prices just haven’t jumped upward so much that the consumer is squawking, and supply chain professionals are managing sources well to keep manufacturing purring. So, enjoy this issue of Metals & Manufacturing Outlook while the good times roll. Lewis A Weiss, Publisher

Contact laweiss@gmail.com for comments, suggestions and ideas.

Metals & Manufacturing Outlook / October 2018

MANUFACTURING OUTLOOK

growth in the second quarter of 2018, putting it at 4.2 percent. The (revised) figure for the first quarter of 2018 was 2.2 percent. STEEL PRODUCTION IS STILL INCREASING. World crude steel production for the 64 reporting countries – which represent 99 percent of world crude steel production - for the month of August, continues to rise and was 151,740 MT, up 2.6 percent y-o-y.

OCTOBER 2018

U.S. crude steel production for August 2018 was 7.461 MT, up 5.1 % y-o-y.

MANUFACTURING OUTLOOK There is a new NAFTA deal on the table called USMCA. The trade wars are causing concern worldwide, not least in the U.S. The global PMI continues to ease, but U.S. manufacturing outshines that of all other nations at the moment. The Global Manufacturing PMI rolled up slightly softer in September, but still above 50 which indicates manufacturing growth. In fact, of the 18 global surveys followed by Norbert Ore in the Global Survey Outlook section of Metals & Manufacturing Outlook this month, every measured country was at 50.0 or higher. The BLS jobs report for September shows the addition of 134,000 non-farm payroll jobs – against a forecast of 185,000 jobs - and an unemployment rate falling to 3.7 percent. There were gains in professional and business services, health care, and transportation and warehousing. Manufacturing, after a loss of 3,000 jobs in August, gained 18,000 jobs in September, reflecting a gain in durable goods industries. Manufacturing has gained 278,000 jobs over the past year, with durable goods representing some 80 percent. The U.S. Department of Labor is currently reporting over 500,000 unfilled manufacturing jobs in the U.S., a number that could triple or even

Metals & Manufacturing Outlook / October 2018

quadruple over the next 10 years as more baby boomers retire (at a rate of 10,000 per day) in the U.S. Other economies face an equivalent problem. The impact on manufacturing will be a brain drain that will likely be filled by automating repetitious jobs. The ISM PMI figure for U.S. manufacturing eased back to 59.8 percent in September from August’s 61.3 percent, representing the 25th consecutive month of growth in manufacturing. The overall economy grew for the 113th consecutive month. See NORTH AMERICAN OUTLOOK. IHS Markit’s remarks on the U.S. put the PMI at 55.6 percent in September, a four-month high, up from August’s 54.7. There were further increases in production and new orders, and backlogs expanded at the joint-fastest rate for three years. Input prices rose sharply, due in large part to tariffs. Business confidence is ongoing. The Bureau of Economic Analysis recently released its ‘third’ estimate for the annual rate of Real GDP

Primary Global Aluminum Production in August 2018 was reported at 5.485 million tons, with production in China, at 3.120 million tons representing 57 percent of world total. Production was 452,000 tons in GCC; 376,000 tons in the rest of Asia; 321,000 tons in Western Europe; 320,000 tons in North America and 343,000 tons in Eastern and Central Europe.

says third quarter sales were down 11 percent to 694,638 cars and light trucks. THE ECONOMIST magazine, in its latest weekly report on world economies, highlights changes in Gross Domestic Product (GDP), Industrial Production, Consumer Prices and Unemployment Rates for what it considers the world’s major economies. These data are not necessarily good to the present day, but are mostly applicable to at latest the past two months, and show definite trends in the world economy. The figures are qualified as being the latest available, and with reference to a given quarter or month. The figures for GDP represent the % change on the previous quarter, annual rate. The industrial production

U.S. LIGHT VEHICLE SALES

SEPT 2018

SEPT 2017

TOYOTA

203,098

226,632

- 10.4

FORD

196,496

221,643

- 11.3

FCA

199,819

174,266

+14.7

HONDA

132,668

142,722

- 7.0

NISSAN

122,819

139,932

- 12.2

HYUNDAI/KIA

108,862

109,475

- 0.6

32,112

- 4.8

1,525,122

- 5.5

TOTAL

30,555

1,441,240

PERCENT CHANGE

U.S. car sales down 20 percent, trucks up 2.2 percent. Passenger vehicles remain unattractive to buyers. GM, which reports every three months, Metals & Manufacturing Outlook / October 2018

NORTH AMERICAN OUTLOOK

strongly, whereas Ontario and Quebec both experienced softer overall rates of expansion, largely reflecting a weaker contribution from new order growth. Canadian light vehicle sales continued to fall in September, and at a 7.4 percent y-o-y drop posted the largest monthly drop since 2009. This was the seventh straight month of decline. Sales were down to 173,000 cars and light trucks, the lowest monthly sales figure since 2014. Car sales were down 13.7 percent, light trucks down 4.7 percent. It is suggested that uncertainty over NAFTA negotiations may have contributed to the decline in sales.

The Institute of Supply Management PMI figure eased back from 61.3 in August to 59.8 in September. by ROYCE LOWE Of the 18 manufacturing industries, 15 reported growth in September, in the following order: Textile Mills; Miscellaneous Manufacturing; Plastics & Rubber Products; Computer & Electronic Products; Food, Beverage & Tobacco Products; Machinery; Apparel, Leather & Allied Products; Paper Products; Electrical Equipment, Appliances & Components; Chemical Products; Petroleum & Coal Products; Transportation Equipment; Furniture & Related Products; Fabricated Metal Products; and Non-metallic Mineral Products. The only industry reporting contraction in September is Primary Metals. Comments from the manufacturing sector are mostly very positive, but there are concerns regarding tariffs, supply chains and lack of skilled and unskilled labor.

Metals & Manufacturing Outlook / October 2018

THE COMPLETE ISM REPORT ON BUSINESS MAY BE FOUND AT THE END OF THIS eZINE.

MEXICO’s production took a positive turn in September and the PMI rose to 51.7 from August’s ten-month low of 50.7. There was an upturn in production, and exports increased at the strongest pace in over three years. There was further job creation and input/output costs and charges softened. Business is optimistic for the next twelve months. Mexico produced 1.750 MT of crude steel in August, up 7.0 percent y-o-y.

Canada produced 1.020 MT of crude steel in August, down 2.2 percent y-o-y. There was slower overall growth across CANADA’s manufacturing sector in September, largely reflecting lower increases in production and new order growth. The PMI in September, 54.8, down from August’s 56.8, was a nine-month low. Job creation was maintained in September as manufacturers sought to reduce backlogs and boost operating capacity. Suppliers’ delivery times continued to lengthen. There was a lack of suitably skilled workers available.

ISO9100:2015 and AS9100D

Alberta and B.C. saw business conditions improve Metals & Manufacturing Outlook / October 2018

METALS OUTLOOK

OCTOBER 2018

METALS OUTLOOK THE COST, MAKING, TREATING AND APPLICATIONS OF METALS

So why all this talk about Sheffield? The Boeing facility will open late this year. The collaboration will surely be good for both Sheffield and Boeing, and will be long-lasting. The parts produced in Sheffield will be shipped to Portland, Oregon for assembly. A step forward from Ulysses S. Grant, the collaboration he spoke of in Cutler’s Hall so many, many years ago.

by ROYCE LOWE General Ulysses S. Grant had just left his second term as the 18th President of the United States when he stood at supper at Sheffield’s Cutler’s Hall and appealed to South Yorkshire’s industrialists to work together with the United States for mutually beneficial economic prosperity. Grant said that business at the time was a little depressed, but he forecast that the day was not that distant when trade and commerce would revive. Grant was in Sheffield during the advent of the Second Industrial Revolution, when manufacturing was being transformed by the introduction of new processes and new materials. The era saw the invention of the Bessemer process, where steel was made quickly, hence cheaply, by blowing air through molten iron to make steel, a precursor to the much later Basic Oxygen Process. In the early 1900s, Harry Brearley, a metallurgist, in experimenting with gun-barrel steel, was credited with the invention of stainless steel; though others around the world also laid claim to having done that. Cutler’s Hall is a kind of museum that displays what the city was renowned for. Cutlery, together with the steel it was made from, was exported world-wide, and the word Sheffield became synonymous with quality and reliability. Helped no doubt by the far reaches of the British Empire, Sheffield cutlery could be found at tables throughout the world. There was a knife made for everything, and in those days when the printed word was law, a catalogue too. In the nineteenth century Sheffield was the world center of steel, and lost its crown only through the upsurge of American steel, which was helped

Metals & Manufacturing Outlook / October 2018

Sheffield Advanced Manufacturing Research Centre

at the time by a large import of British workers. Japan later named one of its cities Sheffield, so it could proudly and truthfully stamp “Made in Sheffield” on its cutlery. The story of Sheffield Steel filled many books. Its demise in the 1980s, along with the closure of many of Britain’s coal mines, left mostly bitter memories, some of which still divide communities, even families. Major steel mills in Sheffield were demolished to make way for shopping centers and stadiums. So why all this talk about Sheffield? Where are we

going with all this? To Boeing, that’s where. More to the point to AMRC, the University of Sheffield Advanced Manufacturing Research Centre with Boeing, a collaboration that came about back in 2001 when Sheffield met Boeing and the two decided that the Research Centre idea would be good for companies large and small who labored in the fabrication and treatment by many methods of metals in all their forms and content. The Research Center counts Rolls-Royce, BAE Systems and Airbus among its partners. Its staff, at around 500, is increasing, and mostly based upon an ongoing apprenticeship program.

Hot-rolled and cold-rolled steel prices in the U.S. eased slightly of late, with late September’s prices for H.R. coil at around $860/ton and C.R. coil at around $950/ton. Hot-rolled coil has fallen by some $70 per ton since early July, cold-rolled coil by some $80 per ton since May. Non-ferrous metal prices are somewhat volatile, with aluminum at $0.925 per pound in early September, $0.98 in early October, down from $1.15 per pound in April; Copper at $2.67 per pound in early September, to $2.85 in early October, from $3.30 in June; Nickel at $5.62 per pound in early September, $5.65 in early October, down from $7.0 in June; Zinc at $1.10 in early September, $1.21 in early October, down from $1.48 in April.

Metals & Manufacturing Outlook / October 2018

AEROSPACE OUTLOOK

AEROSPACE OUTLOOK Mention the name F-35 and we may think of a fighter aircraft that has to date cost the U.S. Defense Department an absolute fortune, and has suffered some minor quality problems during its manufacture to date – if we can consider a quality problem on a fighter aircraft to be minor.

OCTOBER 2018

Mention the name F-35, and the word Turkey might come up, as in the country.

AEROSPACE OUTLOOK

But first : the U.S.D.O.D. and Lockheed Martin Corp., the prime contractor, recently settled terms on the cost for the next series of F-35 Lightning II Joint Strike Fighter Jets, following lengthy negotiations and a preliminary deal was reached in mid-summer. The agreement is worth a reported $11.5 billion, but cuts unit costs for all three F-35 models. This allows the Pentagon and the program’s primary contractor to proceed with long-term purchase plans for the program.

by ROYCE LOWE

The F-35 is a series of three Stealth-enabled single-engine aircraft designed for ground attack and combat, and deployed by the U.S. Air Force, the U.S. Navy and the U.S. Marine Corps, together with the defense forces of many allied nations. The program is under ongoing scrutiny and criticism for the high cost of individual aircraft, and Lockheed and other contractors have made a steady effort to contain costs for future deliveries.

The Lockheed F-35 Lightning on the runway at the Los Angeles Airshow

Lockheed states that the deal for lot 11 of the program covers production and delivery of 141 F-35s, 91 of which are for the U.S.A.F., U.S.N., and U.S.M.C. A further 28 are for the program’s international partners and 22 for foreign military sales clients. Delivery of Lot 11 will start in 2019.

That’s all well and good we might say. The problem is that as a global leader in aerospace manufacturing, Turkey counts ten companies who will make some $12 billion worth of parts for the F-35, including such key components as the center fuselage and some landing gear. For some items, such as the cockpit display, Turkey is the world’s only source. If the U.S. blocks this deal, Turkish president Erdogan could cut off his country’s flow of parts. Such a break in the supply chain from Turkey would result in an accompanying break in aircraft production, delaying delivery of 50-75 jets and, as Defense Secretary Mattis wrote to Congress in July, re-sourcing of parts would take 18-24 months. Mattis must submit a report to Congress by midNovember regarding the potential impact of any change to Turkey’s participation. Lockheed says the sale to the Turks is on track. If President Trump is going to put tariffs on steel and aluminum under the guise of national security, what is the U.S. doing by sourcing critical components for its fighter aircraft from single-source suppliers that may be less than cooperative during wartime? The U.S. can crank up steel production or divert steel deliveries quickly during war, but finding another source for complex components for a front-line aircraft for three branches of our military during war would basically ground the flying fleet. Yes, friendly nations and all that, but should strategic national defense build its supply chain this way?

Manufacturing Laughs

Under the new deal, unit costs for the F-35A, conventional take-off and landing, have been reduced by 5.4 percent to $89.2 million; F-35B, short take-off and vertical landing by 5.7 percent to $115.5 million, and F-35C by 11.1 percent to $107.7 million. As production increases, costs will be on track to reduce the F-35A to $80 million. There is, however, a potential spanner in the works. One of the countries that wants to buy (100) F-35s is Turkey. It also has an agreement to buy a Russian air defense system, the reason Congress passed legislation in August that would block the F-35 sale.

Metals & Manufacturing Outlook / October 2018

AUTOMOTIVE OUTLOOK

Europeans met Harley-Davidson right after WWII, when American soldiers rode around West Germany on big bikes with 45 cu. in. engines

by ROYCE LOWE What’s big and shiny and (was) mostly made in America? The Harley, the Road King, the machine from which emanates that lub-dub growl, that powerful purr that sends a lot of motorcycle lovers wacky. While Donald Trump is berating Europe for not buying U.S. cars (most Europeans would prefer a root canal treatment), sales of Harley-Davidson have jumped in the last decade from 3.3 percent to 6.4 percent on the German market. And that’s in BMW land, where you can buy a really smooth, comfortable motor cycle ride. But the Harley gives ‘ein gefuhl,’ as the Germans call it, a feeling. For a mere $28,000. American car companies have an abysmal record in Europe – with the possible exception of the Ford Mustang – as Cadillac and Chrysler fail to make a dent in Mercedes and BMW. With U.S. sales falling, the European market has become so important to Harley that the company is willing to invoke Trump’s wrath, and it announced a few months ago that it would move

Metals & Manufacturing Outlook / October 2018

production abroad to get around retaliatory tariffs enacted in the president’s trade war over steel and aluminum shipments. The EU is imposing a 25-percent tariff on U.S. motorcycle imports in response to Trump. Harley has competed and grown in Europe, without a trade war, testament to product quality and, let’s not forget, ‘the feeling.’ A strong dealership network completes the package. Europeans met Harley-Davidson right after WWII, when American soldiers rode around West Germany on big bikes with 45 cu. in. engines. A generation later, in 1976, the company was surely thinking of those U.S. troops when it opened Harley-Davidson Germany. Thorsten Knorr, president of the Harley Club Deutschland, recently went with five friends on a 15-day, 4,500 mile journey through Scandinavia. They rode as far as North Cape in Norway, the northernmost point in Europe, and cruised through the Arctic Circle. Harley’s a dream that people buy into. It’s also a quality American product. Metals & Manufacturing Outlook / October 2018

ISSUES OUTLOOK

OCTOBER 2018

ISSUES OUTLOOK A new report, released in early September, says the manufacturing skills gap continues to hinder large segments of the industry, represents a significant impediment and threat to manufacturing growth, and the adoption of new technologies. The report says that the main business challenges for manufacturers are finding candidates, imparting skills to them, and using their innate and newly-acquired talents.

We’ve all heard of the German apprenticeship scheme. Some smaller companies in the U.S. have even put it into practice. But the apprenticeship scheme has not caught on in the U.S., surely to its detriment. Manufacturing accounts for almost a quarter of Germany’s economy. The U.S. is about half of that at 12%. The key element is Germany’s apprenticeship training program. Some half a million young Germans enter the workforce through these apprenticeship programs every year. They provide a steady stream of highly qualified industrial workers that helps Germany maintain a reputation for producing top quality products. One young 19-year old is training at Hebmuller Aerospace to be an industrial clerk. This doesn’t sound like a very desirable, high-up-the-ladder kind of job, but it will actually qualify our young candidate to do a variety of jobs from material purchasing to marketing. Each week he spends three-and-a-half days at the company’s production

Hence the necessity for practical work. It’s much easier for young people to understand what they’re doing, what and why they’re learning if they have experienced the product first hand. Hebmuller, founder of the company, says only three of the 16 people who work for his company went to university. Even in some of Germany’s larger companies, at upper-management level, many of the personnel are a product of apprenticeship programs. Apprenticeships are one of the foundations of Germany’s manufacturing strength. U.S. presidents have taken notice. Even Donald Trump, who signed an executive order in June 2017 aimed at upping the number of U.S. apprenticeships tenfold to some 5 million. However, funding is inadequate. For vocational education to be effective it must be directly connected to specific jobs at real companies. There is also the U.S. stigmatization of vocational education, so most parents still, today, opt for college for their kids. There is no such stigma in Germany, where hard work on an apprenticeship program is recognized and rewarded. Ludger Deitmer, international research coordinator at the Institute of Technology and Education at the University of Bremen, has extensively studied apprenticeship. He suggests that the failure of the U.S. to widely provide this kind of training has hurt U.S. manufacturing. “Vocational training should be one of the medicines, the key medicine, in how to make America great again.” Deitmer says. One problem in the U.S. is getting American companies to contribute, because of the cost of training. In Germany, a firm trains the apprentice and pays them a modest wage. The second year sees the apprentice already doing 60 percent of the workload of a fully skilled worker. So there is a return: after three years there is a highly-skilled worker, at a cost to the employer of some $10,000.

by ROYCE LOWE We’re speaking here of a new report about a manufacturing skills gap, a situation that is far from new but to which there has been so far no major, sweeping solution at the federal level.

Metals & Manufacturing Outlook / October 2018

center, and a day and a half at a government funded school. Before he can become a clerk, though, he must first learn how to build the valves Hebmuller sells to aerospace companies. He’ll be a better clerk because he’ll know the valves inside out when time comes for him to describe them to a customer or vendor.

There is a serious lack of skilled workers in the U.S., but the U.S. has struggled to create widespread apprenticeship programs. It will not be easy to develop a viable American apprenticeship program, in part because the U.S. has historically had a barrier between schools and business, partly because of the differences between the various state-run education systems. But persistence must surely be the order of the day here. Something that has worked so well in Germany, Switzerland and Austria must surely be worth pursuing. It’s difficult to believe that the U.S. can’t figure out a way to (find the money to) do it.

Metals & Manufacturing Outlook / October 2018

ENERGY OUTLOOK

ENERGY OUTLOOK by ROYCE LOWE

OCTOBER 2018

The gas turbine power plant industry is in a deep slump and the winner of this contest will get a welcome boost.

ENERGY OUTLOOK

Siemens AG and General Electric Co. are about to do battle for a contract worth an estimated 13 bn euros ($15 billion) to develop power stations in Iraq.

Siemens’s CEO, Joe Kaeser, recently met with Iraqi Prime Minister Hander Al-Abadi to discuss a plan involving installation of 11 gigawatts of powergenerating capacity over four years, with the attendant creation of thousands of jobs. Siemens’s chances of winning this order are high, but Iraq’s Deputy Electricity Minister says the government hasn’t picked a winner or set a price tag on the order. (It should be noted that a lot of available information on this contract was given by people ‘who do not wish to be identified.’)

This could be the biggest project ever for Siemens. At the moment they seem to be favorite to win. They certainly seem to be prepared. Kaeser said if the government is ready today, we start tomorrow. A little time will tell.

GE is in there and has presented a proposal to the government that would add capacity, maintain and improve existing plants and strengthen the networks. There has been a broad decline in GE’s gas-power sector, due in some extent to renewable energy sources, and the business at GE has been a huge drag on the parent company.

Manufacturing Laughs

The proposed power station in Dohuk, Northern Iraq

Metals & Manufacturing Outlook / October 2018

Demand for the type of large gas turbines used in power plants is cited as about a quarter of manufacturing capacity through 2020. Timing of this order is not of the best for GE after it recently disclosed that its flagship gas turbine is suffering from an ‘oxidation issue’ that has already prompted one customer in the U.S. to temporarily shut down two plants. Metals & Manufacturing Outlook / October 2018

EUROZONE

GLOBAL OUTLOOK

EUROZONE

by ROYCE LOWE IHS Markit’s Eurozone Manufacturing Composite Purchasing Managers’ Index (PMI) eased back from 54.6 in August to 53.2 in September as the area witnessed the slowest growth of its manufacturing sector for two years. Exports increased only slightly. Global trade concerns push confidence down to a near three-year low. The current eurozone expansion period is now at 63 months, but September’s growth is the weakest since September 2016. France and Germany’s exports took a tumble in the month. There was a further solid growth in employment, but the weakest in one-and-a-half years. Business sentiment is at a three-year low, due it is said to global trade protectionism. Crude steel production in Germany in August was at 3.900 MT, up 7.5 percent y-o-y; in Italy 1.162 MT, up 6.0 percent y-o-y; in France 0.944 MT, down 16.8 percent y-o-y and in Spain 1.205 MT, up 6.6 percent y-o-y. Russia’s crude steel production for August was at 6.170 MT, down 0.1 percent y-o-y; Ukraine’s was 1.786 MT, down 3.7 percent y-o-y. Car sales in Western Europe plummeted in September as the Worldwide Harmonized Light Vehicle Test (WLTP) became mandatory on September 1, forcing carmakers to halt deliveries of vehicles that had yet to be re-certified. Western European car sales were down 23 percent in September, with total sales down 30.5 percent in Germany, 20.5 percent in the UK, 12.8 percent

Metals & Manufacturing Outlook / October 2018

ASIA OUTLOOK

in France and 25.4 percent in Italy. The Seasonally Adjusted Annualized Rate (SAAR) fell 39 percent from August to 11.26 million cars last month. IHS Markit’s PMI for the UK was up in September to 53.8 from August’s (corrected) 53.0 figure. There was an expansion in production and new orders – both domestic and export, and employment was up at the end of the third quarter. Purchasing costs were up with increases in electronic components, energy, food products, metals, paper, plastics, resins and timber. Supplier delivery times were extended. There was also an improvement in business optimism in September. The UK produced 0.550 MT of crude steel in August, up 0.8 percent y-o-y.

GLOBAL OUTLOOK

ASIA OUTLOOK

by ROYCE LOWE CHINA saw what may be termed stagnation in September, with little change in production and new orders, and new export business falling at the quickest rate since early 2016. The month also saw the quickest rate for job cuts in 14 months. The PMI for September came in at 50.0, down from August’s 50.6. There is concern in China regarding the global trade wars, and weakened optimism regarding the 12-month business outlook. CHINA produced 80.326 MT of crude steel in August, up 2.7 percent y-o-y; Japan 8.805 MT, up 0.9 percent y-o-y; India 8.839 MT, up 3.7 percent y-o-y and South Korea 6.097 MT, un-changed y-o-y. Taiwan produced 2.040 MT in August, up 8.2 percent. Chinese light vehicle sales for August, sedans, SUVs and minivans were down for a second consecutive month, 4.6 percent y-o-y, to 1.8 million. Total vehicle sales, including trucks and buses, fell 2.1 percent to 2 million. Total for the first eight months was up 2.6 percent at 15.2 million. All-electric vehicle sales were up 32 percent to 72,000 units; gas-electric hybrids up 131 percent to 28,000 units.

are expecting order book volumes to expand further. Goods producers are optimistic regarding future production. On the other hand, the level of positive sentiment is the lowest in some two years. INDIA’s operating conditions picked up in September, and the PMI rose to 52.2 from August’s 51.7, as production and new orders – both domestic and export - showed stronger gains. Price pressures intensify with a stronger U.S. dollar on materials such as fuel and steel. Business confidence in India is high.

Manufacturing Laughs

In Japan, September saw growth in production and new orders, with a further monthly decline in export orders. The PMI was unchanged from August’s reading at 52.5. Input delivery times continue to lengthen sharply. On the one hand, firms are upbeat and

Metals & Manufacturing Outlook / October 2018

SOUTH AMERICA

GLOBAL PMI OUTLOOK

GLOBAL OUTLOOK

STRATEGAS

GLOBAL PMI OUTLOOK

SOUTH AMERICA

by NORBERT ORE Goodbye NAFTA! Hello USMCA! The announcement of a new U.S., Mexico, Canada trade agreement will form the cornerstone of a new era of trade relationships between the three countries. While there were many good things about NAFTA, it was old and tired. This change comes at a time when the U.S. economy is booming and, when the U.S. does well, its two closest trading partners will also prosper. A North American marketplace featuring low cost energy and diverse capabilities should be a formidable global player. 17 of the 18 surveys that we closely follow indicated growth this month. The exception, China’s Caixin, fell on the mid-point at 50, but that should not be a cause for concern as it has averaged a modest 51 percent for the past 18 months. The JP Morgan Chase Manufacturing PMI®

by ROYCE LOWE BRAZIL saw marginal growth in September, with its PMI easing slightly from August’s 51.1 to 50.9. New order growth was the highest in five months, but export sales fell significantly. Input costs were at a record rate, with the strong U.S. dollar. The production rate was down, there was a decline in backlogs and a further slight cut in employment. Brazil’s crude steel production for the month of August was 3.020 MT, an increase y-o-y of 2.2 percent. The JP MORGAN GLOBAL MANUFACTURING PMI – a composite index produced by JPMorgan and IHS Markit in association with ISM and IFPSM (International Federation of Purchasing and Supply Management) – dropped to a 22-month low of 52.2 in September from August’s 52.6. Global manufacturing production growth is at a two-year low. There were modest rates of expansion for consumer, intermediate and investment goods in September, with the PMI levels falling in consumer and investment categories, but rising slightly in the intermediate category. The U.S. remained the bright spot, with its PMI at a four-month high, with Japan and the eurozone following. China registered its lowest PMI reading since May 2017. There was a further increase in global employment as companies responded to higher production needs and rising backlogs of work. But the rate of job growth was at a 14-month low.

Metals & Manufacturing Outlook / October 2018

Manufacturing Laughs

in expansionary territory for the 27th consecutive month. China: China’s Official Report, the CFLP PMI (50.8, -0.5), and the Caixin Manufacturing PMI (50.0, -0.6) slowed in September, continuing the slowdown that began in early 2016. India: India’s PMI (52.2, +0.5) accelerated while posting its 14th consecutive month of growth. The economy is growing and the stage appears set for further expansion. South Korea: Output and employment gains helped drive the PMI (51.3, +1.3) above the 50-mark following six months of contraction. Cost pressures were noted as particularly troubling. Business confidence improved, but remains at a low level. Taiwan: Taiwan’s PMI (53.9, -2.1) stayed in expansionary territory for the 31st consecutive month. During that period, the PMI has averaged 57.0 percent and places Taiwan among the best performing countries over the past three years. The decline in September’s reading was reportedly driven by trade tensions between the U.S. and China – China is Taiwan’s largest trading partner. North America: Canada’s PMI (54.8, -2.0) expanded for the 31st consecutive month. The new trade agreement should enhance Canada’s prospects for continuing growth. Mexico’s PMI (51.7, +1.0) established a low water mark and should strengthen going forward now that the trade picture has improved.

(52.2, -0.4), continued a downward trend from a high of 54.5 percent in December 2017. Overall, we see a leveling in the overall velocity of these economies. Eurozone: The Eurozone PMI (53.2, -1.4) expanded, but at a slower rate again – a trend that began in December 2017. The EZ’s manufacturing expansion continued to be led by Netherlands, Ireland, Austria, Germany, and Greece which averaged 55.7. Spain, France, and Italy averaged 51.3 – a level that is less supportive of hiring and investment. United Kingdom: The UK/ CIPS PMI (53.8, +0.8) produced another respectable reading post-Brexit, remaining solidly

Metals & Manufacturing Outlook / October 2018

THE SKILLS GAP ISN’T THE ONLY WORKFORCE CHALLENGE

2) Shore-Up Your HR Skillsets - Is your HR team flipping through resumes and looking for keywords, or evaluating candidates based on their skills? Your HR team needs a clear strategy to effectively assess organizational talent needs, and how they will assess candidates against the skills needed for the role. I recently interviewed a CEO of a construction company, and he noted that they will only consider applicants with 5 specific previous titles in their work history. Titles vary from organization to organization, but skills are the real transferrable value. You need to have a strategy to effectively evaluate and vet candidates skills.

THE SKILLS GAP ISN’T THE ONLY WORKFORCE CHALLENGE

3) Look Outside Your Traditional Recruitment Channels and Approaches - So you have flooded the major internet job boards with job listings, but you’re still getting little response or lackluster candidates. Why? Firstly, you’re likely not “selling” the position. Is it written in a way that talks about dry duty details and a canned overview of your company? Or does it communicate excitement, and value to the potential employee (such as learning new skills, upward mobility, the impact of their role, etc.)? Plain Jane just doesn’t cut it anymore. Secondly, if you’re getting little success online, go to where your candidates are. This can range from trade schools to job fairs, to holding your own open house. Again, just like prospecting for customers, you need to prospect for employees - they won’t simply just come to you.

by ANDREA OLSON We talk extensively about the “skills gap” facing manufacturing. The problem is this only partially true. Yes, there’s a deficit in our skilled trades pipeline, and as employers, educators, and communities, we need to rally around the value of skilled trades and support the growth of this critical workforce - starting in junior high and beyond. Yet, there’s another gap that mid-market manufacturing is facing - The Strategic Gap - and it has many facets. Historically, manufacturing hasn’t had to look far for employees. There was always a good pool of skilled labor, at a reasonable price, and they came to companies with minimal effort. The challenge today is that the environment has changed. Unemployment is low, so it’s an employee - not an

Metals & Manufacturing Outlook / October 2018

THE SKILLS GAP ISN’T THE ONLY WORKFORCE CHALLENGE

employer market. This means that the up-andcoming workforce has more power, more options, more choices, and can make more demands on employers. Whether you feel this is “right” or not, is immaterial. If you need to get strong talent into your organization, you need to start doing these 5 things immediately: 1) “Selling” Your Organization - You need to sell your organization, the role, and the value of being a part of your company to potential employees. And just like a potential customer, you need to frame your sale around candidate interests and needs. This starts with understanding what potential employees are looking for. Ask them and then develop a strategy to meet those needs. Remember, you are competing for talent.

4) Look Beyond Your Traditional Competitors - Your competitors are not just other manufacturers. I spoke with the Vice President of Operations at a regional manufacturing company and he noted they struggle to secure talent, but they offer very competitive salaries. While compared to other similar, smaller manufacturing companies in the area, their rates can be up to 12% more, but compared to the local Coscto (yes, Costco), they are almost 22% lower. In addition, they offer less flexibility in hours, time off and benefits. Even though you might believe a candidate is seeking a position in the manufacturing industry, they might be able to simply find a better paying, more flexible and higher growth job in another industry.

5) Re-Examine Your Expectations - The New York Times reported the story of a manufacturer outside of Milwaukee that had 25 positions open for skilled workers. The manufacturer received more than 1,000 applications for their positions. The company hired the 25 needed, but within a month fired 15 of the employees because of their dissatisfaction with their wages and the company’s work rules. The manufacturer’s pay rate for a skilled technician with an associate degree was $15 per hour. By comparison, the local McDonald’s was paying $14 per hour. Though not everyone is motivated by salary, it’s critical to understand what your expectations are as an employer, and if they are reasonable to the market. I spoke with a manufacturing CEO who said he was having a hard time finding welders - yet, he said he was looking for 15 years experience for $14/hr, in addition to someone who would not call in sick, come to work early, and just “selling”keep their head down and stay quiet”selling”. No doubt he will be hard-pressed to find talent. In short, the recruitment and retention game has changed for manufacturing. In this competitive environment, it may be difficult to pay the wages and benefits necessary to attract individuals with the education and skills desired; however, that does not mean that those skills are missing. You need to fill the Strategic Gap if you want to truly overcome today’s workforce challenge. About the Author Andrea’s 20-year, field-tested background provides unique, applicable approaches to creating more customer-centric organizations. A 4-time ADDY® award-winner, she began her career at a tech startup and led the strategic marketing efforts at two global industrial manufacturers. In addition to writing, consulting and coaching, Andrea speaks to leaders and industry organizations around the world on how to craft effective customer-facing operational strategies to discover new sources of revenues and savings. Connect with Andrea to access information on her book, workshops, keynote speeches, training or consulting. More information is also available at prgmatik.com and nodisruptions.com

Metals & Manufacturing Outlook / October 2018

COVER STORY

COVER STORY for all the countries exporting these products to the U.S. and imposed a 25% tariff on steel and a 10% tariff on aluminum to pressure countries to come to the negotiating table to update trade agreements. That included NAFTA with Canada and Mexico.

GOODBYE NAFTA – HELLO USMCA

ed at a time when OPEC controlled oil and U.S. oil reserves could not meet demand. As a result, the U.S. wanted to ensure its access to oil from Mexico and Canada without either nation joining OPEC, and was willing to give away a bit too much for that security. by ROYCE LOWE & TIM GRADY The impetus for the North American free trade zone actually came from Gov. Ronald Reagan, who made the idea part of his campaign during his run for the presidency in 1979. Canada and the U.S. signed the Canada-U.S. Free Trade Agreement in 1988, and shortly thereafter Mexican president Carlos Salinas de Gortari approached President George H.W. Bush to propose a similar agreement in an effort to bring in foreign investment following the Latin American debt crisis. When the two began negotiating, Brian Mulroney, Canada’s prime minister, feared all the advantages ensuing from the U.S.-Canada agreement might be frittered away by a U.S.-Mexico bilateral agreement and he asked to be included in the U.S.-Mexico talks. Through changes of government in the U.S. and Canada, a trilateral agreement known as NAFTA,

Metals & Manufacturing Outlook / October 2018

or the North America Free Trade Agreement, was signed into law on December 8, 1993, and went into effect on January 1, 1994. The bill that was signed by Bill Clinton prompted the then-president to utter, “NAFTA means jobs. American jobs. If I didn’t believe that I wouldn’t support this agreement.” NAFTA then replaced the previous Canada-U.S. Free Trade Agreement. All three countries involved were delighted with that outcome then. NAFTA was designed to last indefinitely. However, 25 years after it took effect on trade between the U.S., Canada and Mexico, things evolved differently. NAFTA, from the perspective of the U.S., was craft-

It was close. A couple of days before a deadline, Trump was still saying not too complimentary things about Canada. His team had successfully negotiated an updated agreement with Mexico using a divide and conquer strategy that left Canada the odd man out. Our northern neighbor meanwhile continued to push for a solution, knowing full well that trade in North America couldn’t function without its very important contribution; as Trump also knew. At the eleventh hour, common sense prevailed.

Today, the USA is an oil exporter and has more than enough proven reserves for its own needs for the long foreseeable future. What it no longer wanted were U.S. jobs and assembly in the automotive industry going south to Mexico unabated, and the heavy dairy restrictions on milk, cheese and other dairy product exports to Canada that were embodied in NAFTA and allowed Canada to continue the price controls and protection from imports which had been in place across its provinces since 1970.

Pending approval by lawmakers from all three countries, the agreement affects about $1.2 trillion in goods each year. The legislatures of all three participating countries must ratify the agreement which could happen in Mexico and Canada within 60 days, although Congress is not expected to take it up until 2019. However, the new agreement, awkwardly named the United States Mexico Canada Agreement or USMCA, does not resolve the tariffs on steel and aluminum being exported by Mexico or Canada into the U.S., and that remains a sticking point that both countries may insist be resolved before their respective governments would approve the deal.

The negotiating tool that President Trump chose to break the logjam on old trade agreements he felt were no longer fair to the U.S. was Section 232 of the Trade Expansion Act of 1962 which authorizes the President of the United States, through tariffs or other means, to adjust the import of goods or materials from other countries if the President deems the quantities or circumstances surrounding those imports to threaten national security. The President focused on steel and aluminium

Nonetheless, goodbye NAFTA, hello USMCA. The ‘worst trade deal in the history of the U.S.’ according to President Trump, will go into the sunset, and many agreed it was seriously flawed and outdated. Now, NAFTA will be replaced by USMCA, which is intended to take effect in 2020 and be reviewed every 6 years, essentially reviewed twice before its preliminary expiration date of 2036, although in could be extended to 2052. It impacts three main areas: Automobiles, Dairy and Intellectual Property. Metals & Manufacturing Outlook / October 2018

COVER STORY Automobiles

As far as automobiles go, 75 percent of parts must come from the USMCA region to receive a duty-free designation – up from 62.5 percent. A further requirement is that at least 40 percent of a car be made by workers whose average pay is $16 per hour. This means some of Mexico’s cheap labor, now at $3.41 per hour for parts and $7.34 per hour for assembly, could shift to the U.S. where the current production wage is $20.00 unless the auto industry in Mexico decides to adjust wages sharply higher.

COVER STORY This might mostly apply to European and Asian carmakers building vehicles in Mexico for export to the U.S. In many cases, foreign carmakers would likely choose to pay a tariff since this would be cheaper than investing to relocate production for big items, like engines and transmissions that they import into the NAFTA region. Thus, since automakers won’t be able to source parts as freely, there will be added costs. Add this to the current record-high vehicle prices and some customers may balk at paying even more. One of the present cooling spots of concern in this strong economy is the automotive sector, which could peak in 2019 or 2020. It will take some time to determine how the USMCA will affect this industry as 2020 approaches.

This has been the elephant in the agreements around the world. As more intellectual property became digital, it became easier to steal. It was less about grabbing a physical device and more about grabbing the data files, whether those were designs, drawings, or final products such as music or videos. Dairy exports to Canada were severely restricted by NAFTA and the dispute process, which remains largely similar in the USMCA, could not loosen the reins for farmers in the upper Midwest, particularly Wisconsin; America’s Dairy-land. How does a Republican win a traditionally blue State? Make a promise during the campaign that directly benefits the heart and soul of that State. For Michigan, it was automotive. For Wisconsin, it’s dairy. With the USMCA in place, U.S. dairy farmers will be able to ship more products to Canada, about $560 million, a clause certainly not popular with their Canadian peers, but this increased access

Metals & Manufacturing Outlook / October 2018

Tariffs

Intellectual Property

Dairy

When USMCA takes effect, 70% of the steel and aluminum used in vehicles entering the U.S. will have to come from the U.S., Canada or Mexico.

could backfire if the demand for raw milk increases to the deficit of value-added products such as ice cream, and an attendant hit against profit margins. However, this ‘concession’ if fully realized would loosen the grip on just 3.5% of Canada’s $16 billion dairy industry.

The dispute resolution process of NAFTA was largely ineffective. While the process will remain the same, there will be more emphasis on implementing solutions. For the first time, counterfeit or pirated goods in any of the three countries can be seized, or their production or pirating shut down, with harsher penalties and the allowance for more aggressive enforcement. This remains a major outlier in the disputes between the U.S. and other nations, and not as easily resolved, but for the USMCA, significant progress was achieved.

At some point, the tariff issue between countries will be resolved. Those with Canada and Mexico may remain in place until the USMCA is signed, but be extinguished well before the USMCA takes effect in 2020. The U.S. president stated that without tariffs there would be no trilateral agreement. It will be interesting to see if there is any further movement in the easing of these tariffs. U.S. manufacturers constantly complain about the tariffs’ effects on their bottom line, and they have no option but to pass this onto their customers. Signed, Sealed and Delivered Until the USMCA is signed, anything is possible. Someone could balk. The tariffs will most likely become a hold-out card. But NAFTA is simply too outdated to fall back on, and President Trump has stated that the U.S. will back out of it if no other agreement is reached, so USMCA will end up signed, sealed and delivered for implementation between the three North American trading partners, and the tariffs will evaporate. Once signed by the respective legislatures, USMCA will become the topic of conversation in business circles and entities from large corporations to mom-and-pop farms as they begin to adapt to the adoption of the new rules of play. We will see the effects in 2019.

Metals & Manufacturing Outlook / October 2018

IT’S ALL ABOUT PERSPECTIVE

to solve a problem. Did you take the time to ask someone else what they thought a reasonable solution could be? Did you think about how your potential solution would impact the whole situation? This could be not only from the businesses point of view but also your customers, your employees and your investors.

by ANDREA OLSON We all understand the different people have different perspectives. These perspectives are often shaped by a variety of aspects - gender, background, experiences, lifestyle, community, geography, and more. In the most recent Women And Manufacturing Podcasts, Jennifer McNelly spoke with Cyndi Bray-McDaniel of Ingersoll Rand about personal reflection and improvement, while I had the opportunity to interview Kristi Wiechmann of Specialty Manufacturing about a woman’s perspective on manufacturing. Why are these perspectives important? When we think about resolving issues and solving problems within the business of manufacturing, different perspectives make it easier and more efficient to get things done. This may seem counterintuitive, but consider this: everyone in a group might see a problem as the same because they are all looking at it from the

Metals & Manufacturing Outlook / October 2018

same perspective. This limits the group’s ability to identify innovative solutions, since they see the problem in the same way. Let’s say the problem is a square. Simple enough. But what if something is missing? The group that had a single perspective would have built a solution to solve a problem that is a square. Now add someone into the group that is looking at the problem from another physical angle (remember, they are looking at the same “problem”). It turns out that actually the problem isn’t a square but a cube. The significant thing here is to remember that it took someone with a completely new perspective of the problem to identify this. To bring this back to how it relates inside an organization, think about the last time you had

We know multiple perspectives come from diversity, and diversity can be difficult. Yet the fact is that if you want to build teams or organizations capable of innovating, you need diversity. Diversity enhances creativity. It encourages the search for novel information and perspectives, leading to better decision making and problem solving. Diversity can improve the bottom line of companies and lead to unfettered discoveries and breakthrough innovations. Even simply being exposed to diversity can change the way you think.

thing. The pain associated with diversity can be thought of as the pain of exercise. You have to push yourself to grow your muscles. The pain, as the old saying goes, produces the gain. In just the same way, we need diversity—in teams, organizations and manufacturing as a whole— if we are to change, grow and innovate.

Manufacturing Laughs

People who are different from one another in race, gender and other dimensions bring unique information and experiences to bear on the task at hand. A male and a female engineer might have perspectives as different from one another as an engineer and a physicist—and that is a good Metals & Manufacturing Outlook / October 2018

CREDIT MANAGERS’ INDEX

CREDIT MANAGERS’ INDEX by CHRIS KUEHL Another uptick in the Credit Managers’ Index and this one puts the combined score as high as it has been since May and thoroughly in expansion territory. Anything over 50 qualified as expansion but getting past the mid-point is always welcome news as it suggests that most of the economy is firing on all cylinders. The fact is that the CMI is in agreement with a number of other leading indicators and that is always reassuring. The latest data from the Purchasing Managers’ Index was welcome new last month as the readings jumped into the 60s. There has been growth in term of industrial production and the overall GDP as well. This is all somewhat unexpected given the turmoil and controversy over tariffs and trade wars but timing is everything. The truth of the matter is many of these tariffs and restrictions have not yet come to pass. By most accounts they will come sooner than later but for the time being there is a window of opportunity to sell and buy before the restrictions are in place. This was what goosed the second quarter GDP numbers up to 4.2% - lots of frantic activity designed to beat the deadlines. That motivation will fade through the remainder of the year. The combined score for the favorable factors hit a high point not seem since May of this year – 65.2 as compared to the previous month’s 64.3 and May’s 65.7. The combined score for the unfavorable factors was also an improvement but a very small one as it went from 50.1 to 50.6. This has been the pattern for the year as a whole as the high point was reached in September of last year when it hit 51.8. This continues to be the prime concern for the CMI data – why are there still so many

Metals & Manufacturing Outlook / October 2018

struggling operations given the overall growth of the economy and the good news that has been registered in the favorable categories. A breakdown of the favorable categories shows solid growth and numbers that are back to where they were at the start of the summer. The “sales” reading was 68.8 and that is just shy of the reading in May and June. There is likely to be some of that precautionary buying registered here as companies sought to try to insulate themselves against the impact of tariffs and trade wars. The “new credit applications” reading fell just a but from 62.5 to 61.9. This is still comfortably in the 60s but there has been some evidence that business is starting to become a little more cautious and fearful of the future. The “dollar collections” data stayed very nearly the same as it was last month with a reading of 62.8 as compared to 62.6 last month. There was slightly more activity noted when it came to “amount of credit extended” as it improved from 66.9 to 67.1. This reading has been very high for the bulk of the yearn and suggests that the biggest and most important creditors are asking for more credit as they are likely to be the companies that have been growing most aggressively. As with prior months the real issues and concerns are showing up in the non-favorable categories. There was a slight reduction in the category of “rejections of credit applications” and that is consistent with the reduction in applications for new credit. There have been more companies with questionable financial futures seeking credit and many are not deemed a good risk right now. There is already evidence that companies with a lot of foreign trade exposure are not having an easy time of it as far as credit is concerned. On the

positive side there was a significant improvement in the “accounts placed for collection” category as it moved from the contraction zone to expansion by the barest of margins. It moved from 49.0 to 50.2 and narrow as this is the point remains that it signals growth again. There was also improvement in the “disputes” category but the rise did not quite get the reading out of the contraction zone. It was sitting at 46.4 and now stands at 47.6. There was a similar pattern with “dollar amount beyond terms” but this month’s reading is very, very close to escaping contraction. It was at 48.5 and now sits at 49.9 – just a hair away from being in growth mode again. The reading for “dollar amount of customer deductions” remained very close to what it was last month and just shy of getting into the expansion zone. This month the reading was 48.6 and last month it was 48.7. The “filings for bankruptcies” category also stayed very close to what it had been the month prior. It had been at 55.9 and it slipped a tiny bit to 55.6. Throughout the year the rate of bankruptcies has stayed in generally positive territory as companies have been able to work themselves out of the predicament they have been in. The hope is that the number of bankruptcies will remain low as the trade wars and tariff issues come home to roost. There is deep concern regarding the farm sector and all the industries that have been related to it. Manufacturing Sector From last month to this there has been only slight change as far as the manufacturing sector is concerned. This will be well worth watching for the next month or two. As mentioned earlier the performance of the Purchasing Managers’ Index was very strong this month and last month the CMI index for manufacturing perked up – a kind of early sign that PMI data would be strong. The data for manufacturing this month remains strong and has built on the gains of earlier months but there are a couple of troubling signs that may have an impact sooner than later. The combined score was 56.4 and last month it was at 55.9. The combined score for the favorable factors index is the same ads it was the month before – standing pat at 64.4. This is one of those potential warning signs as these are the factors that tend to drive new business development. T Even though the total number was the same as last month

there was still quite a bit of variability in the subcategories. The “sales” reading improved quite a lot and this is very likely due to the somewhat frantic reaction to the potential imposition of tariffs and other trade restrictions. Many companies were trying to sell as much as they could before the taxes were levied and few think this pace will be maintained much longer. The “new credit applications” category was very similar to the reading last month – a reading of 61.8 as compared to 61.4. This is a bit worrisome as it may suggest expansion plans are being delayed. The “dollar collections” numbers fell and that also presents a future problem. For the first time in five months this category has dipped below 60 but at least it is not as big a drop as was seen in April. The “amount of credit extended” improved a bit as it went from 67.1 to 68.5 and that signals that the bigger asks are still being made. The less exciting news was to be found with the non-favorable factors although there were some areas if improvement and the overall index rose from 50.2 to 51.1. This is not comfortable territory as it would not take much to send the numbers back into contraction territory but compare to where it has been of late this is a decent reading. The “rejections of credit applications” slipped a bit but stayed about where it was last month. It went from 53.7 to 53.1 and that is consistent with the numbers for applications for credit. The reading for “accounts placed for collection” went up quite a bit and escaped the contraction zone. It went from an August reading of 49.6 to one of 51.2, welcome trending indeed. There was also positive movement as far as “disputes” are concerned but not enough to leave contraction territory. It has moved from 545.8 to 48.7 so it is moving in the right direction and that is good news. The “dollar amount beyond terms” reading also managed to escape contraction with a move from 48.4 to 50.2. This corresponds with the data from the dollar collections cate gory. The “dollar amount of customer deductions” fell somewhat as it went from last month’s 48.1 to 47.4 this month. There was some good news from the “filings for bankruptcies” category as it stayed right where it was – solidly in the middle of the 50s with a reading of 56.0.

Metals & Manufacturing Outlook / October 2018

ISM REPORT OUTLOOK

THE INSTITUTE FOR SUPPLY MANAGEMENT’S MANUFACTURING REPORT ON ® BUSINESS

ISM® REPORT ON BUSINESS®

MANUFACTURING E

conomic activity in the manufacturing sector expanded in September, and the overall economy grew for the 113th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM® Report On Business®. The September PMI® registered 59.8 percent. The New Orders Index registered 61.8 percent, a decrease of 3.3 percentage points from the August reading of 65.1 percent. The Production Index registered 63.9 percent, a 0.6 percentage point increase compared to the August reading of 63.3 percent. The Employment Index registered 58.8 percent, an increase of 0.3 percentage point from the August reading of 58.5 percent. The Supplier Deliveries Index registered 61.1 percent,

SEPTEMBER 2018 Analysis by Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management® Manufacturing Business Survey Committee

a 3.4-percentage point decrease from the August reading of 64.5 percent. The Inventories Index registered 53.3 percent, a decrease of 2.1 percentage points from the August reading of 55.4 percent. Of the 18 manufacturing industries, 15 reported growth in September, in the following order: Textile Mills; Miscellaneous Manufacturing ‡; Plastics & Rubber Products; Computer & Electronic Products; Food, Beverage & Tobacco Products; Machinery; Apparel, Leather & Allied Products; Paper Products; Electrical Equipment, Appliances & Components; Chemical Products; Petroleum & Coal Products; Transportation Equipment; Furniture & Related Products; Fabricated Metal Products; and Nonmetallic Mineral Products.

PMI @ 59.8% ®

BREAKING NEWS

‡Miscellaneous Manufacturing (products such as medical equipment and supplies, jewelry, sporting goods, toys and office supplies).

MANUFACTURING AT A GLANCE

ISM PMI for the past 5 years

Aug Index 61.3 65.1 63.3 58.5 64.5 55.4 41.0 72.1 57.5 55.2 53.9

% Point Change -1.5 -3.3 +0.6 +0.3 -3.4 -2.1 -0.5 -5.2 -1.8 +0.8 +0.6

Growing Growing Growing Growing Slowing Growing Too Low Increasing Growing Growing Growing

Trend* (months) 25 33 25 24 24 9 24 31 20 31 20

OVERALL ECONOMY

Growing

Slower

113

Manufacturing Sector

Growing

Slower

PMI® New Orders Production Employment Supplier Deliveries Inventories Customers’ Inventories Prices Backlog of Orders New Export Orders Imports

ISM PMI at 59.8%

Sep Index 59.8 61.8 63.9 58.8 61.1 53.3 40.5 66.9 55.7 56.0 54.5

Rate of Change Slower Slower Faster Faster Slower Slower Faster Slower Slower Faster Faster

Index

Direction

*Number of months moving in current direction. Manufacturing ISM® Report On Business® data is seasonally adjusted for the New Orders, Production, Employment and Supplier Deliveries Indexes.

PMI 2016

2017

2018

59.8%

50% = Manufacturing Economy Breakeven Line 43.2% = Overall Economy Breakeven Line

PMI® Manufacturing expanded in September as the PMI® registered 59.8 percent, a decrease of 1.5 percentage points from the August reading of 61.3 percent. This indicates strong growth in manufacturing for the 25th consecutive month, led by strong production output, continued strength in new orders, improvements in supply chain delivery performance and better utilization of existing inventory accounts. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

COMMODITIES REPORTED Commodities Up in Price: Aluminum (23); Aluminum Based Products (5); Corrugate (24); Electrical Components (2); Electronic Components (2); Freight (8); Hydrochloric Acid; Lumber (3); Nylon (4); Paper (5); Steel*; Steel — Stainless (6); Steel Based Products (5); and Sulfuric Acid. Commodities Down in Price: Brass; Copper (3); Steel*; and Steel — Hot Rolled. Commodities in Short Supply: Capacitors (15); Electronic Components (5); Freight (5); Labor (2); Nylon; Resistors (11); and Sulfuric Acid.

Metals & Manufacturing Outlook / October 2018

Note: The number of consecutive months the commodity is listed is indicated after each item. *Reported as both up and down in price.

OCTOBER 2018

ISM REPORT OUTLOOK

ISM Report On Business ®

manufacturing

September 2018 Analysis by Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management ® Manufacturing Business Survey Committee

New Orders (Manufacturing) 2016

2017

New Orders

2018

52.4% = Census Bureau Mfg. Breakeven Line

Production

2018

51.5% = Federal Reserve Board Industrial Production Breakeven Line

ISM’s Production Index registered 63.9 percent. The 14 industries reporting growth in production during the month of September — listed in order — are: Printing & Related Support Activities; Miscellaneous Manufacturing‡; Apparel, Leather & Allied Products; Textile Mills; Plastics & Rubber Products; Computer & Electronic Products; Electrical Equipment, Appliances & Components; Food, Beverage & Tobacco Products; Machinery; Chemical Products; Furniture & Related Products; Paper Products; Fabricated Metal Products; and Transportation Equipment.

Employment (Manufacturing) 2017

Employment

2018

58.8% 50.8% = B.L.S. Mfg. Employment Breakeven Line

Supplier Deliveries (Manufacturing) 53.1% 2016

2017

2018

61.1%

Inventories (Manufacturing) 2016

2017

ISM’s Employment Index registered 58.8 percent. Of the 18 manufacturing industries, the 12 reporting employment growth in September — listed in order — are: Textile Mills; Miscellaneous Manufacturing‡; Petroleum & Coal Products; Paper Products; Food, Beverage & Tobacco Products; Plastics & Rubber Products; Computer & Electronic Products; Machinery; Transportation Equipment; Fabricated Metal Products; Electrical Equipment, Appliances & Components; and Chemical Products.

43% = B.E.A. Overall Mfg. Inventories Breakeven Line

Supplier Deliveries

2016

2017

2018

40.5%

2016

2017

2018

66.9%

52.4% = B.L.S. Producer Prices Index for Intermediate Materials Breakeven Line

Backlog of Orders (Manufacturing) 2016

2017

2018

55.7%

2016

2017

The delivery performance of suppliers to manufacturing organizations slowed in September, as the Supplier Deliveries Index registered 61.1 percent. The 13 industries reporting slower supplier deliveries in September — listed in order — are: Textile Mills; Apparel, Leather & Allied Products; Nonmetallic Mineral Products; Fabricated Metal Products; Furniture & Related Products; Machinery; Computer & Electronic Products; Food, Beverage & Tobacco Products; Miscellaneous Manufacturing‡; Plastics & Rubber Products; Paper Products; Chemical Products; and Transportation Equipment.

Customers’ Inventories ISM’s Customers’ Inventories Index registered 40.5 percent in September, which is 0.5 percentage point lower than the 41 percent reported for August, indicating that customers’ inventory levels were considered too low. The only manufacturing industry that reported customers’ inventories as too high during the month of September is Transportation Equipment.

Prices The ISM Prices Index registered 66.9 percent. Fifteen of the 18 industries reported paying increased prices for raw materials in September, in the following order: Textile Mills; Printing & Related Support Activities; Apparel, Leather & Allied Products; Paper Products; Chemical Products; Miscellaneous Manufacturing‡; Machinery; Furniture & Related Products; Computer & Electronic Products; Transportation Equipment; Plastics & Rubber Products; Petroleum & Coal Products; Food, Beverage & Tobacco Products; Nonmetallic Mineral Products; and Electrical Equipment, Appliances & Components.

Backlog of Orders ISM’s Backlog of Orders Index registered 55.7 percent. The 11 industries reporting growth in order backlogs in September — listed in order — are: Textile Mills; Food, Beverage & Tobacco Products; Petroleum & Coal Products; Printing & Related Support Activities; Miscellaneous Manufacturing‡; Plastics & Rubber Products; Computer & Electronic Products; Chemical Products; Electrical Equipment, Appliances & Components; Machinery; and Transportation Equipment.

2018

56%

New Export Orders ISM’s New Export Orders Index registered 56 percent. The five industries reporting growth in new export orders in September are: Petroleum & Coal Products; Miscellaneous Manufacturing‡; Nonmetallic Mineral Products; Chemical Products; and Computer & Electronic Products.

Imports (Manufacturing)

Inventories

2016

2017

2018

The Inventories Index registered 53.3 percent. The 11 industries reporting higher inventories in September — listed in order — are: Textile Mills; Apparel, Leather & Allied Products; Plastics & Rubber Products; Electrical Equipment, Appliances & Components; Food, Beverage & Tobacco Products; Petroleum & Coal Products; Computer & Electronic Products; Transportation Equipment; Primary Metals; Miscellaneous Manufacturing‡; and Machinery.

Manufacturing (products such as medical equipment and

supplies, jewelry, sporting goods, toys and office supplies).

Analysis by Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management ® Manufacturing Business Survey Committee

New Export Orders (Manufacturing)

53.1% 2018

53.3%

‡Miscellaneous

September 2018

Prices (Manufacturing)

63.9%

2016

manufacturing

ISM’s New Orders Index registered 61.8 percent. Twelve of 18 industries reported growth in new orders in September, in the following order: Textile Mills; Miscellaneous Manufacturing‡; Plastics & Rubber Products; Computer & Electronic Products; Printing & Related Support Activities; Chemical Products; Paper Products; Machinery; Electrical Equipment, Appliances & Components; Food, Beverage & Tobacco Products; Furniture & Related Products; and Transportation Equipment.

Production (Manufacturing) 2017

Customer Inventories (Manufacturing)

61.8%

2016

ISM Report On Business ®

Metals & Manufacturing Outlook / October 2018

54.5%

‡Miscellaneous

Imports ISM’s Imports Index registered 54.5 percent. The nine industries reporting growth in imports during the month of September — listed in order — are: Apparel, Leather & Allied Products; Miscellaneous Manufacturing‡; Plastics & Rubber Products; Computer & Electronic Products; Food, Beverage & Tobacco Products; Furniture & Related Products; Petroleum & Coal Products; Nonmetallic Mineral Products; and Chemical Products.

Manufacturing (products such as medical equipment and

supplies, jewelry, sporting goods, toys and office supplies).

Metals & Manufacturing Outlook / October 2018

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