The road to recovery

Materials World magazine
,
1 Mar 2010
Recession or recovery?

The UK economy is said to have clawed its way out of its deepest recession since the 1930s, but are we out of the woods yet? Gary Price talks to representatives from various technical communities about the difficult financial year that has passed and what may lie ahead.

Construction products, Mining, Automotive, Polymers, Packaging, Light metals, Petroleum and drilling, Cast metals, Timber, Composites, Particulate engineering, Fuel cells, Nuclear, Electronics, Steel, Technical ceramics

Construction products

Michael Ankers, Chief Executive, Construction Products Association, London

Last year Michael Ankers predicted a fall in output of nearly nine per cent, but now says the downturn was worse than expected.

‘The dramatic 12% fall in output has led to large scale reshaping of businesses with the loss of many qualified and competent staff who may be lost to the industry forever.

‘There is a real concern that the scale of public sector spending cuts after the General Election [this year] will delay the recovery even further as nearly 40% of construction output is dependent on the public sector.

‘One of the main areas in which the industry needs help is for Government to create a more business-friendly environment in the UK for manufacturers and suppliers. The planning system constrains rather than encourages development, the transport infrastructure is a handicap to business competitiveness, and the cost of energy (as well as the continuing uncertainty of energy being available at competitive prices) are discouraging long-term investment in the UK by companies in our sector.

‘The industry must continue to invest in innovative products and solutions. It has been encouraging that while, in general, capital expenditure by companies has been cut, spending on R&D and innovation has been largely maintained. The focus has been on products/solutions that will help address sustainability issues.’

Mining

Michael Forrest, Mining Research, Barnet, and Chair of the Institute’s Applied Earth Science Division

The most pressing need for all mining companies is accessing finance. That was Michael Forrest’s view in 2009. Has this issue now been addressed?

‘The dire predictions of last year, namely that very few junior exploration companies would survive beyond the second quarter, proved groundless. Although some exploration companies have wound down operations those in production have benefited from a recovery in metal prices. This has brought solace to investors, and although bank lending dried up, significant finance has been raised, over US$550m in London and more than US$5bln globally for the sector. However, there is a price, it is the 40% reduction in exploration expenditure in 2009 that will have repercussions as the demand for metals recovers.’

Automotive

Mark Ellis, Manager of Materials Design and Test, Nissan Technical Centre Europe, Cranfield

Mark Ellis was optimistic about how the impact of the recession might effect the automotive sector in 2009. However, the industry was hit hard by the downturn, to such an extent that the Government tried to increase car sales through a scrappage scheme launched in May 2009. This provided motorists with a £2,000 discount on new vehicles purchased when trading in cars that are over 10 years old.

Nonetheless, Ellis says, Nissan took the opportunity to improve the business.

‘The recent financial difficulties have given us the opportunity to look at the entire business and see how we could make reductions and economies by doing things in a more economically reasonable way, which will stand us in good stead for the future. We have introduced a lot of recycling activities.

‘We have also learned a lot about maximising the utilisation of steel, plastics, etc, making sure we get nearly 100% yield on everything that enters the factory.

‘We are seeing a lot of our customers downsize their vehicles and go for smaller, more efficient models. Actually, we have done reasonably well out of the downturn. Models like our Micra and Kashkai are selling relatively well compared with the opposition.’

Polymers

Peter Davis, Director General, British Plastics Federation, London

‘The two worst hit markets are housing, where our members supply pipes, windows and wall coverings, and automotives, where sales of new cars in the UK have dropped by about 50%.’ This was Peter Davis’ view last year and he says there is still no positive news in sight at present.

But there are reasons to be cheerful in other areas. ‘Use of plastics in all forms of transport has increased because lightweighting saves power and electronic advances will depend on plastics’ advanced technology.

‘We welcome the Government’s strategies to boost UK composites production.

‘Plastic packaging for non foods and electronic and white goods has also suffered from consumers being careful what they spend. I believe last summer the UK produced its last television set. This may be shortsighted since the lower value of sterling has made the UK a more attractive place to manufacture.’

Packaging

Keith Barnes, Packaging Advisor to Mintel Group, London, and Board Member of The Packaging Society

In 2009, Keith Barnes believed that price and the impact on the environment would be the key issues for businesses as the economy crumbled. He says that these are still pressing concerns in 2010.

‘As always the challenge is to keep prices down as we come out of the recession. There is a need to strengthen the resolve to decrease carbon emissions within the whole packaging supply chain.

‘As with most industries, packaging has suffered closures and seen mergers during the last year. However, we are probably among the first to see an upturn as companies stock up again and look to product development.

‘Much has been done in our industry to create new ideas, both from large companies and via academia, using Knowledge Transfer Networks as the commercial conduit. This will continue apace and we must all ensure that this new knowledge is widely disseminated.

‘There also needs to be a more coordinated approach to waste control, collection and recycling which would ease the pressure on landfill, decrease carbon emissions and, in some cases, through incineration, contribute to much needed energy.’

Light metals

Summary of a discussion carried out by the Institute’s Light Metals Division

‘The story for the aluminium and magnesium sectors has been one of successive closures and a loss of both capacity and capability, along with continued decline in price.’ The picture was bleak according to the Light Metals Division in 2009. But is there light at the end of the tunnel?

‘At the end of 2009, light metals research and development in the UK received a major boost with the announcement of five years of funding from EPSRC into industrial development for sustainable transport solutions and maximisation of recycling that will help the UK’s manufacturing industry deliver stronger, more durable and lightweight components and structures, while also minimising energy consumption, carbon footprint and overall environmental impact.

‘The price of aluminium scrap has increased rapidly in the past month, led by increases in the London Metal Exchange primary metal price. But the aluminium industry in the UK continues to labour under low levels of profitability and difficulty in accessing finance and this is precluding investment in new equipment. The situation is not helped by legislation that encourages scrap export rather than domestic utilisation of this important low carbon source of metal.

‘The UK magnesium industry remains slow and commodity prices controlled by China remain low. Greater controls on factory carbon emissions are a concern as they may lead to exporting manufacturing capability in light materials that are essentially environmentally positive.’

Petroleum and drilling

Craig Durham, Nexen Petroleum UK,
Aberdeen, and a member of the Institute’s Petroleum and Drilling Engineering Division

‘The UK oil and gas industry is the market leader in subsea developments, but the industry needs to make more use of rig sharing opportunities,’ says Craig Durham.

‘A group of operators should contract a rig and take one or two well slots each, rather than one operator taking sole risk.

‘Our biggest challenge is to control costs, particularly as rig rates have not reduced
in line with oil price. Drilling contractors are relocating or stacking rigs to maintain the supply and demand balance, rather than accept a lower day rate.’

Cast metals

John Parker, Chief Executive, Cast Metals Foundation, West Bromwich

Last year John Parker said that energy costs for many companies had doubled, and the disparity with other EU countries has put UK manufacturing at a competitive disadvantage.

While he is pleased to see that energy prices have dropped of late, Parker believes that it is now Government legislation that is having the biggest impact on the industry.

‘Government proposals to reduce the Climate Change Levy rebate from 80% to 65% have been a huge blow to the metals industry. This is likely to result in challenging carbon reduction targets.

‘The Government has also recently consulted on modernising landfill tax, which if implemented, would have a direct impact on the sector with an increase in sand disposal costs by a staggering 1,800%.

‘During these difficult times it was hoped that legislative proposals from the European Commission, and indeed our own Government, might have been postponed or at least toned down, but in reality the pace has not abated and a plethora of new environmental proposals have been announced.

‘2010 will be challenging for most casting manufacturers, but companies have geared their businesses to suit the current level of activity. Value added is now a predominant feature of the UK castings industry with many companies not only producing the castings, but also machining, finishing and, in some cases, assembling components as a total service.’

Timber

John White, Chief Executive of the Timber Trade Federation, London, and member of IWSc: The Wood Technology Society, of IOM3

‘In January 2009 it seemed as though the world had stopped, but, as a whole, last year was not quite as bad as predicted. Companies had resized their businesses early and most therefore made it through the year.

‘Wood’s future is bright. The recession is over in my view and increasingly the message that wood is helping to fight climate change is getting through (use wood and trees are planted to replace it). This is something that competing building materials cannot match and will be the driver for buying decisions in the future.

‘Credit availability is going to be key in terms of getting the building industry back on its feet. Banks and Government are going to be important players.’

Composites

Summary of a discussion carried out by the Institute’s British Composites Society

A shortage of engineers with composite knowledge and experience was the biggest challenge facing the industry in 2009. Nothing has changed according to The British Composites Society. It believes that training is difficult to identify and access, and qualifications address specific application areas rather than the composites industry as a whole.

‘The UK composites industry is fragmented and lacks a single voice to articulate industry requirements. As a result, most companies perceive themselves as belonging to an industry sector rather than being part of a wider composites industry. Consequently, technology and skills transfer has been hindered.

‘Government action is needed, in partnership with business, to overcome this
barrier.’

Particulate engineering

John Dunkley, Atomising Systems Ltd, Sheffield, and Chair of the Institute’s Particulate Engineering Committee

In 2009, John Dunkley said that sintered parts production had been suffering for
years and, with the automotive industry particularly hard-hit during the recession, the situation was poor.

Dunkley argues that short-termism is proving fatal to durable success and that providers of capital are not interested in UK industry.

‘Large public companies lack perspective, being ruled by quarterly results. Family companies take a far more long-term view of investment returns, not demanding 12 month paybacks. Sadly this sector is preyed on by firms hoping to persuade them to sell out, often to leveraged companies, often fatal for investment.

‘After what the bankers have done to us, it is hard to feel charitable.’

Fuel cells

Summary of a discussion carried out by the Institute’s Energy Materials Group

‘There is not enough fiscal encouragement for the enormous task (time and money) needed to invest in new, low carbon technology.’ This was the view expressed by the Institute’s Energy Materials Group in 2009 and it appears that nothing much has changed.

‘The availability of equity finance has declined significantly due to a reduction in investors’ risk appetite. Many larger and well-established companies are seeking
new capital to repair balance sheets and refinance bank debt (equity is being used to fill the gap left behind by substantially reduced bank lending).

‘Supply chain partners are also under significant financial pressure and are unwilling to finance the development expenditure, tooling and machines costs, and recover these through the volume unit pricing. These additional R&D and investment costs are passed onto SME technology companies, further increasing the up-front funding pressures.

‘As a result, businesses are less willing to spend time and money developing pre-commercial low carbon technology.’

Nuclear

Adrian Bull, UK Stakeholder Relations Manager, Westinghouse Electric Company

Adrian Bull was upbeat about the future of nuclear energy last year, but how do things stand now?

‘The progress of some activities has been slower than many people hoped for, and this has been frustrating, but overall things are moving well. Our biggest challenge is getting the conditions right for the private sector to invest in new nuclear build – not something which is commonplace around the world.

‘As we approach the General Election, we have a good level of agreement between the two main parties on the importance of nuclear, which is vital.

‘We have also seen big steps forward in the past year – not least the purchase of potential new build sites for hundreds of millions of pounds, which illustrates how serious people are about new nuclear build. But the supply chain needs some encouragement, especially as the difficult economic climate remains. Government has done a lot recently through investment in initiatives such as the Nuclear Advanced Manufacturing Research Centre, which should act as a beacon for high-precision manufacturing for the sector.’

Electronics

Ruth Porter, Technology Markets Programme Manager, technology trade association Intellect, London

In 2009, Henry Parker, then Programme Manager at Intellect, believed that the UK electronics industry needed to focus on niche products in order to find its place in the market. Ruth Porter explains that this is now being done.

‘Over the last decade, the UK electronics manufacturing sector has changed markedly with a lot of high volume, low-value work been offshored to locations where labour is cheaper. In the face of this, the industry here has adapted, and is now based on high-value, low volume production. Largely, industries such as defence, industrial and medical, provide the key opportunities, with innovation an important growth driver.

‘Investment in R&D, good linkages between universities and industry, and a competitive tax and regulatory environment are some of the elements needed to foster a sustainable and thriving electronics industry.

‘Skills is another key issue. For SMEs, finding the resource to ensure staff have the relevant technical skills is sometimes a challenge, as the cost of training includes not just the training itself but also the cost of lost staff time. For other companies it can be finding staff with the right high-level specialist skills that is the challenge.

‘The signs so far seem to be that over the next 12-18 months demand will increase and the sector will eventually be growing again. It also seems that some companies that previously offshored work are now bringing it back to the UK, having encountered problems such as lax intellectual property enforcement abroad. As the market does pick up, visibility across the supply chain and predictability of demand are likely to become issues, but dealing with the challenges of growth is a welcome problem to have.’

Steel

Bob Ruddlestone, Technical and European Affairs Manager, UK Steel, and member of the Institute’s Iron and Steel Society

With the mothballing of Corus’ Teesside plant having begun, the future of UK steelmaking seems uncertain. But with the right investment, the industry has the potential to become a market leader in the global nuclear new build market, aerospace and energy markets, says Bob Ruddlestone.

‘So long as there is a UK manufacturing base, there is a future for UK steel
companies. The industry has never sought bail-outs. The best Government can do is to avoid over-costly regulatory burdens. When the credit insurance market disappeared, the government failed to deliver a solution that would have helped all of UK manufacturing. The industry still needs improved credit insurance availability to assist growth and access to capital at reasonable interest rates. Financial help is also needed to train the next generation of craft and manufacturing operators.

‘The industry has reacted to the downturn by reducing fixed costs, deshifting and increasing the flexibility of the workforce. This has placed many in a strong position to exploit short-term growth opportunities without having to incur increased fixed costs.’

Technical ceramics

Charlie Cobb, President of Morgan Technical Ceramics Europe, Stourport-on-Severn

Charlie Cobb said last year that diversity in end markets would enable technical ceramics to maintain a ‘balanced portfolio’. ‘As we experience delays and cutbacks in areas such as automotives and semiconductor production, we will see demand continuing in the medical and military sectors,’ he argued.

Cobb stands by this statement and says that, while the recession was tough on the industry, organisations need to recognise that many of the issues can be addressed by themselves, either strategically ‘by playing in the right markets’, or operationally ‘by reducing internal lead times to respond to shortening customer lead times’.

‘We can learn a lot from the recession, not least that we need to review the forecasting process to get a better view of the end market drivers and provide early warning of any imminent change.

‘We have strategically moved away from commodity sectors which are affected
the most in any downturn and have migrated to more attractive growth
markets, such as security and defence, communications and healthcare. We have looked at where existing products or processes can provide benefits in other, more buoyant markets.’

‘Moving forward, the sector needs to fully understand the effects of global megatrends, and the opportunities they create, such as energy and healthcare, and align their growth strategies with them.