Metals & Manufacturing Outlook June 2018

In this issue:

Cybersecurity Be Concerned or Be Crushed

By Jason McNew page 18

METALS OUTLOOK PAGE 9

ISSUES OUTLOOK PAGE 13

JUNE

ISM PMI:

58.7% The Full Report Page 21

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IN THIS ISSUE PUBLISHERS STATEMENT - p.2 MANUFACTURING OUTLOOK - p.3 Publisher – Lewis A. Weiss Editor-In-Chief – Tim Grady Design – Rovere Media

INTRODUCING WOMEN AND MANUFACTURING - p.6

Contributing Writers:

NORTH AMERICAN OUTLOOK - p. 7

Royce Lowe, UK and EU International Correspondent

METALS OUTLOOK - p.9

Tim Grady, Co-Host, Manufacturing Talk Radio

AUTOMOTIVE OUTLOOK - p.11

Chris Kuehl, PH.D - Chief Economist, FMA

AEROSPACE OUTLOOK - p.12

Norbert Ore, Senior Correspondent for Global PMI Survey Reports

ISSUES OUTLOOK - p.13

by ROYCE LOWE

Andrea Olson - MSC - CEO of Prag’madik Jason McNew - CEO, Stronghold Cyber Security

ENERGY OUTLOOK - p.14

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ASIA OUTLOOK - 16 SOUTH AMERICA OUTLOOK - 17 CYBER SECURITY... BE CONCERNED OR BE CRUSHED - p.18

by JASON MCNEW GLOBAL PMI OUTLOOK - p.20

by NORBERT ORE JUNE ISM PMI REPORT - p.21 CREDIT MANAGER’S INDEX - p.25

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Metals & Manufacturing Outlook

PUBLISHERS STATEMENT

BY LEWIS A. WEISS It is remarkable in America during these good times that there are more job openings than there are job seekers. An unusual set of circumstances has created this situation.

First, about 10,000 Baby Boomers retire – each and every day! The baby boom began in 1946 as men returned home from the wars in Europe and Japan, and continued until 1964. In 2011, the first boomers hit retirement age. In 2029, the last of the boomers will hit retirement age.

This has created a huge exodus out of the workforce, including manufacturing.

The generations behind the Baby Boomers, Generation X (1965 – 1979), Generation Y, aka the Millenials (1980 – 2000) and Gen Z (2001 – the present) are not sufficient in size or skills to close the skills gap. Gen X was smaller in birth rates than the Baby Boomers, creating a birth dearth.

Gen Y and Gen Z are the focus of digital upskilling by the local, state and federal government, as well as county, technical, two-year and 4-year colleges.

Nonetheless, even with more STEM students graduating from high schools across America, and Vo-Tech schools getting Gen x and Gen Y students better prepared for the digital workforce, America has more job opening than job seekers – and every prediction is that this gap will widen each year until 2030. | June 2018

This is driving the Rise of the Machines, or robotics. The country with the most robots in “the workforce” is Japan. There is a practical reason for that – after World War II, Japan’s male population dropped drastically from men lost in battle, and the birth rate followed suit creating a birth dearth in Japan that didn’t turn around population growth until the 1990’s. So, to get jobs accomplished in the “workforce”, Japan focused on automation and is now producing not just machines, but robots with a human appearance.

America is now faced with the same possible solution, especially in manufacturing. In the absence of humans to fill jobs, companies will be making adaptable, intelligent machines for other companies which will use them in the flow of production from intake of raw materials through production and assembly to warehousing and pick-pack-andship operations. Digital “workers” will drive forklifts, handle raw materials, circulate components, dispense with scrap, assemble parts, inspect completed assemblies, package or box completed pieces, transfer them to inventory, and pick-pack-andship them. Some will be controlled over local wireless networks while others will be connected to Skynet – sorry, I mean the Internet. Much of this is already happening with additional integration of repetitive

tasks along the production cycle under development.

Thus, the forecast of millions of vacant jobs in the manufacturing industry may be filled with robotics and automation more than humans. Non-manufacturing will see a similar integration of automation and robotics, as has been the case in mining and forestry, with new entrants appearing in some retail establishments from taking orders to stocking shelves.

Virtually any repetitive task can be programmed into a machine designed to perform it, freeing up “human intelligence” for more diverse jobs requiring complex thinking and reasoning. We are not [yet] at the stage where the machines can do all the thinking for us.

Even the Chinese will embark on more automation and robotics at an accelerated pace as a result, in part, of the One Child Policy from 1979 until 2015 which resulted in plummeting birth rates, an aging population, a shrinking labor force and may continue for decades to come as families continue to have fewer children than before 1979. Even with their massive population, China may experience a skilled labor shortage in the coming decades. Metals & Manufacturing Outlook will continue to keep a look out on the evolution of robotics, automation and population. Today, enjoy the various Outlook sections within this issue.

Lewis A Weiss, Publisher

Metals & Manufacturing Outlook

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MANUFACTURING OUTLOOK

BY ROYCE LOWE

GLOBAL MANUFACTURING PMI DOWN A NOTCH, BUT U.S. AND CANADIAN MANUFACTURING RACING AHEAD FOR NOW. TARIFFS, TARIFFS, TARIFFS....

HIT THE HARLEYS, HIT THE BOURBON. WILL WE ALL GO TO (A TRADE) WAR?

The backlash will be fierce, but its effects will not be known for some time. There are mixed reactions to the tariffs among manufacturers and business groups in the U.S. and from the EU. For further details see ISSUES OUTLOOK.

in April, representing the 21st consecutive month of growth in manufacturing. The overall economy grew for the 109th consecutive month. Suppliers’ delivery times are lengthening significantly. See NORTH AMERICAN OUTLOOK.

In a not uneventful couple of weeks, global trade, which has been mostly ticking along very nicely, came under the potential hammer of Trump’s misguided desire to make the rest of the world, even its closest allies, pay for the U.S. trade deficit. Canada, Mexico and the EU will henceforth be subject to a 25 percent steel, 10 percent aluminum tariff package.

The Global manufacturing PMI eases back to a nine-month low, but not in the U.S. and Canada.

IHS Markit’s remarks on the U.S. points to the PMI, at 56.4 percent in May, effectively unchanged from April’s 56.5, noting a further steep inprovement in business conditions. There was a sharp increase in production and new orders, and employment was up at steeper rates.

Hopefully common sense will prevail, but there is no evidence of that in recent actions: thus Justin Trudeau in his reply.

The BLS jobs report for May shows the addition of 223,000 non-farm payroll jobs, a 3.8 percent unemployment rate, and 18,000 new jobs in manufacturing, mostly in durable goods. Over the past year 259,000 jobs were added in manufacturing, some 75 percent in durable goods.

The ISM PMI figure for U.S. manufacturing recovered to 58.7 percent in May from 57.3 percent

Inflationary pressures remain high.

Backlogs increased at the fastest pace since September 2015, and supplier delivery times are lengthening to the greatest extent on record | June 2018

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Metals & Manufacturing Outlook

There is a strong demand for inputs and a sharp rise in purchasing costs, with sales prices increasing accordingly.

New orders have grown at a faster pace than production in each of the past five months.

The five ISM components are equally weighted at 20 percent each. The IHS Markit components are weighted: 30 percent New Orders, 25 percent Production, 20 percent Employment, 15 percent Supplier Deliveries and 10 percent Raw Materials Inventories.

The Bureau of Economic Analysis recently released its ‘second’ estimate for the annual rate of Real GDP growth in the first quarter of 2018, putting it at 2.2 percent. The figure for the fourth quarter of 2017 was 2.9 percent.

NAFTA and Brexit negotiations are both bogged down for the time being.

World crude steel production for the 64 reporting countries – which represent 99 percent of world crude steel production - for the month of April was 148 322 Mt, up 4.1 percent y-o-y. Capacity utilization for the month was 76.9 percent, up 2.4 percent on April 2017 and up 2.4 percent on March 2018.

U.S. crude steel production for April 2018 was 6.930 Mt, up 3.6 percent y-o-y.

Primary Global Aluminum Production in April 2018 was reported at 5.256 million tonnes, with production in China, at 2.96 million tonnes representing over 56 percent of world total.

Production was 446,000 tonnes in GCC; 355,000 tonnes in rest of Asia ; 303,000 tonnes in Western | June 2018

Europe; 311,000 tonnes in North America and 334,000 tonnes in Eastern and Central Europe.

U.S. LIGHT VEHICLE SALES General Motors will no longer publish its monthly sales figures, stating that they are not a true representation of its overall market. It will instead report quarterly figures.

May 2018

% change

Ford

241,527

0.7

FCA

215,244

10.8

Toyota

215,321

-1.3

Honda

153,069

3.1

Nissan

144,248

8.61

Hyundai/Kia 125,518

5.91

VW Group

2.70

55,786

Total sales

1,326,721, up 3.5 percent y-o-y.

Manufacturing Laughs

Metals & Manufacturing Outlook

5

THE ECONOMIST magazine, in its latest weekly report on world economies, highlights changes in Gross Domestic Product (GDP), Industrial Production, Consumer Prices and Unemployment Rates for what it considers the world’s major economies. These data are not necessarily good to the present day, but are mostly applicable to at latest the past two months, and show definite trends in the world economy. The figures are qualified as being the latest available, and with reference to a given quarter or month.

The figures for GDP represent the % change on the previous quarter, annual rate. The industrial production figures represent year-on-year changes, as do the consumer prices increases. The unemployment figures, %, are for the month as noted.

| June 2018

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Metals & Manufacturing Outlook

Most people have heard that women are 51% of the U.S. population and only 27% of employees in manufacturing. But there is so much more to this story than a few statistics. To bring the story to life, the Manufacturing Broadcasting Corporation (MBC), broadcasters of Manufacturing Talk Radio has launched Women And Manufacturing, an exciting new show where accomplished women interview accomplished women who can share their experiences and encourage women to look across the broad landscape of manufacturing, from the loading dock doors to the C-Suite, and the expanse of jobs and careers in between, to learn more about this exciting sector of the U.S. economy and what it might hold for them.

Never before has the manufacturing industry been in such an accelerated state of change, from retirees leaving the workforce creating a serious skills gap and brain drain to the implementation of the technological innovations of modern manufacturing often referred to as Industry 4.0, or the 4th Industrial Revolution. The hosts of Women And Manufacturing, all successful women in their own right, will interview women who are in the midst of a successful career in the industry and their respective companies, providing the guests with an opportunity to give guidance, insight, and inspiration to women who may or may not have considered a career in the industry, from teenagers just beginning to think about their career path to women in the industry or in transition in their own professional lives.

The subject matter of the interviews will cover the spectrum of unique challenges any woman might face in the workplace or the industry from the success and accomplishments of women from the shop floor to the C-suite, from executive management to labor unions, and from educational to governmental institutions.

Each will share their thoughts in congenial, collegiate conversations with one of 6 hosts who will alternate each week. Hosts will also tease out insights through guest introspection, along with suggestions and recommendations from guests to listeners about navigating the manufacturing and corporate world.

Tune in to each episode to hear the accomplished women share their experiences with this generation and the next generation of women who will make and remake manufacturing for the generations who follow in this noble profession which contributes to the greater good of all, improving products, making things better and safer, and fulfilling lives – not just making a living.

All of us involved with Women And Manufacturing appreciate your listenership and look forward to your feedback as this incredibly exciting show develops.

Visit WOMENANDMFG.COM for more information. | June 2018

Metals & Manufacturing Outlook

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NORTH AMERICAN OUTLOOK

BY ROYCE LOWE

The Latest Manufacturing Reports from the United States, Canada and Mexico The Institute of Supply Management PMI figure came back from 57.3 percent in April to 58.7 percent in May, representing the twenty first consecutive month of growth in manufacturing. There was growth in the overall economy for the 109th consecutive month.

There were significant increases in the indexes for new orders, production and employment.

Of the 18 manufacturing industries, 16 reported growth in May, in the following order: Textile Mills; Nonmetallic Mineral Products; Electrical Equipment, Appliances & Components; Printing & Related Support Activities; Fabricated Metal Products; Furniture & Related Products; Machinery; Chemical Products; Food, Beverage & Tobacco Products; Computer & Electronic Products; Petroleum & Coal Products;

Plastics & Rubber Products; Miscellaneous Manufacturing; Transportation Equipment; Paper Products; and Primary Metals. No industry reported a decrease in PMI® in May compared to April.

Comments from the manufacturing industries continue in a very positive mode, but there are concerns over tariffs, both on Chinese products and on steel and aluminum. The labor market continues to be tight and material costs, due to both increasing demand and tariffs, continue to rise. Suppliers’ deliveries become more and more extended.

Following is a summary of the five major indexes, each weighted at 20 percent in calculation of the PMI number for May; April’s readings are in parentheses: New orders 63.7 (61.2) Production 61.5 (57.2) Employment 56.3 (54.2) Supplier Deliveries 62.0 (61.1) slowing, faster Inventories 50.2 (52.9) The following five components are not instrumental in the PMI calculation, but are an important part of the manufacturing industry: Customer Inventories 39.6 (44.3) too low Prices 79.5 (79.3) Backlog of orders 63.5 (62.0) | June 2018

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Metals & Manufacturing Outlook

Commodities Up in Price Aluminum (19); Aluminum Based Products; Brass; Capacitors; Caustic Soda (11); Cobalt; Copper (7); Corrugate (20); Corrugated Boxes; Corrugated Cartons; Electrical Components (2); Freight (4); Paper; Resistors; Steel — Galvanized; Steel — Hot Rolled (18); Steel — Hot Rolled Plate; Steel — Stainless (2); Steel — Stainless Steel Bar; Steel — Stainless Steel Sheet; Steel Based Products; and Wood (2).

Commodities Down in Price None

CANADA saw its strongest improvement in manufacturing business conditions since April 2011, and the PMI at its highest in over seven years, up from 55.5 in April to 56.2 in May. Production, new orders and employment saw strong rises, and there was the steepest rate of input cost inflation since March 2014.

Export sales served to significantly lift growth, showing their strongest rise for just over seven years, particularly sales to the U.S.

Note: The number of consecutive months the commodity is listed is indicated after each item.

Capacity pressures led to more job creation, but supply chain constraints led to delays in raw material deliveries. This was further aggravated by U.S. truck driver problems.

Quebec showed the strongest improvement in manufacturing conditions, and the fastest growth in new orders for almost six years.

The complete ISM Report on Business may be found at the end of this MMO report.

All regions recorded strong input cost inflation and longer delivery times for materials.

Commodities in Short Supply Aluminum; Capacitors (11); Electrical Components (2); Electronic Components; Freight; Memory; Resistors (7); Steel Based Products; and Steel – Hot Rolled (2).

| June 2018

Canada produced 1.190 Mt of crude steel in April, up 13.8 percent y-o-y.

Canadian light vehicle sales in May were off 0.6 percent y-o-y, with sales at 215,942 units. Sales for the first five months to date are slightly up by 0.2 percent. Light truck sales represented 70 percent of total sales.

MEXICO saw falls in production, albeit marginal, for the first time in seven months.

New order growth slowed, but thanks in large part to a devalued peso, export sales were good.

The PMI slid from 51.6 in April to 51.0 in May. The rate of employment growth was up to the strongest since October 2015, but many jobs were reported to be of a temporary nature.

Mexico produced 1.790 Mt of crude steel in April, up 13.7 percent y-o-y.

Metals & Manufacturing Outlook

9

METALS OUTLOOK

BY ROYCE LOWE

Hot-rolled and cold-rolled steel prices in the U.S. are still on the up, and in early June hot-rolled coil was being quoted at just over $890 per ton, cold-rolled coil on the verge of $1,025 per ton.

Rebar was being quoted at around $700 per ton.. European hot-rolled coil is still pricing around €570 per tonne, or equivalent to around $630 per ton, with European rebar just over €540 per tonne. More price increases are expected from U.S. mills.

Chinese galvanized is pricing at just over $630 per ton.

Voestalpine officially began the three-year construction phase for its special steel plant in Kapfenberg, Austria. Once it opens in 2021, the fully digitized facility will produce approximately 205,000 tons of high-performance steels per year for the international aerospace and automotive industries. The project is expected to create more than 3,000 highly

skilled jobs in the region over the long term.

Gerdau Special Steel North America will undertake a $70.3 million capital investment program for its SBQ steel minimill in Monroe MI. It will upgrade its EAF and secondary refining technology, and will increase capacity from the present 540,000 to 740,000 upon completion of the project in 2020.

Sheffield Forgemasters International Ltd has 2018 order books worth over $150 million, its highest recorded since 2012. SFI works mainly on U.K. and U.S. defense programs, civil nuclear power projects and material processing programs. The company attributes its success to its heavy investment in technology and skills training.

Russian steelmaker NLMK has ordered a new thick slab caster from the SMS Group. The

machine will cast slabs to 2.8 metres (110 ‘’) wide x 355-400 mm (14’’-15.75’’) thick, for a capacity of 2 million tpy, and twin casting will be available for slab widths of 900-1290 mm wide x 250 mm maximum width.

The Worldsteel Association has published a ‘World Steel in Figures’ booklet, detailing crude steel production and apparent finished steel consumption, along with other interesting historical data. The link is https://www.worldsteel.org/ en/dam/jcr:f9359dff-95464d6b-bed0-996201185b12/ World+Steel+in+Figures+2018.pdf Non-ferrous metal prices saw aluminum around $1.06 per pound in late May; copper at around $3.16 per pound; nickel at around $6.90; zinc at $1.36/1.40 per pound. In fact there was very little change from April. | June 2018

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Metals & Manufacturing Outlook

AUTOMOTIVE OUTLOOK

BY ROYCE LOWE

TESLA is going through its most critical time since the launch of its model S six years ago. It had hoped to be making 10,000 Model 3s per week by the end of 2018, but there have been difficulties with its highly automated production line and they were recently making 2,000 models per week – and have revised their forecast to 5,000 per week.

Both cash and top executives are ‘leaving’ the company and there have been crashes involving the Autopilot self-driving system.

Analysts are saying the company will need to raise another $2 billion or more this year, and it has been further suggested that the introduction of new products such as a model Y, a smaller SUV, and an electric truck will require raising $10 billion by 2020.

If Tesla’s shares continue to tumble the company might be an inviting target. But all the major German carmakers have competing cars in the works.

FCA has made less progress on electrification, but might be interested at a low enough price.

The Chinese are likewise working in their own backyards. | June 2018

Elon Musk has said “ I wish we could be private.” If it does get cheap enough maybe Space X could buy it.

BMW plans 12 electric vehicles by 2025, starting in 2019 with a battery-powered Mini, assembled in Oxford alongside conventional models. Alongside BMW, Volkswagen AG and Daimler AG will take the fight to Tesla. BMW, meanwhile, has words of wisdom that Tesla might pick up on. “To fully automate the assembly process is not our goal, because the human being with its unique properties is unbeatably flexible.”

Elon Musk has admitted to installing too many robots.

BMW’s advice, meanwhile, would be to embrace human labor, be flexible and focus on the details.

BMW churns out ‘elite cars for discerning customers’ and is presently facing an expensive retooling of the bulk of its production network to assemble battery-powered vehicles alongside its conventional models, giving it a scale that Tesla just can’t match.

Toyota Motor Corp. will invest

C$1.4 billion ($U.S.1.1 billion) in its Canadian operations, and create 450 jobs, to build the traditional and hybrid RAV4 SUVs, banking on the nation’s manufacturing sector amid a cloud of uncertainty from the NAFTA talks. The two plants in Cambridge, Ontario, west of Toronto, employ some 8,000 people, and made over 600,000 vehicles in 2017.

The investment will allow Canada to become the largest producer of hybrid Toyotas in North America. Assembly of the Corolla compact will move to the U.S. to make room for RAV4 production, a model which sold 407,594 units in the U.S. in 2017, beating Camry Sedan sales for the first time.

Toyota will also invest in Canadian R&D over a ten-year period.

Volkswagen has vowed to introduce 40 new locallyproduced new-energy vehicles over the next seven to eight years in China.There will be three new factories in China with local partner FAN Group, including

Metals & Manufacturing Outlook

two new facilities in Tianjin and Foshan: one was just opened in Qingdao.

There will be more SUVs and EVs for local production, the fastest growing segments of China’s auto market. VW’s sales were up 13.4 percent to 1.01 million in the first quarter of 2018.

Nissan Motor Co. meanwhile will cut vehicle output in the U.S. and Mexico through this summer to reduce inventories in what it calls a ‘cooling market.’

Nikkei Publications reports that Nissan will cut hours and reduce production by up to 20 percent.

Nikkei didn’t say where it got the info. Nissan’s U.S. output fell for 10 consecutive months as of March this year, with sales down 28 percent in April.

11

General Motors will invest $2 billion in facilities over ten years and spend $1.6 billion on corporate restructuring and operational costs, as part of a bailout for its troubled South Korea Unit. This unit loses money and has seen production fall by almost half in the last decade.

GM recently planned to shut down Gunsan, one of its four plants in the country and to lay off some 2,000 workers. This led to a prolonged, sometimes ugly strike.

Workers and management recently reached agreement on job and welfare payment cuts.

There will be restructuring and a wage freeze.

China is to cut the import duty on cars to 15 percent from the current 25 percent that has been the norm for over a decade. | June 2018

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Metals & Manufacturing Outlook

AEROSPACE OUTLOOK

BY ROYCE LOWE

Deliveries of the new F-35 fighter jet are on again, following an agreement with the U.S. Department of Defense over maintenance costs - for airframe corrosion - on currently-operating F-35s. Lockheed and its F-35 program partners (Northrup Grumman Corp., Pratt & Whitney and BAE Systems Plc) are scheduled to deliver 90 new jets this year, on the way to a peak annual production rate of 160 new jets by 2013.

The WTO final appeals body recently revealed that under a previous ruling the EU had wrongly provided $22 billion in illegal subsidies to Airbus for development of new aircraft, hitting sales of Boeing jets. There will be another WTO ruling, later this year, on $11.7 billion in tax breaks from Washington State for Boeing 787 and 777X jets. | June 2018

Both companies presently seem more than proud of their growing order books. There seems to be more than enough business to go around, for the foreseeable future.

Rolls Royce Holdings Plc has a problem with the Trent 1000 Turbine engine used to power Boeing’s 787 Dreamliner. Cracks and wear and tear have been found on turbine blades. There were 34 Dreamliners parked, awaiting repaired engines, and the number was set to rise in the coming months, according to sources who asked not to be identified.

Boeing in fact dispatched a Vice President, responsible for development of the 737 Max to its commercial debut. He will be Boeing’s eyes and ears in both Singapore and Derby, England, where the Trent 1000 engine is manufactured and being repaired.

It has since been reported that the number of parked Dreamliners will likely go to around 50 from the present 34.

Metals & Manufacturing Outlook

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ISSUES OUTLOOK

BY ROYCE LOWE

Canada will go tit for tat on steel and aluminum tariffs. It’s rather ironic that the U.S. gets most of its aluminum from Canada in any event. Canada will further take aim at yogurt, coffee, sugar, toilet paper, sailboats, mattresses, washing machines and lawn mowers.

The U.S. Chamber of Commerce urged the administration not to proceed with tariffs, stating it would hurt manufacturers with higher costs, and would impede construction-sector growth, whilst hurting job creation in both these sectors.

U.S. steel prices are already almost 50 percent higher than those in Europe and China, and aluminum prices have been ‘volatile.’ New tariffs will aggravate these situations.

Even the Koch brothers, some of whose money was to some extent responsible for getting Trump elected, are against the tariffs, as are some Republican members of Congress.

The EU says it will retaliate on $3.3 billion of U.S. imports. This includes Harleys and Bourbon and Jeans.

Germany “ rejects the tariffs imposed by the U.S. on steel and aluminum” said Angela Merkel’s chief spokesman. “ We consider that this unilateral measure is unlawful and that the national security concerns given as the reasons can’t be upheld,”he added.

France said the EU isn’t seeking a trade war with the U.S. but has no choice but to impose ‘re-balancing’ tariffs on U.S. imports.

Dennis Muilenberg, CEO of Boeing, said his company sells some 70 percent of its products outside the U.S.. He emphasized the importance of Free Trade agreements for aerospace.

Boeing’s manufactures are 90 percent carried out in the U.S..

He stated that the tariffs on steel and aluminum are not currently affecting Boeing sales, but ‘it’s something we are watching.’ He was, of course, very careful not to critcisize!

Manufacturing Laughs

The Alliance of Automobile Manufacturers, a trade association for twelve producers in the U.S., including G.M., Ford, VW AG and Daimler AG, warned that expanding tariffs will lead to higher prices for U.S. produced materials that will be passed on to consumers.

The AISI “thanked the president for his actions to ensure a strong American steel sector that is fundamental to our national and economic security.”

As for aluminum: there just isn’t nearly enough produced in the U.S. | June 2018

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Metals & Manufacturing Outlook

ENERGY OUTLOOK

BY ROYCE LOWE

Trump’s imposition of up to 30 percent duties on imported solar panels looks like it may serve to add substantially to U.S. solar capacity, in fact to more than double it.

U.S. companies SunPower Corp. and First Solar Inc. say they’ll up production in Oregon and Ohio. South Korea’s Anwha Q Cells says it will build in Georgia; Jinkosolar Holding Co. of China plans to build in Florida.

But automation may mean fewer jobs than Trump may have promised, and profits will flow offshore.

Meanwhile Trump is backing coal as an energy source, arguing it’s good for national security. And nuclear may figure again too....but see the following story.

The Trump Administration is pulling the plug on the South Carolina facility that was designed to convert weapons-grade | June 2018

plutonium into nuclear reactor fuel, that the U.S. government had already sunk billions in to partially build. The Trump Administration wants to spend billions more to wind down the project and to retrofit the plant for a new mission; the production of triggers for nuclear weapons.

Both the Obama and Trump administrations wanted to end construction, but they were blocked by the South Carolina delegation in Congress, thus preserving a source of jobs and federal funding in their district.

Construction of the South Carolina facility brought on lawsuits, delays and budget overruns and turned into waste and mismanagement by the Energy Department’s National Nuclear Security Administration (NNSA). Meanwhile things soured between the U.S. and Russia and Russia pulled out of the pact in 2016, citing Washington’s noncompliance.

Costs and problems mounted, and after $7.6 billion had been sunk into the project and a further $50 billion would have been necessary to finish construction and convert the intended 34 tonnes of plutonium over the coming decades. The plutonium will now be diluted with nonradioactive materials and disposed of in a defense waste repository in new Mexico.

The original idea of this project was to take tons of excess plutonium the U.S. produced during the cold war for nuclear weapons and convert this (dangerous) material into mixed oxide, MOX, fuel for commercial reactors. There was a U.S. -Russia There will be battles ahead on this pact in 2000 which agreed to dispose of a certain amount of the story, regardless of the Federal Government’s intentions. material from both countries.

Metals & Manufacturing Outlook

GLOBAL OUTLOOK

BY ROYCE LOWE

15

Crude steel production in Germany in April was at 3.775 Mt, down 1.7 percent y-o-y; in Italy 2.061Mt, up 3.7 percent y-o-y; in France 1.398 Mt, up 10.7 percent y-o-y and in Spain 1.316 Mt, up 7.5 percent y-o-y.

Russia’s crude steel production for April was at 6.030 Mt, up 2.4 percent y-o-y; Ukraine’s was 1.721 Mt, up 6.0 percent y-o-y.

Car sales in Western Europe were up based on the SAAR (Seasonally Adjusted Annual Rate) from 14.4 million in April to 14.8 million in May. There were concerns in Europe regarding Italy’s political turmoil, accompanied by a 2.8 percent drop in sales in that country in May.

EUROZONE

IHS Markit’s Eurozone IHS Markit’s Eurozone Manufacturing Composite Purchasing Managers’ Index (PMI) eased again, from April’s 56.2 to 55.5 in May.

Growth was recorded across consumer – weakest -, intermediate and investment goods, but rates eased in all three categories.

There was slower growth in production, new orders (including export) and employment; in fact there was a general loss of momentum.

The outlook for manufacturing stays positive in May. There are capacity constraints. The rate of employment growth slipped to a 14-month low.

IHS Markit’s PMI for the UK was up slightly to 54.4 from April’s 53.9 figure.Production was up slightly despite a slower expansion of receipt of new orders. Supply-chain constraints are getting more serious and cost pressures intensifying.

But, production was mainly achieved through the steepest inventory build-up of finished goods in the 26-year survey history, together with a sharp reduction in backlogs.

New orders were slow at the domestic level, but there was strength from overseas, notably Europe, North America, China, India, South America and Africa.

Employment growth was at the slowest pace in 15 months.

The UK produced 0.769 Mt of crude steel in March, up 8.4 percent y-o-y.

Car sales in the U.K. turned up in May by 3.4 percent, but year-todate sales are down 6.8 percent. | June 2018

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Metals & Manufacturing Outlook

GLOBAL OUTLOOK

BY ROYCE LOWE

ASIA

There was a modest expansion in May in CHINA’s manufacturing sector, with the seasonallyadjusted PMI remaining unchanged at 51.1.

Growth in production and new orders picked up slightly from April, but there was a further reported drop in export sales.

Employment was down as a costcutting measure.

CHINA produced 76.698 Mt of crude steel in April, up 4.8

Manufacturing Laughs

percent y-o-y; Japan 8.723 Mt, down 0.4 percent y-o-y; India 8.692 Mt, up 5.6 percent y-o-y and South Korea 5.893Mt, up 7.1 percent y-o-y. Taiwan produced 1.660 Mt in April, down 14.6 percent.

China sold 1.9 million passenger cars in April, up 14.2 percent y-o-y, and around 7.9 million cars in the first four months of 2018, 6.2 percent up on the same period last year. In April, 82,000 EVs and plug-in hybrids were sold, up 138 percent y-o-y, and in the first four months of 2018, at 225,000 EVs and PHEVs, sales in

this category were up 149 percent on the same period in 2017.

In May, JAPANESE manufacturers saw total new order growth slow, but new export orders up at a quicker pace, to China, Taiwan, Europe and North America. Suppliers’ delivery times lengthened significantly, to the most marked extent in seven years.

Employment was up at its softest pace in seven months, coincident with a slower pace of backlog accumulation.

The manufacturing PMI closed at 52.8 in May, down from 53.8 in April.

Input price inflation was up at its highest in 41 months, with selling prices up accordingly.

Overall business optimism was retained over the next twelve months.

INDIA saw conditions improve, but at a slower pace than in May. The PMI for May was down slightly from April’s 51.6 to 51.2 in May. Production, new orders and employment all increased but at a slower pace. Indian manufacturers reported the strongest gain in new export orders since February.

| June 2018

Cost pressures intensified in May.

Metals & Manufacturing Outlook

17

GLOBAL OUTLOOK

BY ROYCE LOWE

SOUTH AMERICA BRAZIL saw manufacturing sector growth cool further in May, with production and new order growth up at their weakest pace in 15 months.

Input buying was put off due to price hikes. Inflationary pressures strengthened. Currency depreciation led to cost inflation that was the second highest in almost two years. Job creation softened and business optimism recoiled.

The PMI in May was at 50.7, a 10-month low, down from April’s 52.3.

Political instability, surging commodity prices and truckers protesting against fuel prices lend to a rather dismal month in Brazil’s manufacturing sector.

Brazil’s crude steel production for the month of April was 2.949 Mt, an increase y-o-y of 1.9 percent.

The JP MORGAN GLOBAL MANUFACTURING PMI – a composite index produced

by JPMorgan and IHS Markit in association with ISM and IFPSM (International Federation of Purchasing and Supply Management) – was at a ninemonth low in May at 53.1 down from April’s 53.5.

Global manufacturing production rose at the same pace as March’s eight-month low, and there was a slowdown in the pace of increase of new orders to the lowest sinc June 2017. New export order growth was effectively stagnant.

Investment goods was the only industry covered to see an improved, five-month high, PMI level, with faster growth in both production and new orders: there was an accompanying slowdown in consumer and intermediate goods.

The U.S. outperformed the euro area for the second straight month and is in the midst of one of its best grwoth spells in the past four years.

Things are not quite so good in Asia, with minimal increases in China, Japan and India.

ISO9001:2008 and AS9100C

| June 2018

18

Metals & Manufacturing Outlook

CYBER SECURITY… BE CONCERNED OR BE CRUSHED.

BY JASON MCNEW

Organizations.” The ultimate intent of this publication is to protect the entire Department of Defense (DoD) supply chain from end to end, as well as those of NASA and the federal Department of Transportation.

American manufacturers of all shapes and sizes have a very serious security problem, because economic and strategic competitors to the U.S. have been actively targeting our companies with the objective of stealing their intellectual property. The biggest of these cyber threats is undoubtedly China. If you want to know what China is after, just look a look at their most recent “Five Year Plan.” As there are thousands of manufacturers who make parts for the DoD, the federal government decided to take a proactive approach to this problem, by helping American manufacturers to protect their information with a framework known as NIST 800-171.

The framework is ideal for non-DoD manufacturers as well.

How Did NIST 800-171 Come About?

President Obama issued Executive Order (EO) 13556, Controlled Unclassified Information on November 4, 2010. This Executive Order laid the groundwork for NIST Special Publication 800-171, “Protecting Controlled Unclassified Information in Nonfederal Information Systems and | June 2018

As of December 2015, DFARS (Defense Federal Acquisition Regulation Supplement) 225.2047012 required DoD contractors to implement NIST 800-171 “as soon as practical, but not later than December 31, 2017”. This deadline is now almost 180 days passed, and many manufacturers are not complaint. What is worse, is that many have not taken any steps to comply, putting their business at risk.

There are endless pages on the Internet trying to explain who is impacted by this, and many small manufacturers think they do not have to comply because they are sub-contractors, or they think they don’t hold any CUI. However, the problem is that the big, multibillion dollar DoD prime contractors such as Lockheed and Northrup are not taking ANY chances with NIST 800-171 at all, because billions of dollars are at stake.

Here is the BLUF (Bottom Line Up Front): if you have a Commercial and Government Entity Code (CAGE Code), https://www.fsd. gov/fsd-gov/answer.do?sysparm_ number=kb0011119 and you fall anywhere within the DoD (or NASA or DoT) supply chain (whether its materials or labor/knowledge), it is HIGHLY probable that you need to comply with NIST 800-171. If

you are still not sure, it would be best to discuss this with the COR (Contract Officer Representative) for the prime contract you fall under, and additionally seek legal counsel. If your business does not comply with NIST 800-171, the prime contractors will, at some point, remove you from their list of suppliers.

Sadly, it is well known in the InfoSec community that 800-171 is going to convert countless formerly thriving small businesses into corpses, when they choose not to comply and then lose their contracts.

What is NIST 800-171?

NIST 800-171 is a cyber security framework which prescribes 110 controls over 14 sections. These sections are: Access Control, Awareness and Training, Audit and Accountability, Configuration Management, Identification and Authentication, Incident Response, Maintenance, Media Protection, Personnel Security, Physical Protection, Risk Assessment, Security Assessment, System and Communications Protection, and System and Information Integrity.

The framework can be found here: https://nvlpubs.nist.gov/nistpubs/ SpecialPublications/NIST.SP.800171r1.pdf The good news is that NIST 800-171 was designed with the needs of small and mid-sized manufacturers in mind. Like ISO 9000, NIST implementation will improve the valuation of your business. Also like ISO 9000, in a few years’ time the marketplace will simply expect manufacturers (whether they are DoD or not) to have a cyber security program of some kind. The NIST standards are very highly regarded in the cyber security community. If you are a manufacturer and are concerned about cyber security, there is no need to reinvent the wheel; the DoD has invented it for you – follow NIST 800-171.

While compliance isn’t easy and must be done organizationally top-down, it is manageable

Metals & Manufacturing Outlook

19

for most companies, even very small ones. Many manufacturers, even those with in house IT staff, will choose to bring in cyber security experts to help them comply. There are two basic portions of compliance – gap analysis, and remediation.

During the gap analysis phase, the needed documentation including the SSP (System Security Plan) and the POA&M (Plan of Action and Milestones) will be created. The SSP is a high-level description of your network, and how you are meeting the 110 controls. The POA&M is a progressive plan to implement unmet controls over a period of time. For small manufacturers having a few dozen employees and a small vanilla network, this should cost eight to ten thousand dollars.

The remediation phase however, is another story and can vary wildly. For example, if you don’t have any physical security or have network equipment from Best Buy, remediation can get expensive.

Every federal government contractor or subcontractor was supposed to comply with NIST 800-171 by December 31st, 2017. If you have not started on your compliance efforts, do not wait any longer – not only will it help you avoid losing contracts, doing so will also go a long way toward reducing your business risks. | June 2018

20

Metals & Manufacturing Outlook

GLOBAL PMI OUTLOOK

BY NORBERT ORE PMI surveys provide monthly insight into the magnitude and direction of change. This month, we see a continuing overall growth trend that is moderating, but still at levels that spur economic activity in many countries and regions. When we look at the magnitude of change, the variance on average in the 18 surveys that we cover is +/- 1 pp m/m. The biggest winners this month are North America (dominated by the U.S. and Canada) and the Eurozone which continues to be driven by the Netherlands, Austria, and Germany. Year-to-date, we have seen stellar performance in global manufacturing by reaching levels many thought were unattainable in this current cycle. For a third consecutive month, South Korea (48.9, +0.5) is the only survey indicating overall contraction. The JP Morgan Chase Manufacturing PMI™ – which summarizes the data from 44 countries – was

| June 2018

slightly weaker m/m as it posted a 53.1 (a 10-month low).

Eurozone: The Eurozone PMI (55.5, -0.7) expanded at a slower rate for a fifth consecutive month. While the rate of growth has slowed, the PMI has remained above the 54-mark for 18 consecutive months. The EZ’s manufacturing expansion continues to be led by the Netherlands (60.3, -0.4), then Austria (57.3, -0.7) and Germany (56.9, -1.2). The five remaining countries averaged 54.0 percent for the period which is the same as the prior month. The rate of growth sustains expansion in investment and employment.

United Kingdom: The UK/CIPS PMI (54.4, +0.4) enjoyed a slight uptick in May as it came off a 17-month low. In May, the rate of growth remained in the middle of the range that promotes economic growth.

China: China’s Official Report, the

CFLP PMI (51.9, +0.5), exceeded the two-year average of 51.2 for the index. The Caixin China General Manufacturing PMI (51.1, unch) also exceeded its two-year average of 50.8. The trend from both surveys is for continuing growth consistent with past performance.

India: India’s PMI (51.2, -0.4) decelerated slightly while posting its 10th consecutive month of growth, placing it below its 12-month average of 51.4 percent.

Consistency in terms of orders, jobs, and inventory appears to be the best categorization for India’s economy.

North America: Canada (56.2, +0.7) expanded for the 27th consecutive month driven by rises in new orders and production.

This also represents the highest PMI in seven years for Canadian manufacturing. Mexico’s PMI (51.0, -0.6) fell below its YTD average (51.9).

Metals & Manufacturing Outlook

21

THE INSTITUTE FOR SUPPLY MANAGEMENT’S MANUFACTURING REPORT ON ® BUSINESS BREAKING NEWS

ISM PMI at 58.7% ISM PMI for the past 5 years

| June 2018

22

Metals & Manufacturing Outlook

ISM® REPORT ON BUSINESS®

MANUFACTURING E

conomic activity in the manufacturing sector expanded in May, and the overall economy grew for the 109th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM® Report On Business®.

The May PMI® registered 58.7 percent. The New Orders Index registered 63.7 percent, an increase of 2.5 percentage points from the April reading of 61.2 percent. The Production Index registered 61.5 percent, a 4.3 percentage point increase compared to the April reading of 57.2 percent.

The Employment Index registered 56.3 percent, an increase of 2.1 percentage points from the April reading of 54.2 percent.

The Supplier Deliveries Index registered 62 percent, a 0.9 percentage point increase from the April reading of 61.1 percent.

The Inventories Index registered 50.2 percent, a decrease of 2.7

MAY 2018 Analysis by Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management® Manufacturing Business Survey Committee

percentage points from the April reading of 52.9 percent. The Prices Index registered 79.5 percent in May, a 0.2 percentage point increase from the April reading of 79.3 percent, indicating higher raw materials prices for the 27th consecutive month. Of the 18 manufacturing industries, 16 reported growth in May, in the following order: Textile Mills; Nonmetallic Mineral Products; Electrical Equipment, Appliances & Components; Printing & Related Support Activities; Fabricated Metal Products; Furniture & Related Products; Machinery; Chemical Products; Food, Beverage & Tobacco Products; Computer & Electronic Products; Petroleum & Coal Products; Plastics & Rubber Products; Miscellaneous Manufacturing ‡; Transportation Equipment; Paper Products; and Primary Metals.

PMI @ 58.7% ®

‡Miscellaneous Manufacturing (products such as medical equipment and supplies, jewelry, sporting goods, toys and office supplies).

MANUFACTURING AT A GLANCE May Index 58.7 63.7 61.5 56.3 62.0 50.2 39.6 79.5 63.5 55.6 54.1

Apr Index 57.3 61.2 57.2 54.2 61.1 52.9 44.3 79.3 62.0 57.7 57.8

% Point Change +1.4 +2.5 +4.3 +2.1 +0.9 -2.7 -4.7 +0.2 +1.5 -2.1 -3.7

Growing Growing Growing Growing Slowing Growing Too Low Increasing Growing Growing Growing

Rate of Change Faster Faster Faster Faster Faster Slower Faster Faster Faster Slower Slower

Trend* (months) 21 29 21 20 20 5 20 27 16 27 16

OVERALL ECONOMY

Growing

Faster

109

Manufacturing Sector

Growing

Faster

21

Index PMI® New Orders Production Employment Supplier Deliveries Inventories Customers’ Inventories Prices Backlog of Orders New Export Orders Imports

Direction

*Number of months moving in current direction. Manufacturing ISM® Report On Business® data is seasonally adjusted for the New Orders, Production, Employment and Supplier Deliveries Indexes.

PMI 2016

2017

2018

58.7%

50% = Manufacturing Economy Breakeven Line

PMI® Manufacturing expanded in May as the PMI® registered 58.7 percent, an increase of 1.4 percentage points from the April reading of 57.3 percent. This indicates strong growth in manufacturing for the 21st consecutive month. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting. A PMI® above 43.2 percent, over a period of time, generally indicates an expansion of the overall economy.

43.2% = Overall Economy Breakeven Line

COMMODITIES REPORTED Commodities Up in Price: Aluminum (19); Aluminum Based Products; Brass; Capacitors; Caustic Soda (11); Cobalt; Copper (7); Corrugate (20); Corrugated Boxes; Corrugated Cartons; Electrical Components (2); Freight (4); Paper; Resistors; Steel — Galvanized; Steel — Hot Rolled (18); Steel — Hot Rolled Plate; Steel — Stainless (2); Steel — Stainless Steel Bar; Steel — Stainless Steel Sheet; Steel Based Products; and Wood (2).

Commodities Down in Price: None.

Commodities in Short Supply: Aluminum; Capacitors (11); Electrical Components (2); Electronic Components; Freight; Memory; Resistors (7); Steel Based Products; and Steel – Hot Rolled (2).

| 12J u nJUNE e 2| JULY 0 1 82018

Note: The number of consecutive months the commodity is listed is indicated after each item. *Reported as both up and down in price.

ISM Report On Business ®

®

manufacturing

May 2018

by Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Metals Analysis & Manufacturing Outlook 23 Management ® Manufacturing Business Survey Committee

New Orders (Manufacturing) 2016

2017

New Orders

2018

ISM’s New Orders Index registered 63.7 percent. Fifteen of 18 industries reported growth in new orders in May, listed in the following order: Nonmetallic Mineral Products; Computer & Electronic Products; Fabricated Metal Products; Electrical Equipment, Appliances & Components; Furniture & Related Products; Miscellaneous Manufacturing‡; Textile Mills; Printing & Related Support Activities; Chemical Products; Machinery; Transportation Equipment; Food, Beverage & Tobacco Products; Petroleum & Coal Products; Plastics & Rubber Products; and Primary Metals.

63.7% 52.4% = Census Bureau Mfg. Breakeven Line

Production (Manufacturing) 2016

2017

Production

2018

ISM’s Production Index registered 61.5 percent. The 15 industries reporting growth in production during the month of May — listed in order — are: Textile Mills; Furniture & Related Products; Electrical Equipment, Appliances & Components; Nonmetallic Mineral Products; Plastics & Rubber Products; Fabricated Metal Products; Printing & Related Support Activities; Machinery; Chemical Products; Food, Beverage & Tobacco Products; Computer & Electronic Products; Miscellaneous Manufacturing‡; Petroleum & Coal Products; Transportation Equipment; and Paper Products.

61.5%

51.5% = Federal Reserve Board Industrial Production Breakeven Line

Employment (Manufacturing) 2016

2017

Employment

2018

ISM’s Employment Index registered 56.3 percent. Of the 18 manufacturing industries, the 13 reporting employment growth in May — listed in order — are: Textile Mills; Petroleum & Coal Products; Electrical Equipment, Appliances & Components; Food, Beverage & Tobacco Products; Chemical Products; Furniture & Related Products; Miscellaneous Manufacturing‡; Fabricated Metal Products; Plastics & Rubber Products; Transportation Equipment; Computer & Electronic Products; Machinery; and Paper Products.

56.3% 50.8% = B.L.S. Mfg. Employment Breakeven Line

Supplier Deliveries (Manufacturing) 53.1% 2016

2017

2018

The delivery performance of suppliers to manufacturing organizations was slower in May, as the Supplier Deliveries Index registered 62 percent. The 17 industries reporting slower supplier deliveries in May — listed in order — are: Printing & Related Support Activities; Apparel, Leather & Allied Products; Fabricated Metal Products; Machinery; Petroleum & Coal Products; Plastics & Rubber Products; Textile Mills; Electrical Equipment, Appliances & Components; Paper Products; Nonmetallic Mineral Products; Food, Beverage & Tobacco Products; Computer & Electronic Products; Furniture & Related Products; Primary Metals; Transportation Equipment; Chemical Products; and Miscellaneous Manufacturing‡.

62%

Inventories (Manufacturing) 2016

2017

Supplier Deliveries

53.1% 2018

50.2%

Inventories The Inventories Index registered 50.2 percent. The eight industries reporting higher inventories in May — listed in order — are: Apparel, Leather & Allied Products; Printing & Related Support Activities; Textile Mills; Nonmetallic Mineral Products; Electrical Equipment, Appliances & Components; Fabricated Metal Products; Chemical Products; and Machinery.

43% = B.E.A. Overall Mfg. Inventories Breakeven Line

‡Miscellaneous

Manufacturing (products such as medical equipment and

supplies, jewelry, sporting goods, toys and office supplies).

| June 2018

ISM Report On Business

®

24

manufacturing

Metals & Manufacturing Outlook

May 2018 Analysis by Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management ® Manufacturing Business Survey Committee

Customer Inventories (Manufacturing) 2016

2017

2018

Customers’ Inventories ISM’s Customers’ Inventories Index registered 39.6 percent. The only manufacturing industry reporting customers’ inventories as too high during the month of May is Miscellaneous Manufacturing‡.

39.6%

Prices (Manufacturing) 2016

2017

2018

79.5%

52.4% = B.L.S. Producer Prices Index for Intermediate Materials Breakeven Line

Backlog of Orders (Manufacturing) 2016

2017

2018

63.5%

Prices The ISM Prices Index registered 79.5 percent. Seventeen industries reported paying increased prices for raw materials in May, in the following order: Apparel, Leather & Allied Products; Printing & Related Support Activities; Electrical Equipment, Appliances & Components; Miscellaneous Manufacturing‡; Petroleum & Coal Products; Fabricated Metal Products; Food, Beverage & Tobacco Products; Nonmetallic Mineral Products; Primary Metals; Machinery; Computer & Electronic Products; Paper Products; Textile Mills; Transportation Equipment; Furniture & Related Products; Chemical Products; and Plastics & Rubber Products.

Backlog of Orders ISM’s Backlog of Orders Index registered 63.5 percent. The 13 industries reporting growth in order backlogs in May — listed in order — are: Printing & Related Support Activities; Paper Products; Nonmetallic Mineral Products; Plastics & Rubber Products; Computer & Electronic Products; Fabricated Metal Products; Chemical Products; Transportation Equipment; Electrical Equipment, Appliances & Components; Machinery; Furniture & Related Products; Food, Beverage & Tobacco Products; and Miscellaneous Manufacturing‡.

New Export Orders (Manufacturing) 2016

2017

2018

55.6%

New Export Orders ISM’s New Export Orders Index registered 55.6 percent. The eight industries reporting growth in new export orders in May — listed in order — are: Nonmetallic Mineral Products; Furniture & Related Products; Chemical Products; Computer & Electronic Products; Transportation Equipment; Machinery; Plastics & Rubber Products; and Fabricated Metal Products.

Imports (Manufacturing) 2016

2017

2018

54.1%

‡Miscellaneous

Imports ISM’s Imports Index registered 54.1 percent. The six industries reporting growth in imports during the month of May — listed in order — are: Furniture & Related Products; Electrical Equipment, Appliances & Components; Chemical Products; Computer & Electronic Products; Transportation Equipment; and Machinery.

Manufacturing (products such as medical equipment and

supplies, jewelry, sporting goods, toys and office supplies).

| June 2018

Reprinted with permission

Metals & Manufacturing Outlook

25

Report for May 2018 Issued May 31, 2018 National Association of Credit Management

Combined Sectors Lately, there have been more than a few sighs of relief heard as people try to review the state of the current economy. Some of the indicators attracting the most attention have stuttered and pointed to big declines only to stage a rebound later. Inflation numbers jumped with the ferment in the Middle East and then calmed. There were also a series of reactions to the steel and aluminum tariffs and other indicators of a trade war. The CMI has had its share of scares as well. “In April’s report, the bottom fell out of the dollar collection category, but this month it has bounced back to a more expected position,” said NACM Economist Chris Kuehl, Ph.D. “The April reading now seems an anomaly, but one that could occur again. The drop was drastic in April, but there has been up-and-down movement in that category for over a year—just not usually to this extreme.”

The combined score for this month’s CMI was back to what it had been through most of the year. It now stands at 56.6, nearly the same as it was in February when it stood at 56.5. The index of favorable factors rebounded strongly as well, hitting 65.7. It had not been this high since last November. The index of non-favorable factors recovered a little and left the contraction zone (anything below 50) by moving from 49.4 to 50.6—exactly the same reading as March.

As is generally the case, the interesting data is contained in the sub-index readings. This month looks like a return to positive news across the board as far as the favorable numbers. The sales category jumped as high as it has been since the recession with a reading of 69.6—just a hair shy of 70. “This data tracks with much of the other data releases, such as durable goods orders and capacity utilization, as well as the data from the Purchasing Managers’ Index,” said Kuehl. The new credit applications data also improved a bit by moving from 62.2 to 63.8, showcasing an active demand for new credit. Next, the controversial dollar collections number launched its way out of the doldrums by moving from 46.7 to 62.5—the same level as was seen in February. “The best theory on this dramatic drop has been that many companies suddenly began to protect their cash flow and stalled their creditors for a while,” Kuehl said. “These were the weeks of maximum unease over the impact of the tariff and trade war threats.” The last of the favorable readings is amount of credit extended. Here, the change was slight, moving from 66.1 to 66.8.

The unfavorable factors remain generally low, but there is not much indication that conditions are getting any worse. The rejections of credit applications improved just slightly from 51 to 51.3. The accounts placed for collection stayed in the contraction zone, only shifting from 48.7 to 49. The disputes category showed much the same behavior with a slight improvement over what it was the month before (48 to 48.1), continuing to languish in contraction territory. The other marker that is watched as carefully as the dollar collection data is dollar amount beyond terms. It shows that creditors are trying to stretch their terms. This reading is still in contraction territory but not nearly as deeply, moving from 46.4 to 49.4. The dollar amount of customer deductions also stayed in the 40s but improved from 48.4 to 49.7. The filings for bankruptcies remained thoroughly in expansion territory at 56.4 compared to 53.8 in April. Kuehl noted that although these numbers all saw some improvement, the majority of the categories are still showing contraction. Only two of the six are in the 50s, which demonstrates some continued fragility. On the plus side, they are all trending in a generally positive direction and might break into expansion territory sooner than later.

NACM CMI — 1 — May 2018

| June 2018

26

Metals & Manufacturing Outlook

Combined Manufacturing and Service Sectors (seasonally adjusted)

May '17

Jun '17

Jul '17

Aug '17

Sep '17

Oct '17

Nov '17

Dec '17

Jan '18

Feb '18

Mar '18

Apr '18

May '18

Sales

60.6

66.5

62.8

62.2

67.3

66.8

68.3

59.2

63.0

66.8

64.1

65.8

69.6

New credit applications

59.3

59.8

59.7

61.2

60.5

62.8

63.7

57.3

59.8

63.3

62.7

62.2

63.8

Dollar collections

56.7

62.5

60.2

58.9

60.0

60.2

63.1

59.1

58.7

62.9

59.6

46.7

62.5

Amount of credit extended

63.6

66.8

64.1

66.7

66.3

65.5

67.8

61.8

64.3

66.4

66.2

66.1

66.8

Index of favorable factors

60.0

63.9

61.7 62.2

63.5

63.8

65.7

59.4 61.4

64.9

63.2

60.2

65.7

Rejections of credit applications

52.4

52.6

51.9

52.2

52.5

51.8

52.4

51.4

51.8

51.5

53.3

51.0

51.3

Accounts placed for collection

48.5

49.3

48.9

48.7

50.3

49.5

50.5

49.8

51.7

49.8

50.4

48.7

49.0

Disputes

47.9

50.4

48.8

49.1

51.7

47.6

48.3

49.7

49.6

49.6

47.7

48.0

48.1

Dollar amount beyond terms

45.9

50.4

48.3

47.4

50.4

47.3

47.5

49.3

47.0

49.9

47.2

46.4

49.4

Dollar amount of customer deductions

48.7

49.1

48.1

49.2

49.8

48.7

48.9

49.7

49.7

49.1

49.8

48.4

49.7

Filings for bankruptcies

52.7

53.4

53.6

55.3

56.2

55.3

55.1

55.0

55.2

55.4

55.2

53.8

56.4

Index of unfavorable factors

49.3

50.9

49.9 50.3

51.8

50.0

50.4

50.8 50.8

50.9

50.6

49.4

50.6

NACM Combined CMI

53.6 56.1 54.6 55.1 56.5 55.5 56.6 54.2 55.1 56.5 55.6 53.7 56.6

Combined Index Monthly Change (seasonally adjusted)

4.0 3.0

Index

2.0 1.0 0.0 -1.0 -2.0 -3.0 +/-

May '17 Jun '17 Jul '17 Aug '17 Sep '17 Oct '17 Nov '17 Dec '17 Jan '18 Feb '18 Mar '18 Apr '18 May '18 -2.2

2.5

-1.4

0.4

1.4

-1.0

1.0

-2.3

0.8

1.4

-0.9

-1.9

2.9

Manufacturing Sector “There is generally good news on the manufacturing front, which is more than a little encouraging and somewhat unexpected,” Kuehl said. “The manufacturing sector overall has been riding some impressive waves up and down.

The tax cuts at the start of the year really had a stimulating impact on the small- and medium-sized manufacturers because they were able to do the purchasing they had been putting off. On the other hand, the sector was left dealing with the uncertainty of tariffs on key commodities, like steel and aluminum, as well as the looming threat of trade wars with China, NAFTA nations, Europe and almost every other nation they sell to. Much of the data from manufacturing looks like the overall CMI this month.”

NACM CMI — 2 — May 2018

| June 2018

Metals & Manufacturing Outlook

27

The sales category comes very close to the rarified air of the 70s with a reading of 69.6, compared to the 66.2 seen last month. The new credit applications category stayed strong moving from 60.8 to 62.4. The dollar collections data that had collapsed so dramatically the month prior rebounded and is now at 63.5, opposed to the 46.1 that was notched in April. “This anomaly is still a little mysterious and seems related to trepidations regarding cash flow,” said Kuehl. The amount of credit extended stayed almost exactly where it had been the month before (66) with a reading of 66.4.

Just as with the overall CMI, there was not that much movement in the unfavorable categories. The rejections of credit applications improved a little from 52.4 to 53.4. “This is good news given the number of new applications.

When these readings diverge it means companies that are not all that creditworthy are requesting credit and are subsequently turned down,” Kuehl explained. The category of accounts placed for collection surged out of contraction territory with a 51.3 reading compared to 49.8 in April. “This is especially welcoming news since there has been concern that those low dollar collection numbers would next trigger more collection activity,” he said.

Disputes stayed in contraction territory and slid quite a bit deeper (48 to 46.9). “This is one of the cautions that were triggered by last month’s dollar collection fiasco,” Kuehl added. In contrast, the dollar amount beyond terms ramped up and escaped the contraction zone with a reading of 50.2 compared to April’s 46.8. Again, this was somewhat unexpected good news given the usual link between dollar collection and slow pays. The dollar amount of customer deductions remained right where it was at 48.4. The filings for bankruptcies showed a nice gain to 58.

This is the best reading seen in this category in several years and suggests most of the manufacturers are thriving.

Manufacturing Sector (seasonally adjusted)

May '17

Jun '17

Jul '17

Aug '17

Sep '17

Oct '17

Nov '17

Dec '17

Jan '18

Feb '18

Mar '18

Apr '18

May '18

Sales

59.5

66.9

64.0

60.8

65.0

67.4

68.2

59.2

62.7

65.8

62.5

66.2

69.6

New credit applications

58.6

59.8

60.6

61.8

59.0

61.8

64.5

56.5

57.8

65.2

62.4

60.8

62.4

Dollar collections

57.3

61.0

61.1

59.3

60.4

59.5

60.9

58.9

58.7

62.8

59.5

46.1

63.5

Amount of credit extended

63.4

67.4

64.5

66.1

64.0

65.2

67.4

60.7

63.4

65.9

65.3

66.0

66.4

Index of favorable factors

59.7 63.8

62.5 62.0

62.1

63.5

65.3

58.8 60.7

64.9

62.4

59.8

65.5

Rejections of credit applications

52.6

53.3

52.9

52.8

52.5

53.7

52.6

51.5

51.8

51.5

54.1

52.4

53.4

Accounts placed for collection

49.5

49.8

49.8

49.7

50.1

48.6

51.5

50.3

51.2

50.1

51.0

49.8

51.3

Disputes

48.0

49.6

47.8

47.3

53.0

48.2

47.1

48.8

48.4

47.6

46.0

48.0

46.9

Dollar amount beyond terms

48.1

49.3

49.4

49.2

51.9

48.6

48.2

50.1

45.0

48.5

46.5

46.8

50.2

Dollar amount of customer deductions

48.6

48.7

47.6

48.0

48.5

47.1

45.7

49.1

46.6

47.7

48.7

48.4

48.4

Filings for bankruptcies

53.1

53.6

53.0

55.5

54.7

56.0

55.4

54.4

55.3

56.3

55.6

55.1

58.0

Index of unfavorable factors

50.0 50.7

50.1 50.4

51.8

50.4

50.1

50.7 49.7

50.3

50.3

50.1

51.4

NACM Manufacturing CMI

53.9 55.9 55.1 55.0 55.9 55.6 56.1 53.9 54.1 56.2 55.2 54.0 57.0

NACM CMI — 3 — May 2018

| June 2018

28

Metals & Manufacturing Outlook

Manufacturing Index Monthly Change (seasonally adjusted)

4.0 3.0

Index

2.0 1.0 0.0 -1.0 -2.0 -3.0 +/-

May '17 Jun '17 Jul '17 Aug '17 Sep '17 Oct '17 Nov '17 Dec '17 Jan '18 Feb '18 Mar '18 Apr '18 May '18 -2.3

2.1

-0.9

0.0

0.9

-0.3

0.5

-2.2

0.2

2.1

-1.0

-1.2

3.1

Service Sector The sales category can be volatile this time of year and not because there is a lot of activity. “The big spending holidays are over and there are all the inhibitors as far as the consumer—everything from the looming reality of filing tax returns to bad winter weather and the hangover from all that holiday-inspired spending,” Kuehl said.

“The data matches pretty well with what had been observed with manufacturing but with a few unique trends.

The sales category was strong with services as well, despite the slow pace of retail activity. Fortunately, the other service sectors have more than made up for this.”

The construction sector performed well as did finance and accounting, taking the latest reading to 69.6 after a 65.5 mark in April. The new credit applications category also performed well, moving from 63.6 to 65.1. As with manufacturing, the dollar collection data improved dramatically (47.3 to 61.5). This abrupt fall and rise will remain confusing for a while, at least until there is some kind of pattern manifesting. The amount of credit extended moved even further from the 66.2 reading in April and is now at 67.2.

The rejections of credit applications slipped a bit, which is slightly worrying. It was at 49.5 and is now at 49.2. This is hardly earthshaking, Kuehl explained, but when the applications and rejections are up, it signals that some of those who are seeking credit may be getting desperate. The accounts placed for collection also slipped a little from 47.7 to 46.7, yet another slightly troubling sign given the issue with dollar collections last month. The disputes reading improved somewhat but remains in contraction territory. It was at 47.9 and is now at 49.3. The dollar amount beyond terms reading also improved (46 to 48.5), but it was still stuck in contraction territory. This is good news as one would have expected this category to have trended worse if that dollar collection issue had worsened.

The dollar amount of customer deductions broke into expansion territory by a hair, reaching 50.9 after being at 48.3 the month prior. The filings for bankruptcy reading also saw some improvement going from 52.4 to 54.8.

Service Sector

(seasonally adjusted)

| June 2018

May '17

Jun '17

Jul '17

Aug '17

Sep '17

Oct '17

NACM CMI — 4 — May 2018

Nov '17

Dec '17

Jan '18

Feb '18

Mar '18

Apr '18

May '18

news as one would have expected this category to have trended worse if that dollar collection issue had worsened.

The dollar amount of customer deductions broke into expansion territory by a hair, reaching 50.9 after being at 48.3 the month prior. The filings for bankruptcy reading also saw some improvement going from 52.4 to 54.8.

Metals & Manufacturing Outlook

Service Sector

(seasonally adjusted)

May '17

Jun '17

Jul '17

Aug '17

Sep '17

Oct '17

Nov '17

Dec '17

Jan '18

Feb '18

Mar '18

Apr '18

May '18

Sales

61.7

66.0

61.7

63.6

69.7

66.1

68.4

59.2

63.3

67.8

65.8

65.5

69.6

New credit applications

59.9

59.9

58.8

60.6

62.0

63.7

62.9

58.2

61.8

61.5

63.0

63.6

65.1

Dollar collections

56.0

63.9

59.4

58.6

59.5

61.0

65.4

59.4

58.6

63.0

59.8

47.3

61.5

Amount of credit extended

63.8

66.3

63.8

67.3

68.6

65.9

68.2

63.0

65.1

66.9

67.2

66.2

67.2

Index of favorable factors

60.3

64.0

60.9 62.5

64.9

64.2

66.2

59.9 62.2

64.8

63.9

60.6

65.8

Rejections of credit applications

52.3

51.9

50.8

51.5

52.5

49.8

52.3

51.2

51.8

51.5

52.4

49.5

49.2

Accounts placed for collection

47.5

48.9

48.1

47.8

50.6

50.3

49.6

49.3

52.1

49.6

49.7

47.7

46.7

Disputes

47.7

51.3

49.8

50.8

50.3

47.0

49.5

50.7

50.9

51.6

49.3

47.9

49.3

Dollar amount beyond terms

43.6

51.6

47.2

45.6

49.0

46.1

46.7

48.4

49.0

51.3

47.8

46.0

48.5

Dollar amount of customer deductions

48.9

49.5

48.6

50.4

51.1

50.2

52.1

50.4

52.7

50.5

50.9

48.3

50.9

Filings for bankruptcies

52.3

53.2

54.2

55.2

57.6

54.6

54.7

55.7

55.0

54.4

54.8

52.4

54.8

Index of unfavorable factors

48.7

51.1

49.8 50.2

51.8

49.7

50.8

51.0 51.9

51.5

50.8

48.6

49.9

NACM Service CMI

53.4 56.2 54.2 55.1 57.1 55.5 57.0 54.5 56.0 56.8 56.1 53.4 56.3

NACM CMI — 4 — May 2018

29

Service Index Monthly Change (seasonally adjusted)

4.0 3.0

Index

2.0 1.0 0.0 -1.0 -2.0 -3.0 +/-

May '17 Jun '17 Jul '17 Aug '17 Sep '17 Oct '17 Nov '17 Dec '17 Jan '18 Feb '18 Mar '18 Apr '18 May '18 -2.1

2.9

-2.0

0.9

1.9

-1.6

1.5

-2.4

1.5

0.8

-0.7

-2.6

2.8

May 2018 versus May 2017 “The big story this month was the return to normal readings in dollar collections,” Kuehl concluded. “It seems that April was an anomaly when it came to how creditors were choosing to handle their obligations. There are generally good readings in the favorable categories, but most of the unfavorable readings continue to be in contraction territory.”

| June 2018

30

Metals & Manufacturing Outlook

Manufacturing and Service Index Levels 65 60 55 50 45 40 35

May '17 Jun '17

Jul '17 Aug '17 Sep '17 Oct '17 Nov '17 Dec '17 Jan '18 Feb '18 Mar '18 Apr '18 May '18

Service

Manufacturing

Methodology Appendix

CMI data has been collected and tabulated monthly since February 2002. The index, published since February 2003, is based on a survey of approximately 1,000 trade credit managers in the second half of each month, with about equal representation between the manufacturing and service sectors. The survey asks respondents to comment whether they are seeing improvement, deterioration or no change for various favorable and unfavorable factors. There is representation from all states, except some of the less populated, such as Vermont and Idaho. The computation of seasonality is based on the formula used by the U.S. Census Bureau and most of the federal government’s statistical gathering apparatus, making it possible to compare the CMI diffusion index with comparable indices, such as the PMI and other manufacturing and service sector indices.

Factors Making Up the Diffusion Index As shown in the table below, 10 equally weighted items determine the index. These items are classified into two categories: favorable factors and unfavorable factors. A diffusion index is calculated for each item with the overall CMI being a simple average of the 10 items. Survey responses for each item capture the change—higher, lower or the same—in the current month compared to the previous month.

For positive indicators, the calculation is: Number of “higher” responses + ½  number of “same” responses Total number of responses For negative indicators, the calculation is: Number of “lower” responses + ½  number of “same” responses Total number of responses A resulting CMI number of more than 50 indicates an economy in expansion; less than 50 indicates contraction.

NACM CMI — 6 — May 2018

| June 2018

Metals & Manufacturing Outlook

Favorable Factors

Why Favorable

Sales

Higher sales are considered more favorable than lower sales.

New credit applications

An increase in credit applications says that demand is greater this month, which represents increased business if credit is extended.

Dollar collections

Higher dollar collections represent improved cash flow for the selling firm and the ability of buying firms to pay.

Amount of credit extended

An increase for this item means business activity is expanding with greater sales via trade credit.

Unfavorable Factors*

Why Unfavorable

Rejections of credit applications

Increased rejections of credit applications means more marginal creditworthy customers are seeking trade credit and being denied.

Accounts placed for collection

As this item increases, the selling firm is having trouble collecting accounts, or conversely, there is an increase in buyers not paying.

Disputes

Higher dispute activity often is associated with cash flow problems of customers.

They dispute the invoice to defer payment until later.

Dollar amount of receivables beyond terms

As this item becomes higher, it means customers are taking longer to pay.

Dollar amount of customer deductions

Higher deductions often are associated with cash flow problems of customers.

Filings for bankruptcies

Higher bankruptcy filings mean cash flow difficulties of customers are increasing.

31

*Note: When survey respondents report increases in unfavorable factors, the index numbers drop, reflecting worsening conditions.

About the National Association of Credit Management

NACM, headquartered in Columbia, MD, supports more than 13,000 business credit and financial professionals worldwide with premier industry services, tools and information. NACM and its network of affiliated associations are the leading resource for credit and financial management information, education, products and services designed to improve the management of business credit and accounts receivable. NACM’s collective voice has influenced our nation’s policy makers on federal legislation concerning commercial business and trade credit for more than 100 years and continues to play an active role in legislative issues that pertain to business credit and corporate bankruptcy. Its annual Credit Congress & Expo is the largest gathering of credit professionals in the world.

NACM has a wealth of member experts in the fields of business-to-business credit and law. Consider using NACM as a resource in the development of your next credit or finance story.

View CMI archives at https://www.nacm.org/cmi/cmi-archive.html.

Source: National Association of Credit Management Contacts: Michael Miller, 410-740-5560 Andrew Michaels, 410-740-5560 Christie Citranglo, 410-740-5560 Website: www.nacm.org Twitter: NACM_National

NACM CMI — 7 — May 2018

Reprinted with permission

| June 2018

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