The industrial gas and hardgoods distribution business across the United States has been searching for growth since the economic downturn that began with the recession in late 2008. Welding and Cutting (W&C) gases and hardgoods are at the heart of the US distributor business.
The 2016 market for the welding industry is keeping pace with key welding and cutting sectors within Industrial Production (IP), with revenue growth results differing for gases versus hardgoods.
W&C gases have fared better during the economic slump over the past few years primarily because of the contribution of cylinder rental and welding specialty gases to revenues. Hardgoods growth has been down reflecting the downturn in fabricated metals, machinery, aerospace, and energy sectors and the appearance that companies are holding off on capital expenditures in an election year. Distributors’ W&C business has been additionally affected by the increasing use by customers of online stores such as Amazon, Fastenal, and Grainger.
Ken Thompson, consultant to industrial gas and hardgoods distributors, noted that distributors should use these slow times to really look at their businesses to evaluate their cost-to-serve metrics to increase margins and increase productivity. Some of the distributors that are faring better in this economic environment have already done this by implementing continuous improvement programs or use tracking software to improve cylinder asset utilization and distribution and selling costs.
Welding and Cutting Industry Forecasts
The second quarter 2016 Industrial Distribution survey by Baird Equity Research, a poll of industry experts in different geographic regions to forecast welding business activity, confirmed the trajectory of W&C business is split by gases versus hardgoods. The Gases and cylinder rental 2Q16 revenue growth was 2.7% with pricing of 0.8% as a part of that. The forecast for gases and cylinder rental for 3Q16 is also 2.7% while the 2016 yearly forecast is for overall revenue growth of 3.3%. In contrast, the hardgoods 2Q16 revenue growth was -2.5 % with pricing of 1.2%. The forecast for Hardgoods for 3Q16 is -1.5% while the 2016 yearly forecast is for an overall revenue decline of -0.6%. According to the Baird survey, welding hardgoods revenue growth has now decelerated for five straight quarters with any growth coming from pricing.
Distributor comments regarding the W&C noted that growth has varied greatly by market and some are wondering if the industry consolidation, most recently Air Liquide’s acquisition of Airgas, could help long-run margins for distributors as they could potentially pick up new business. The recent news that Praxair and Linde are in talks about merging is sure to continue to fuel this speculation.
Welding and Cutting Sector Forecasts
Key welding and cutting business sectors include construction, fabrication, automotive, electronic instruments, aerospace, shipbuilding, and energy. Activity in these sectors has varied by US region as noted in the July 2016 US Federal Reserve Beige Book which comments on the current economic conditions by the twelve Federal Reserve districts. The twelve districts by geographic region are the East (Boston, New York, and Philadelphia), South (Richmond and Atlanta), Central (Chicago, Minneapolis, and Cleveland), Southwest (Dallas, St. Louis, and Kansas City), and West (San Francisco).
The July 2016 Beige Book district reports portrayed mixed growth across industries within manufacturing. Cleveland, Richmond, Chicago, and Minneapolis noted increased demand for construction materials or equipment, but Dallas reported that among construction-related manufacturers, demand was mixed over the reporting period and slightly down from a year earlier. Metal manufacturers in the Richmond district indicated that new orders had risen, Chicago reported growth in steel demand, and producers in Cleveland were encouraged by an increase in domestic steel prices, but reported little change in demand. San Francisco noted that steel producers benefited from reduced overseas competition, but reported somewhat weak demand for other manufactured metal goods. Philadelphia and Dallas also cited weakness in primary metals. Boston, Philadelphia, Cleveland, Chicago, and Dallas reported weakness tied to reduced demand from the energy sector.
The energy sector remained weak across districts as oil drilling continued to decrease in Minneapolis, Kansas City, and Dallas. While natural gas drilling was little changed over this reporting period in Cleveland, demand was rising and output in that district remained at historic highs; natural gas extraction increased in Richmond since the previous report.
In the East, Boston and Philadelphia reported increasing sales in manufacturing. In Boston, 10 out of 11 manufacturing firms reported increased sales. In Philadelphia, the makers of instruments, industrial machinery, and fabricated metal products noted the greatest improvement from the prior period and compared with the prior year. Some of these manufacturers included makers of tools, scientific equipment and jet engines that require W&C gases and hardgoods.
The interview with Tom Crowley, ARCO Welding and Supply Company of Malden, Massachusetts (also in this issue, see related articles, below), highlighted the fact that they are thriving in the greater Boston area construction and fabrication business because they have an extensive inventory of welding equipment, welding supplies, and welding accessories, in addition to its large selection of industrial gases. They are a primary supplier of welding consumables and gases to Boston construction projects.
In the South, Atlanta and Richmond reported manufacturing activity increasing. Manufacturing activity increased on balance since the previous report. Most firms reported solid growth in both shipments and the volume of new orders, and producers reported positive expectations for the six months ahead. In Virginia, manufacturers of engine components, furniture, and seasonal products all reported increased sales. Machinery and metal manufacturers in North Carolina indicated that new orders had risen, although backlogs were flat.
In the Central region, Cleveland, Minneapolis, and Chicago noted modest increases in manufacturing. Activity for suppliers to the motor vehicle, aerospace, and commercial construction industries remains elevated. Key factors tempering output growth include a depressed energy sector. Uncertainty about the general economy motivated producers and their customers to keep inventories at low levels. In Chicago, growth in steel demand picked up as service centers began investing in inventories again after a year and a half of trying to pare back stocks. Growth in construction was noted in Minneapolis where commercial construction activity grew modestly since the last report.
In the Southwest, Kansas City and St. Louis reported declines or weaker activity in manufacturing while Dallas reported manufacturing activity ticked up, but outlooks remained weak. Strength was reported in industrial equipment and auto-related electronics. Kansas City noted that the decline in manufacturing was driven by durables and nondurables, particularly food, machinery, and plastics. Manufacturers’ capital spending plans continued to decline, but at a slower pace. In St. Louis, several manufacturing companies reported capital expenditure and facility expansion plans. The energy sector contracted further.
In the West, manufacturing activity and demand for manufacturing products was largely flat over the reporting period. Steel producers benefited from reduced overseas competition, however, and somewhat weak demand for other manufactured metals also was reported. Manufacturers in the aerospace and defense industry reported that federal sequestration continued to constrain demand and production activity somewhat, although overall domestic and foreign demand for fighter jets remained strong.
Welding and Cutting Markets
Welding is the most economical and efficient way to join metals permanently. It is the only way of joining two or more pieces of metal to make them act as a single piece. Welding is vital to our economy. About 50% of the industrial production of the US is related to welding in one way or another. Welding ranks high among industrial manufacturing processes and involves more sciences and variables than those involved in any other industrial process.
Typical customers in the manufacturing fabrication sector include automotive (component suppliers, assemblers, manufacturers, repair and maintenance providers), construction, general manufacturing, ship-building and aerospace industries. Nearly everything we use in our daily life is welded or made by equipment that is welded, from electronic instruments to skyscrapers. Welding is used to build space vehicles and millions of other products ranging from oil drilling rigs to automobiles. In construction, welding is used to extend subways, building bridges, and helping to improve the environment by building pollution control devices. The use of welding is practically unlimited. There is no lack of variety of the type of work that is done.
Welding and cutting is used in many industry groups. Machinery manufacturers are responsible for agricultural, construction, and mining machinery. The fabricated metals products comprise another group including manufacturers of pressure vessels, heat exchangers, tanks, sheet metal, prefabricated metal buildings and architectural and ornamental work. Transportation is divided into two major groups: manufacturers of transportation equipment except motor vehicles; and motor vehicles and equipment. The first includes shipbuilding, aircraft, spacecraft, and railroads. The second includes automobiles, trucks, buses, trailers, and associated equipment.
In the primary metals industries, welding and cutting is used in steel mills, iron and steel foundries, smelting and refining plants. Much of this work is maintenance and repair of facilities and equipment. Welding and cutting is also used for repair services. This includes maintenance and repair on automobiles or refers to the welding performed on industrial and electrical machinery to repair worn parts.
The industrial gas and hardgoods distribution business across the United States will need to search for growth under the current economic environment. W&C gases and hardgoods is struggling to keeping pace with key welding and cutting sectors within Industrial Production (IP). W&C gases should continue to fare better because of the contribution of cylinder rental and specialty gases to revenues. However, hardgoods needs to overcome online competition and the downturn in fabricated metals, machinery, aerospace, and energy sectors.
Distributors need to use these slow times to evaluate their businesses and their cost to serve metrics to find how to increase margins and increase productivity.
About the author
Maura D. Garvey is a Principal and Director of Market Research for Intelligas Consulting (a J. R. Campbell & Associates, Inc. company), an international consultancy specializing in strategic analysis and forecasting in the industrial gas industry.
She can be reached at email@example.com.