November 2005

New directions plotted for Höganäs as 2005 results and profitability are hit

The storms brewing in US industrial markets are among the factors that have prompted a change of course for one of PM's global players…

Winter's chill has come early to the powder metallurgy industry. Just a couple of weeks after GKN, parent company of both giant power manufacturer Hoeganaes and parts maker GKN Sinter Metals, announced that it had made losses on its US operations, the biggest iron powder maker in the world has said that it expects results this year to be lower than those of 2004. Among the reasons it cites is a slow-down in the US market.

In a tightly worded third quarter statement that also reveals a downward shift in some key performance indicators (KPI), Sweden's Höganäs AB said: "Global sales trends towards smaller, more fuel-efficient cars and the fact that US automakers, which produce vehicles with high powder content, have lost US market share, resulted in lower volumes in 2005 than in the previous year.
"Growth in Asia and South America has not compensated US and European volume downturns. Sustained positive market progress is expected in North America - although on a weaker market. Overall, this means that Höganäs expects to achieve volumes consistent with the previous year.

"Höganäs' income in 2005 is hard to forecast because of the progress of metal prices and the uncertainty of the car industry. The previous forecast for 2005, with income before tax expected to be consistent with the previous year, has been revised to income before tax being lower than the previous year, mainly because of write-downs affecting the third quarter result."

It has to be said that the Höganäs statement can have come as no surprise to those attending the MPIF's annual beanfeast, this year held in early October in the Florida Keys. The headline guest speaker was Alrik Danielson, newly installed President and CEO of Höganäs. In his keynote address he discussed drivers for growth and profits.

Vehicle production in Asia will grow by 3.9 percent through 2009, topping growth rates in Europe and the US, he said. The use of PM parts is increasing annually by 2 per cent in Europe, Japan, and the US, but will rise faster in India, China, and South America.

But settling to his core message which stressed the need for improved profitability, he said: "Costs are increasing too fast to be offset by productivity. Focused innovation and differentiation to grow markets and profits are needed along with alliances in Asia."

These are no empty words. The first steps have already been taken to make them reality. The Q3 statement says: "Höganäs has realigned its strategy through the Autumn and will be building on its strengths: innovation, cost-efficiency and the corporation's global presence, through sales and production networks.

"Höganäs will intensify the orientation of its resources towards profitable growth. The Group will mainly focus on innovation in close co-operation with the end user, with a sourcing strategy that builds on procurement as well as in house production, pricing strategies, and innovations oriented on end-users." More cost-efficient production structures and reduced working capital levels go almost without saying.

Lower returns
It is apparent that in the months since he took over, Mr Danielson has not been entirely impressed with what he found. The second and third quarter results would have been enough to give anyone pause for thought. Second quarter income was down from SEK 420 million in the same period of 2004 to SEK 293 million. "Apart from lower operating income, income before tax was also reduced by deteriorated net financial income and expenses, mainly caused by higher interest costs associated with loans and US Dollar hedging." There was also a bad debt of around SEK 30 million to be considered. In the third quarter, operating income was again heavily down, at SEK 48 million from SEK 137 million the year before. Income before tax was lower at SEK 34 million, down from SEK 129 million. "The write-downs affecting the third quarter are a consequence of the ongoing review of Höganäs' production structures," says the statement.

The company evidently feels that some of the old rigidities need to be relaxed to cope with volatile markets conditions.

This includes making the Group's key performance indicators more flexible. And for any student of company reports, nuance and language, the words used are important.

"In the light of changed market conditions," says the statement, "the targets have been changed with the following key figures now applying to the Group: operating income of 15 per cent (previously, a minimum of 15 per cent excluding futures/options), return on capital employed of 20 per cent (previously a minimum of 20 per cent).

"Looking ahead, market growth over a business cycle is estimated at 5 per cent. The metal powder market has matured in the current decade, raising demands for innovation, while growth has migrated towards Asia.
"Thus in order to retain, and/or improve profitability, Höganäs has adjusted its annual growth target to 6 per cent to 8 per cent (previously a minimum of 10 per cent) over a business cycle."

International legal threat to REACH

The end of this month should see some movement of the REACH chemicals legislation through its stages in the European Parliament. The current state of play was set out for delegates to EuroPM2005 last month in Prague by Dr Hugo Waterschoot of Eurometaux, the body representing European metals industries in Brussels. The Parliament has more than 3000 amendments to the original draft to consider, so perhaps it is no surprise that progress has been sedate.

But although it has been slow to hit the headlines, REACH is now attracting international attention. If enacted in its present form, the new laws will certainly have an effect on international business and could be seen by those with a penchant for litigation as a restriction of trade. And litigation is the meat and bread of some areas of American business. The great Banana dispute between Europe and the US of not very long ago is a case in point.
Could legal wrangles hold up implementation of the new legislation? The head of the US Chamber of Commerce certainly seems to think so. Chamber President, Thomas Donohue, warned that his organisation would mount a vigorous legal challenge if they consider the final version of the new rules to be too tough. In an interview with the Wall Street Journal, Mr Donohue was uncompromising in his initial reaction. "We're going to sue the hell out of them on some of this stuff," he said. Mr Donohue runs one of America's most influential business lobbies and says his comments reflect the deep concern of US manufacturers that REACH would disrupt international trade and supply chains and greatly increase costs.

Trade barriers
The US Chamber of Commerce spends tens of millions of dollars every year challenging regulations in the US, but says it has never before considered hearings in European courts.

Faced with regulations some of which have the potential, they say, to upend international trade, that is a step that will have to be considered.
Speaking of European environmentalists and policy makers Mr Donohue said: "They have no idea of the interdependence of our economies."
But European environmentalists dismissed the threat of international legal action.

"I think this is a lot of noise about nothing," said Karl Wagner, spokesman on REACH for the World Wide Fund for Nature.

Where now for FFC?

Titanium and the search for reliable manufacturing methods that will produce good quality cheaper powder were the subjects of a special seminar at EuroPM2005 in Prague. Titanium is highly valued as a light, very strong metal that can advantageously replace steel in many applications, perhaps especially in aerospace.

Manufacturing components from solid titanium bar is enormously wasteful in both terms of material consumed and energy expended. Powder metallurgy can offer far cheaper alternative manufacturing routes. But given titanium's very strong affinity for oxygen, obtaining good quality powder in large quantities at reasonable prices is less than easy.

A number of methods are under active examination, but in recent years the electrolytic Fray Farthing Chen (FFC) process developed at Cambridge University has been seen as the favourite for early commercialisation. The process itself was put into the hands of a spin-off company from the university called Metalysis.

QinetiQ, the former British Defence Evaluation and Research Agency, has a licence from Metalysis to pursue commercialisation, but the presentation given in Prague by QinetiQ's Malcolm Ward-Close was, to say the least, equivocal about the real-time prospects for FFC. They had not been able to get the process economics right.

By comparison, Professor George Chen, who now works at Nottingham University, told the meeting that his group, in co-operation with colleagues in Wuhan, China, had doubled the efficiency of the process which still bears his name as one of the co-inventors.

It may be that QinetiQ's efforts have been bedeviled by the flux that currently surrounds the former Government agency as it seeks to assemble a coherent and complementary core of activities from the many in which it is involved.
FFC development will continue, however, whether via Metalysis, or the Chen group based on Nottingham. But other methods are looking for funding. Cold crucible melting followed by gas atomisation and plasma production are said to be two promising contenders.