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The electrical wholesaling industry can look forward to a solid year, judging from responses to Electrical Wholesaling's annual Electro Forecast survey. Many electrical distributors, electrical manufacturers and independent manufacturers' reps were downright optimistic in their forecasts this year. However, they are still worrying about copper and steel prices, the health of the industrial market, how much the commercial and residential markets will contribute to sales, and the basic dynamics of the customer-distributor-rep-manufacturer relationship.
COPPER AND STEEL PRICES: WHAT GOES UP MUST COME DOWN…OR DO THEY?
Where are copper and steel prices headed in 2005? Respondents had a wide variety of responses, ranging from double-digit increases or decreases, as well as moderate movement up or down. Said one wire manufacturer, “We are predicting copper to trend downward in 2005 as new primary production is coming on board. Also, China's consumption is predicted to be lower in 2005 than 2004. Distributors must pass on all increases. They can't tolerate the risk of not doing so.”
One respondent said China's consumption of steel and copper will affect pricing in North America because producers will still be scrambling to meet demand. “I see the price going up, but don't know when it will top out. China is using vast amounts of both, and they are setting the price with their unlimited funds.”
Another industry executive also factors China into his forecast on copper and steel pricing. “Steel should decline a little,” he said. “Much depends on China. Copper will continue to be in the $1.50 to $1.60 range.”
Two reps say copper and steel prices will level out in 2005. Said Buddy Binyon, president, Bell & McCoy, Carrollton, Texas, “It's a gut feeling, but I expect to see steel prices stabilize without much fluctuation. It's difficult to get a handle on the copper issue, but I expect to see copper settle between $1 and $1.25 in 2005.”
Gerald Rayborn, president, Tri-Rep Associates, Willow Spring, N.C., believes electrical conduit manufacturers were about 20 years past due for a price increase, but that they “made up for it in one shot.”
“They may be well advised to take a small increase every year instead of creating havoc in the construction market,” he said. “It's funny how other steel products have increased no more than 10 percent to 20 percent.”
Most respondents agreed electrical distributors will not have much choice but to pass along any future price increases to their customers. Marc Pfeiffer, sales manager, WAC Lighting, Garden City, N.Y., expects distributors to attempt to absorb any increases in the short-term, but says they have to eventually pass them along. “When push comes to shove, profitability will force the increases,” he said. “Everyone who wants to be here in 2006 will need to address cost increases.”
Bell & McCoy's Binyon agreed, “They have no option. The margin on wire and steel products are so depressed, it would be suicide to consider any other option.”
One Midwest independent manufacturers' rep said electrical distributors can turn the negative news of price increases into a positive for their customer relationships if they communicate effectively when an increase goes into effect. Said Bill Devereaux, president, and Mark Schon, vice president of sales and distribution, R/B Sales Corp., Marion, Iowa, “Distributors who communicate most clearly with their customer base as the increases come along have the most to gain from this tough task. Keeping the customer informed, especially with the ‘bad’ news, is a courtesy that grows trust and builds relationships.”
THE INDUSTRIAL MARKET: REASONS TO BE CHEERFUL
The skid has stopped in the industrial market, as far as most Electro Forecast respondents are concerned. Many reps, manufacturers and distributors were even willing to go out on a limb and predict growth of at least 5 percent in this market. However, no one expects the industrial business to recover to where it was in the late-1990s; too many companies have closed factories in the United States and shifted capacity to China and other parts of Asia.
One electrical distributor didn't think the U.S. industrial market can ever recover because of China's cost advantages. Steve Rector, manager, Arizona Electric Supply, Phoenix, said, “We are in a world market and we can't compete with China. Half the products in my warehouse have a U.S. name on them with a ‘Made in China’ label, and it's good stuff. Even Mexico is having a tough time competing with China. Even the continuing devaluation of the U.S. dollar will not be enough to stem the tide.”
On the flip side, one respondent is seeing some U.S. manufacturers shift capacity back to the United States, and he believes this trend could help the industrial market slowly recover. Said Hank Bergson, president, National Electrical Manufacturers Representatives Association (NEMRA), Tarrytown, N.Y., “Industries are creeping back for a myriad of reasons: quality, assured supply, logistics and control.”
Industrial business seems to be picking up in some regions faster than others. Rayborn of Tri-Rep Associates said North Carolina and South Carolina are struggling in many business sectors. “Textiles have gone down to niche markets only, due to the World Trade Organization lifting tariffs on imports,” he said. “Telecom manufacturers continue to downsize, and there could be some hard times for pharmaceuticals. We do have a diverse industrial market in the Carolinas overall, and I feel in spite of the industries that I have mentioned, we will still see increases in the industrial market.”
Several respondents saw pockets of growth in tightly defined industrial niches. For instance, Ohio's industrial market has been hammered worse than in most regions of the nation. But one rep in the Buckeye State has found systems integrators in the automation market to be quite busy. Said John Bovyer, president of Bovyer Electrical Sales of Ohio, Hudson, Ohio, “Many integrators are booked well into 2005. The industrial market will recover to a certain extent due to need for heavy maintenance and updating plants and processes, much of which has been put off in the last three years. There will not be levels similar to the late 1990s, as much of the manufacturing and assembly base has disappeared.”
The industrial market in the Pacific Northwest is beginning to improve, said Ken Adams, Shaffer & Nelson Inc., Portland, Ore. “We will not see a return of the aluminum industry, but we will see strength in electronics, transportation and wood products.”
Bob Powell, principal, Kunz-Powell & Associates, Deveault, Pa., also sees growth in some segments in the metropolitan Philadelphia market. “I believe the industrial market will continue to improve, but it will never reach its previous peaks,” he said. “Too many factories and jobs have been moved abroad and they will not return. On the positive side, I believe high-tech manufacturing, including the pharmaceutical sector will continue to prosper.”
One lighting manufacturer said the electrical industry must redefine the industrial market, and search for profitable niches. Said John Wilson, manager of e-business and business development, Osram Sylvania Inc., Danvers, Mass., “The term ‘industrial’ must be refined away from traditional smokestacks.”
In the Pacific Northwest, Ralph Bliquez, principal, TSS, Portland, Ore., looks to the use of new technology and new manufacturing methods to provide some sales opportunities for the electrical market. Devereaux and Mark Schon of R/B Sales Corp. agree with Bliquez, and say the industrials that survive will be based heavily on automation, be technically advanced or require detailed processing. They are looking forward to 5 percent to 10 percent growth in their Midwestern market, due in part to several large, agriculturally based projects slated for development in 2005. “It's welcome news after four years of stagnation,” they said.
Many respondents expressed quiet optimism regarding the fortunes of the industrial market. However, several distributors, reps and manufacturers believe this business segment needs the U.S. government to master some tricky international trade issues such as tariffs and customs, and to offer incentives to manufacturers for operating factories in the United States.
Said Paul Suzio, vice president and general manager, Edwards Signaling & Security Systems, Cheshire, Conn., “Sustained growth in low single digits can happen. However, incentives by federal and state governments have been nonexistent for the most part in keeping manufacturing in the United States. A great deal of product and components are now being sourced overseas. China is producing quality products at lower costs, and the quality of the workforce including technical is very good. Unless something dramatic changes, more manufacturing jobs will be lost to offshore manufacturing.”
John SantaCroce, president and CEO, Argo International Corp., New York, agreed. “The market cannot recover without the U.S. government ensuring all countries compete equally,” he said. “Import duties and customs are too high in certain countries and this hurts U.S. competitiveness.”
Bill Elliott, president, Elliott Electric Supply, Nacogdoches, Texas, is of the same mind. “The industrial market will recover some on its own, but the government needs to negotiate better to level the playing field,” he said.
Rayborn of Tri-Rep Associates said it's nothing new for the U.S. economy to adjust to changing market conditions, and he expects the manufacturing community to adapt.
“We will adjust our markets and allow the labor-intensive, low-paying jobs to go to the third world,” he said. “We will excel in higher tech and remain the most powerful country in the world. Our country has been changing and adjusting for generations.”
COMMERCIAL & RESIDENTIAL CONSTRUCTION: SOLID BUT NOT SPECTACULAR
Construction economists expect 2005 to be a solid year for the all-important commercial construction market. Electro Forecast respondents tended to agree, although some industry executives are concerned with still-troubling office vacancy rates and unemployment numbers.
Dennis Albert, president, Forest Hills Electrical Supply Inc., Boston, said larger customers are still experiencing major layoffs, but that many of the company's smaller to medium customers are enjoying sustained and profitable growth. “I think the commercial and residential contractor markets will remain strong as long as interest rates remain low or at least reasonable,” he said.
Dennis Tulimieri Sr., president, Tulimieri Associates Inc., Glastonbury, Conn., also sees a strong commercial construction market in New England this year, and said consulting engineers have many projects underway.
Kunz-Powell's Bob Powell said the commercial construction business in the Philadelphia market has suffered for three of the past five years, but that he expects this segment to grow 7 percent to 9 percent in 2005, a range in line with the growth forecasts of several construction economists.
Most respondents think the residential market's incredibly strong run during the past few years may finally be losing momentum now that mortgage rates are moving up. They don't expect any big downturn. One respondent spoke for many others when he said, “The residential market could slip a few points this year. It will still be good, just not great.”
CHALLENGES AND NEW OPPORTUNITIES
None of the Electro Forecast respondents were considering any radically new markets or growth strategies. Several distributors were opening up new branches, but most companies seemed to be focused on increasing their penetration of existing accounts. The fire and security market has captured the attention of respondents, and home networking products and energy-efficient lighting, specifically T-5 fluorescent lamps and LED lighting, are product niches in which respondents plan to invest.
When asked to name the three biggest challenges facing the electrical wholesaling industry in 2005, respondents seemed most concerned with increasing competition from Home Depot, other home centers and alternate channels; finding, training and retaining good employees; and rising health-care costs.
But a strong under+current of concern seems to exist about the basic service/price/value equation, and relationships between distributors and manufacturers. Bill Elliott of Elliott Electric Supply said the three biggest challenges will be differentiating value from price and managing the pricing matrix; selecting and developing people; and controlling costs. Another respondent said the greatest challenges will be, “Establishing a solid basis for bringing value to the marketplace, given current customer perceptions of what constitutes value today; rebuilding the relationship between manufacturers and distributors; and finding a way to attract competent and motivated people to this industry.”
GOING GREEN: WHY BUILDING ENVIRONMENTALLY FRIENDLY BUILDINGS MAKES GOOD DOLLARS AND CENTS
The recent announcement that Philadelphia's soon-to-be-built Comcast Center will be an environmentally friendly office giant highlights the sales potential of energy-efficient products for the electrical industry. The 57-story building, which will be Comcast's national headquarters, will have 1.2 million square feet of energy-wise office space. This “green” building will be wired with a ton of top-shelf lamps, ballasts, dimmers, timers, and other energy-efficient electrical products (not to mention oodles and oodles of the latest voice-data-video systems that the headquarters of a media giant will need).
The developer will use waterless urinals, environmentally friendly paints, as well as carpets and other construction materials made from recycled materials. The waterless urinal system is based on a technology that's already saving one of the developer's other office buildings 500,000 gallons of water annually. The building's design will also cut energy costs by employing daylighting in a big way. With floor heights of 15 feet to 17 feet, larger windows can be used, cutting down on need for artificial light.
According to the U.S. Green Building Council (USBC), Washington, D.C., this office tower will be the tallest “green” building in the United States. Liberty Property Trust, the building's developer, plans to have the building LEED-certified by the USBC. This means the Comcast Center's construction and operating system must be extremely energy-efficient. Launched in 2000, the Leadership in Energy and Environmental Design (LEED) Green Building rating system rates a building's construction and design against tough energy-efficient design criteria. LEED is intended to help building owners construct a new generation of “green” buildings that use energy-efficient building design to slash operating costs.
One study of LEED-certified buildings seems to substantiate this claim. An October 2003 study sponsored by more than 40 California state agencies, “The Costs and Financial Benefits of Green Buildings: A Report to California's Sustainable Building Task Force,” analyzed LEED buildings built in California. It said an upfront investment of 2 percent in green building design, on average, resulted in life cycle savings of 20 percent of the total construction costs — more than 10 times the initial investment.
Some cities now require all new construction be LEED-certified. For instance, San Francisco's recently enacted Green Building Ordinance will apply to all new city construction projects, renovations and building additions. San Francisco joins nine other cities that have adopted green building ordinances requiring LEED. A total of 1,751 registered building projects are currently LEED-registered, and an additional 167 have completed certification. LEED projects are either underway or completed in all 50 states and 12 countries.
AHOY THERE: NEW GENERATION OF MEGA-SHIPS READY TO REVOLUTIONIZE U.S.-CHINA SHIPPING TRADE
As people who move millions of dollars of inventory via their own trucking fleets, electrical distributors and electrical manufacturers can appreciate any desire to cut shipping costs and get products to market as quickly and profitably as possible. They are also concerned with the rapidly growing flow of electrical goods from China and other Far East nations. But few distributors, manufacturers or reps probably spend much time thinking about the most cost-effective method of shipping products across the Pacific Ocean.
The first container ships sailed over the horizon in the 1950s, replacing the cargo ship, the workhorse of the world's shipping fleets for many decades. Container ships became more popular than cargo ships because of the efficiency of bringing hundreds of 20-foot containers by truck or train to shipping terminals, unloading the containers onto the massive vessels, and transporting them to worldwide ports of call, where they are unloaded onto trucks or trains and transported to warehouses or distribution facilities. Today, most of these ships can hold 4,000 individual containers. But a new generation of super-vessels is being built with double that capacity, and plans are on the drawing boards for ships with 12,000-container capacities. According to a Business Week report, shipping goods on a vessel that can handle 8,000 20-foot containers (known in the shipping industry as “TEUs,” which stands for “20-foot equivalent units”) is 25 percent to 30 percent cheaper than on a ship with a 4,000-container capacity. According to Drewry, a London-based shipping consultant, more than 110 of these vessels are now under construction. These vessels are so huge that relatively few ship terminals in North America and Europe have docking facilities large enough to accommodate them.
Most of the shipbuilders constructing the mega-ships are in Asia, which has rapidly become the center of global shipping. Ports in China, Korea, Taiwan, Singapore, Japan and other countries accounted for 152 million TEUs in 2003 — 53 percent of the world's container traffic. Ports in mainland China alone handled 48 million TEUs in 2003. That's a lot of containers!
According to the Center for Strategic and International Studies (CSIS), of the world's top 25 container ports, 15 are located in East Asia and six are in Southeast Asia.
According to a 2003 article posted on About.com, the American Association of Port Authorities ranked Hong Kong; Singapore; Pusan, South Korea; and Kaohsiung, Taiwan; as the world's busiest ports in terms of TEUs shipped. Los Angeles and Long Beach, Calif., are the only U.S. ports that rank in that association's listing of the 10 busiest ports. Next time you see a truck loaded with a TEU barreling down the highway or pulling into your company's parking lot, think about the enormous size of a ship that can carry 8,000 containers.
HOOKED ON COPPER PRICES? TRY WATCHING SCRAP METAL FOR A REAL THRILL
Copper prices fascinate many of us in the electrical wholesaling industry. Ask any distributor, rep or manufacturer about the price of copper, and they probably won't be too far off. Some take this fascination to pretty extreme lengths. Not all that long ago, one electrical distributor was setting up a retirement home in Palm Springs. He still wanted to keep tabs on the family business back East, so he had his computer system rigged so it would retrieve daily reports on some financial basics near and dear to any distributor's heart — including daily sales and gross margins, line items ordered and shipped, and, you guessed it, the price of copper that day.
That's why the run-up in copper prices over the past year was of such great interest. When copper prices crossed the $1.40 cents per pound barrier in the fourth quarter of 2004, they hit a new high. (See chart.)
But the price of another metal is also quite popular as an economic indicator: scrap iron. In a December 2003 article on the CNN/Money Web site, Don Fine, president of Fine Financial Forecasting, said, “If scrap steel is rising sharply, it's a good indicator that things overall are picking up. It's an old, trusted standby and it should not be ignored.” Even Federal Reserve Bank Chairman Alan Greenspan follows the price of No. 1 heavy melting steel scrap and factors it into his economic forecasts.
The scrap metal market was in a frenzy in recent months, as the price for scrap steel more than doubled its historical average (see chart) to well over $200 per ton. You know scrap metal is a valuable commodity when thieves are steeling manhole covers, as well as storm drain grates, light poles, guardrails and all things metallic to cash in on soaring scrap-metal prices, according to a recent USA Today report.
The price of hot-rolled-steel, one of the key commodities in global manufacturing, also went through the roof in 2004, although it's expected to moderate in 2005. According to Purchasing magazine, the price for a ton of hot-rolled steel hit $714 per ton in October 2004, an astounding 110 percent above its historical average of $339 for the 1980-2000 time period.