MorrisAnderson

State of the Industry

• Many suppliers were liquidated in the recession but eventual volume rebound will cause liquidity issues.
• Metal costs are subject to major commodity swings – world demand, import restrictions, scrap metal costs.
  • It's critical to have effective cost escalator clause in any customer contract, especially LTAs. 
• Migration of steel to plastics may have stopped due to increased oil price volatility.
• Customer alternatives may now be less such that suppliers have renewed pricing power.
• Machining continues to replace foundry products.
• Stamping and machining rollups have been attempted without success - this remains mostly a local market business.
• Machining segment is increasingly high-tech.

$150 billion dollar industry made up of the following segments:

Iron and steel mills - high concentration of revenue among the four largest players with fierce international competition

• Automotive and construction demand is highly volatile in this segment
• Keys to compete: sales contracts, global reach, differentiated products

Pipe and tube -  moderate concentration of revenue among the four largest players; consolidation increasing slowly

• Keys to compete: cost-lowering technology , diverse client base,  relationship with steel manufacturers

Stamping and forging - highly fragmented; ripe for consolidation

• Almost 60% of demand originates from the Automotive and Aircraft businesses
• Keys to compete: global expansion, integrated supply systems, cost leverage

Hand-tool and cutlery - fragmented, increasing opportunity for consolidation

• Keys to compete: premium brand/product offerings, export markets, extensive distribution

Machine shop services - highly fragmented, relatively low barriers to entry, slow integration with former customers

• Keys to compete: technology, loyal customer base, access to skilled workforce

6- to 12-month Outlook

• After 2010 recovery, growth generally expected through 2015
• Near term: government intervention crucial to restoring business/consumer confidence to restart downstream demand
• Headwinds include fierce global competition and competition from other materials
• Commodity manufacturers need to integrate value added services to protect work
• Mexican capacity is an option to consider
• Eventually, metals will be molded like injection molding via metal powders; this will revolutionize the industry when technology evolution drives costs down.
• Demand for high performance metals such as aluminum and magnesium in aerospace and medical products will increase.
• Foundry capacity will be in short supply as the economy recovers long term - capacity has been shut and environmental regulations make it extremely difficult to open a new foundry.