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Die Casting News

The State of the Die Casting Industry, Part 1 of 3

Posted by Hill and Griffith Company on Aug 8, 2018 1:23:48 PM

North American Die Casting Association's President Steve Udvardy, reviews the Trump Administration, Macro Economics and Die Casting Markets in this three part series.

Good day everyone, and welcome to the latest update of the North American Die Casting Industry State of the Industry. I'm Steve Udvardy, and pleased to have the opportunity to speak to you today.

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Today, we're going to cover three topics within this state of the industry report. First, we'll take a look at the administration and whether they're doing any good at this point, getting close to the midterm of the administration. We'll take a look at some macro economics, and then lastly cover specifically die casting markets and shipments.

You may recall going into the election, we'll rewind the clock to the third quarter of 2016, and then jumping into the fourth quarter, but when we were approaching election time, the focus areas were shown on this bulletized list. Healthcare, tax reform, regulation reduction, trade balancing, infrastructure spending, defense spending, minimum wage, immigration issues. We'll take a look at some of these in detail, but first, let's see what CEOs from the manufacturing sector saw as challenges at that point in time and what they see as challenges today.

NAM, the National Association of Manufacturers, conducts surveys, as well as NADCA conducts surveys, but NAM covers several manufacturing sectors, not just die casting. The next couple slides here is representative of the US manufacturing sector. This is information from NAM's third quarter 2016 report going into the election, and here's what the CEOs had to say about the challenges at that point in time.

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Number one, rising healthcare and insurance costs. 73.9% of the constituents responding to the survey indicated that that was a challenge. Number two, unfavorable business climate, meaning taxes, regulations, weaker domestic economy, strengthen the US dollar relative to other currencies, attracting and retaining a qualified workforce, and you can see the rest of the list here.

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Now, let's fast forward to the most recent quarterly report from NAM, Q2 of 2018. Here we see that now in number one position is attracting and retaining a quality workforce. Number two, rising raw material costs for our products. Number three, rising healthcare costs. That dropped from number one to the number three position from 2016 to present.
Although still a fair percentage of constituents, it was over 70% in Q3 of 2016 that were concerned about rising healthcare costs. Now, still 65.3% concern, but look at the unfavorable business climate today. That dropped from the number two position to the number four position, and not only has that dropped in position, but it dropped from 73% of the constituents being concerned about unfavorable business climate to only 19.1%, so a large change there. If we move to this next slide, in the 20 year history of this NAM survey, the second quarter of this year hit an all time high percentage of manufacturers having a positive economic outlook. Very significant change in the results from the election time period to present.

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Now, let's take a look at some of those focus areas. We'll get into some of them in a little bit of detail. The first one here, healthcare reform. Now, passing a new healthcare bill has failed thus far. However, there has been an executive order signed for association health plans, which allows for pooled healthcare plans as well as self-insured plans. We probably, with the failure and trying to repeal Obamacare and come up with a new replacement healthcare bill, won't see any rewrite yet this year, especially going into midterm of election time, but I would suspect that at some point after the first of the year, we'll start seeing some more rewrites on healthcare.

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Workforce, one of the issues that was raised by the CEOs. Our administration is highly supportive of workforce development, career development, education, although a career technical education bill has not been passed and has been pending for the past several years. The government's supportive in terms of apprenticeship programs and with the national network of manufacturing innovation institutes, several of which NADCA is a member of, that conducts research and development projects, has outreach for workforce.

A couple of those are, for instance, America Makes, which was the first innovation institute. It was rebranded as America Makes after it was initially launched as the National Additive and Manufacturing Innovation Institute. There's also a lightweight innovation institute, which is now called LIFT, Lightweight Innovations for Tomorrow. The point being is that NADCA is not only members in some of these innovation institutes, but participates in some of the research and development.

We've seen a concerted effort in the proposal packages for research and development projects focused on workforce development, and it's not only the incumbent workforce. Interestingly enough, a lot of the workforce development reaches to the high schools, and also in some instances, has K through 12 effort that's required to be written in the proposal and then as a deliverable at the end of some of these projects, some form of information, training, awareness, education for young individuals and not just the incumbent workforce.

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Tax reform. Okay, well, we're all well aware that towards the end of last year, the 22nd of December, there were tax cuts and the Job Act signed into law. What this had done was cut the corporate tax rate permanently for C-Corps from 35% to 21%. In addition, for pass throughs or S-Corps, a 20% deduction on the first 350K. However, that is not permanent and expires in the year 2026, so for those companies that are pass throughs, we encourage them to now take a look at whether it would be more advantageous to become a C-Corp and get the 35% deduction down to the 21% tax cut. One thing to keep in mind is that once you become a C-Corp, you can't go back, so you need to take a look at this closely if you're a pass through, but you do have some time to figure this out and see whether it's an advantage to stay where you're at or to become a C-Corp. Again, expires in 2026.

All the tax cuts for individuals were passed at that same point in time and 80% of taxpayers received a cut averaging about $2100 per year. 15% saw no change and about 5% saw an increase averaging about $2800 per year. There was initially some talk about minimizing the number of individual tax brackets as well from seven to four, but seven brackets stuck, although most of those now have lower rates. The standard deduction was raised, as you're well aware of also. The biggest issue for those that have opposed the tax reform is that this has the potential of adding $1.5 trillion to the national deficit, so we'll see how that all plays out.

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Regulatory reform. The EPA's suffered substantial cutbacks. They now have less resources, so I wouldn't expect anything new coming out of the EPA in the near future. The Clean Power Plan, for instance, is being repealed. The Ground Level Ozone Rule is in the early rewrite stage. In April, it was announced that there would be a rollback of the 54.5 mile per gallon fuel efficiency standard for passenger vehicles. Electronic recordkeeping is in effect, but is being reconsidered. Don't expect that there will be much change in direction now that Scott Pruitt has resigned from his post at the EPA, but certainly rollback of regulations under the Trump administration has been enacted.

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One of the questions, and this is going back before there was actually rollback of some of the regulations and when there was just talk about rollback of regulations, and what NAM had asked manufacturers at that point in time was how they would benefit from lower compliance costs, and here's the information that shows 63% of manufacturers said that they would utilize the lower compliance cost for investing in capital, hiring additional workers at 38%, growth and acquisition, research and development, debt reduction, so all good things. We'll soon see how this plays out, as well, but certainly lowering compliance costs and the burden on manufacturing allows for more flexibility with the manufacturers being able to invest in other things.

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Trade. Lot going on in terms of trade, the tariffs, and we'll talk a little bit about that, as well, but let's first take a look at NAFTA. Now, negotiations for new NAFTA officially began in August of last year and had a targeted completion for January of this year. Well, that has not come to pass, but round seven of the negotiations has been completed and final talks are now expected sometime late this year or early 2019. The general focus here is on revising the North American content in products up from 62.5% up to 85% and setting a minimum US content of 50%. Now, as opposed to moving all the way from 62.5 North American content up to 85% North American content, Canada has suggested 70%.
Timing on this, the president needs to sign a new agreement, which the earliest that's going to be now is expected late 2018 or early 2019, and then roughly six months after that, the new NAFTA goes before congress for a required vote. It would then need to pass a vote, and any change to NAFTA requires a six month notification to all of the members of NAFTA, so Canada and Mexico would need a six month notification, so we're looking at at least one year post-that late 2018, early 2019 date if and when there may be any changes to NAFTA. There's rumblings that if a good trade balance is not met within the NAFTA partners, that there could be a total phaseout of NAFTA.

Tariffs. There's two sets of tariffs covering different items, so this becomes somewhat confusing, but the initial tariffs were under what was called the 232 investigations. There was a 232 investigation for steel and one for aluminum all under the topic of national defense. We'll have some time for questions at the end today, so if you want to get into more detail on this, I'll be happy to try to respond to your questions, but suffice it to say that there has been a 25% tariff placed on imported steel, 10% on aluminum, including castings. That went into effect March 23rd of this year.

There was subsequently a process for exclusions released and the administration has received several fold more exclusions than they initially anticipated and I'm not aware of yet one exclusion being granted. There were some initial exemptions that were granted to Canada, Mexico, and the European Union. Those exemptions expired on June 1st. South Korea, Australia, Argentina, and Brazil have either quotas or exemptions in place.

In addition to the 232 investigation and the resulting tariffs, there is the 301 tariff. This is primarily focused on Chinese goods, 25% on Chinese imports. We've seen several levels, but certainly what is in play is a list of products totaling an annual amount of $34 billion. There's a $50 billion list. There is $100 billion list, and most recently, as we've gotten into this so called trade war with China, there has been talk of having a 25% tariff on absolutely every product coming into the country from China. We'll see how this plays out, but currently, there is a $34 billion list of products upon which a 25% is placed.

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Okay. The last item we'll cover going back to that list of focus areas that the administration had going into the election is on infrastructure spending. The plan currently is a $1.5 trillion infrastructure plan. About a year ago, it was set at $1 trillion, so it was bumped up. The proposed federal share is $200 billion over a 10 year period of time of that $1.5 trillion. If you've heard about a $1.5 trillion infrastructure plan that is not $1.5 trillion coming from the federal government to support infrastructure, it's 200 billion, which is intended to be an incentive for private, state, and municipal projects that would then equate to $1.5 trillion worth of an investment.

Will this plan work again? We'll see how this plays out, but some of the comments, a couple quotes here from Donald Trump was, "We will create the first class infrastructure our country and our people deserve. It's time to rebuild our country, to bring back our jobs." One of the impediments to getting some of the infrastructure projects underway has been a lengthy process for environmental reviews. The administration is establishing a quicker process for these reviews so that major infrastructure projects can get launched more quickly than they had in the past.

(Download a PDF of the slides here. View the video here.)

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