November 2005

Prospects for 2006 wobble as Delphi goes critical in US

The early date of the European Powder Metallurgy Association's EuroPM2005 in Prague meant that while 20/20 hindsight was in sharp focus, the immediate and murkier future was hard to predict...

The past month has shown just how difficult it is to make definitive statements on the public record, whether in politics or business. Last year was characterised by records in powder metallurgy. It saw record raw material price rises as well as record powder shipments, said Dr Cèsar Molins, President of the European Powder Metallurgy Association, speaking at the opening session of EuroPM2005 in Prague last month (2 - 5 October).

Although the price of steel scrap has come down, the stabilised price is well above the start-line levels of 2003. Nickel and molybdenum prices were up and copper was on the move. The inexorable economic expansion of China and continuing high oil prices threw some new elements of uncertainty into an already unstable mix.

But even as Dr Molins was speaking, the management at US Tier 1 parts supplier Delphi was preparing decision to file for Chapter 11 protection under US bankruptcy laws - the biggest American bankruptcy ever.

Although it is "only" Delphi's 40-plus US plants that are affected, the multinational parts maker is a major consumer of PM products, and what happens over the next few weeks in the bid-counter-bid game between the company and the unions representing most of its US workers could have profound effects on the largest PM market in the world. Meanwhile, PM suppliers look set to be stretched further; extended payment time schedules will probably be among the first effects to be felt.

For even without the dramatic events in Detroit, fierce competition among car makers is putting tremendous price pressure on the supply chain, and some PM companies are showing signs of exhaustion, said Dr Molins.

He was right. Since he spoke there has been news that BSA Metal Powders in the UK has gone into administrative receivership.

"Over-production of cars during 2004 caused a production drop in 2005, even though sales remain healthy. This means that we may not be seeing the 'real' level of activity in the parts-making industry," he said. Similarly, the announcement of powder price increases for 2005 caused overstocking in late 2004 - boosting the year's figures, but obscuring the "real" level of activity. As a knock-on, the indications were that powder sale volumes in Europe were down in the first half of 2005.

The likely result, he said, was that there would be a transient and perhaps artificial dip in activity and demand in Western Europe. However, there were some real questions for Europe over the industrial shift from Western to Eastern Europe as manufacturers recognised the value of the well-educated but lower-cost work forces available in the newer countries of the European Union and the countries fringeing the eastern border. This is good news, of course, for the newer members of the European Community, where the PM parts industry is receiving a considerable investment boost.

However, industrialists across the EU are eyeing proposed regulatory changes such as the REACH chemicals legislation with some suspicion, he said. "Over-regulation and fears of more of it foster uncertainty and slow the economy." One reaction has been the trend of companies setting up plants in the Asia-Pacific Region.

But whatever present uncertainties, he added, an economic rebound was to be expected. When? and How strong? were questions with answers hard to predict.

In terms of mergers and acquisitions in Europe, the early summer agreement between Austria's Sinterstahl and Mitsubishi Materials Corporation (See Metal Powder Report, June 2005) to merge their PM interests created a new global PM parts manufacturing company capable of challenging the established leaders such as GKN Sinter Metals and fighting for market share in the areas that may well be soon vacated by Delphi.

The good news for the industry was that the powder metal content of European cars continues to grow, with variable valve timing sets leading the way.

The hard materials sector showed strong sales growth despite raw material price increases. The business has become more innovative, with increasing use of metal injection moulding (See Page 14). However, the emergence of China with its huge reserves of tungsten and ever more sophisticated hardmetal manufacturing industry posed questions of both quality and cost competition.

Glancing at the American and Japanese PM markets, Dr Molins predicted negative growth in the US powder metallurgy market due to the decline of the Big Three Detroit car makers and the continuing growth of Japanese brands. And as if the long-term underlying trends were not bleak enough, this year's hurricane season had added its own touch wit Hurricane Katrina's demolition and flooding of Air Products hydrogen-production capacity on Lake Ponchartrain, just outside New Orleans.

The Japanese market, by comparison, had reported sound growth in general with strong growth in China producing pressure for companies to move production across the East China Sea.