SFSA Casteel Reporter – April 2024

Why have capital intensive industries like ours been low in profitability and unable to justify investment?  This I think is the fundamental question we face.  My best understanding is that we are located in a region that has legacy and a practice of burdening us with economic externalities that cause our costs to be high and a trade policy that has dramatically reduced the demand for common products from our industry that have the volume and cash flow required to make the investment profitable… Read more about this in this month’s Casteel Commentary.

Cast in Steel 2024 Competition

YOU’RE INVITED to the 2024 CAST IN STEEL COMPETITION

Featuring the Halligan Bar

Join us, along with 44 teams from 34 universities at the Grohmann Museum, 1000 North Broadway, Milwaukee, Wisconsin in the Cast in Steel Tent, Grohmann Museum’s parking lot, corner of E. State St. & N. Milwaukee St.
COMPETITION
Monday, April 22nd
1:00 pm – 5:00 pm
and the
AWARDS CEREMONY
Tuesday, April 23rd
9:30 am – 10:00 am
Stop by the FEF booth at the Metalcasting Congress on Tuesday afternoon to see the Halligan Bars on display.

Casting Dreams Competition at MetalCasting Congress

Casting Dreams helped young people ages 14-18 have a fun and enjoyable experience in the world of cast metals manufacturing, engineering and all the related processes in this exciting industry!

SFSA provided a mentor to assist the young people every step of the way – through hands-on design and manufacturing program. We helped them to succeed and cast their very own dream. They have gained experience from concept to finished casting.

Stop by the AFS booth at the MetalCasting Congress to see all the wonderful castings these young people have made. You will be amazed.

Next Gen Mfg and Future Leaders Meetings

Next Generation Manufacturing and Future Leaders will have group meetings in Pittsburgh, PA on May 16-17.  Thursday morning will be a hands-on demo by UNI on learning how to use sensors at your foundry.  Attendees will build a mini IoT system using low cost hardware and open source software.  You’ll learn how to get started with a Raspberry Pi, make a dashboard and expand an IoT system with microcontrollers.  We’ll meet at ARM Institute and tour their facilities.  Friday will be a round table discussion for Future Leaders and a tour of McConway & Torley.  Registration and additional details will be available soon.  For questions, please contact Dave .

Research Review, July 9-11

Please make your plans to participate in the annual SFSA Research Review on July 9-11. This year’s meeting will be held in-person in Rosemont, IL. The Review covers the latest in both Carbon & Low Alloy and High Alloy steel casting research under the DID, ICT, SPI, and STAR programs. The meeting is also your opportunity to interact with the researchers and provide industry steering. The event vets our research portfolio to select the R&D projects to be featured at the National T&O. More details regarding registration and the Design Day are to come. For any questions, contact Caelan Kennedy (ckennedy@sfsa.org).

Spring Leadership Meeting and Tours

This year’s Spring Leadership meeting and foundry tours will be held in Pittsburgh, PA on Tuesday, May 14 and Wednesday, May 15. Along with the Industry Roundtable and Board Meeting, we’ll be touring Standard Forge, Duraloy Technologies, and McConway & Torley. The cost to attend the meeting is $199. For more information and registration, visit: https://sfsa.site-ym.com/event/SLM2024

Specification Committee Meeting

SFSA is actively involved in American Society for Testing and Materials (ASTM), International Organization for Standardization (ISO), Boiler and Pressure Vessel Code (BPVC), and American Welding Standard (AWS).  The specification bodies foster collaborative development of commercial standards, which SFSA will work with to transition technologies into new or existing standards.  These efforts are led by our Specification Committee, which will meet on May 7th in Philadelphia, PA.  For more information, please contact Dave.

78^th Technical & Operating Conference

The T&O Committee is in the process of setting up this year’s conference.  It will be on December 11-14 at the Loews Hotel in Chicago.  If you would like to recommend a topic and presenter, please contact Dave.

Market News

In January, YoY steel casting bookings and shipments are both near parity to January 2023 levels. Stainless bookings and shipments remain below year ago levels but continue to trend upwards.  YoY backlog for carbon and low alloy steel is -22.79% and stainless is -20.45%.

In ITR’s manufacturing trends report, the 12-month moving average for US oil and gas extraction production is no longer anticipated to decline in 2024, rather it is expected to rise through at least 2026 due in part to global demand exceeding supply. Total manufacturing new orders declined in January with a December-to-January change that was weaker than the previous five years.

ITR upgraded their forecast for US Real GDP based on resilient consumers bolstering the service sector. With only one quarter of GDP decline expected, the macroeconomy will likely avoid significant contraction, although the industrial sector will be impacted the most.

Casteel Commentary

Why have capital intensive industries like ours been low in profitability and unable to justify investment? This I think is the fundamental question we face. My best understanding is that we are located in a region that has legacy and a practice of burdening us with economic externalities that cause our costs to be high and a trade policy that has dramatically reduced the demand for common products from our industry that have the volume and cash flow required to make the investment profitable.
A fascinating look at this is to see how the steel mill industry has survived over the past few years. One common theme in policy is that steel mills in the U.S. are less efficient and that global competitors have local cost advantages of labor or materials that allow them to make the steel products needed at lower prices. If true, this should be seen in Figure 1. The largest suppliers of steel in these years to the U.S. are Canada, Brazil, Mexico, EU, South Korea and Japan. As can be seen in the graph, these suppliers have no demonstrated cost advantage in the production, less than $50 a ton lower and some have higher costs. China is a minor source of imports accounting for only 184,000 tons of 27,962,000 tons imported in 2019. The US made 87,800,000 tons of steel that year. It has no advantage in materials or energy or labor.

The pandemic that occurred in these years makes it possible to compare how much of the price differences are not due to a different cost of production but a result of the public policy imputation of economic externalities that make the cost of operation and sales higher. AIST in their monthly magazine has a graph that charts the price of steel hot rolled band in U.S. dollars per metric ton at the plant for USA, Western Europe, China and for the World at the port of export. This can be seen in Figure 2.

The price drop from 2019 to mid-2020 with the rapid spike in 2021 gives the period shown in Figure 1 a wide range of market conditions. The Figure shows a slight drop cost from 2019 to 2020 and a large increase in 2021. Since the cost differences in each year during this period were modest, pricing differences must depend on other market factors. If we think that in stable competitive markets with excess supply, the price is set by the last purchaser, the market clearing price is tied to the cost of production. When purchasers find limited supply, the price is set by the last available producer and is based on the value of the product. A review of the range and values of prices during this period can suggest the costs of economic externalities in this type of market. The table in Figure 3 shows the range of prices during this period of volatile market conditions.

The median price for hot-rolled band/coil steel should be a reasonable estimate of normal pricing as can be seen in Figure 2. This suggests using the median price that producers in the U.S. need a $150 to $200 premium over the prices in the rest of the world for normal operations. The U.S. cost of production shown in Figure 1 puts the cost of steel operations competitive. The difference is at least in part due to the public policy environment that we operate in.
When there is a constraint on supply the price rises to the current value of the product. The pricing maximums created by the lack of inventory and capacity in the post Covid recovery and shows the willingness and capability of U.S. purchasers to pay much higher prices than other economic regions. The maximum prices paid in the U.S. are over $1000 a ton paid to suppliers in other regions, so the demand and value of steel products is clear in the U.S. market. The minimum prices reflect the willingness of producers to reduce inventory and sell at prices close to the cost of production shown in Figure 1. This difference between the minimum price in a downturn to liquidate inventory and the median price in the operating market of over $200 for the U.S. shows that full cost of production that includes the required cost of public policy burdens on producers.
When many of our tax laws, trade policies, regulations were enacted, manufacturing in capital industries was regional and these requirements were costs that all producers in the region had to bear. All could raise the price of the product to remain profitable enough to re-invest and innovate. This was rational because the users of the product paid for the externalities associated with the production. Pensions, healthcare, emissions, education, etc., were embedded in the price of the products and were paid by the purchasers and customers in the region were it was made.
Two things happened when trade liberalization and containerized shipping made globalization a reality. Capital intensive industries now measured in pricing against other suppliers with different public policies. The growth of government as a part of the economy and the intrusive policies expected in our time made capital intensive industries ability to compete globally dependent on trade and domestic policy. Public policies in the U.S. assumed that the competitive pressures of global suppliers would force innovations to compete or global suppliers should displace domestic production. This created a period of global prosperity as developing economies in countries tailored their policies to give their producers lower costs than U.S. domestic producers. They identified that these industries were essential to national and economic security. The U.S. as the global dominant economy saw this as progress and were willing to allow the de-industrialization. The dependence on global sources for essential items was exposed during the Covid pandemic as a vulnerability for security.
One idea was that the U.S. economy could continue to have a dominant role in manufacturing and technology as long as we were the innovators and made the advanced products. This remains a challenge. For small volumes of expensive products with the low cost of containerized shipping, predatory trading practices in advanced products did make these markets less profitable. Vulnerable products were targeted by peer rivals to gain geopolitical power. Our trade policies that are intended to deal with predatory practices were designed before containerization allowed small markets to be efficiently supplied offshore. Their force is felt in bulk commodity practices but are unworkable in small lots of advanced products.
The loss of volume for common products in capital intensive industries made it difficult to sustain the equipment and skill set to make the more complex advanced products. Another move by competitors was to become the producer of most of the basic materials needed for our economic infrastructure. Steel is a great example of this strategy as seen in Figure 4. China used its participation in the global system to invest in the processing of raw materials into needed commodity materials like steel. The U.S. dependence on these economies for most of the basic materials needed for our economic functioning is problematic.

Capital intensive industries in the U.S. are seen as too expensive when our costs include economic externalities of more than 25% that global competitors do not have. Other regions recognize that capital intensive industries like steel foundries are an essential resource for economic and national security and have public policy that allows them to be profitable. Germany is a great example. The three most active traders in the global economy are the U.S. as the importer and China and Germany as exporters. Germany is a higher cost steel maker and is a major source of steel exporting 24,100,000 metric tons. Their ability to remain an exporting economy of manufactured goods shows that a supportive public policy mix to ensure domestic capital industry profitability is possible. Germany invests in manufacturing in the U.S. while domestic investors cannot find a way to do it profitably.
It is clear that the problem in our industry is not our capabilities to produce but the costs to produce in the market we serve. Our inability to re-invest and for our region to make the basic investments in technology, education and changes in policies that allow the best producers to succeed in the market threatens our future.

Raymond