Volume 7 Issue 1 January 2006
Rising Material Costs, Softening of the Market and Globalization Threats Will Have an Impact on Your Company in 2006
by Alan B. Goldberg
005 was a good year for suppliers and manufacturers. Will 2006 be more of the same? That’s what DWM aimed to uncover when it interviewed experts from all segments of the fenestration industry for our annual industry forecast.
For some, 2005 started slowly but ended with a strong fourth quarter. Although business seemed brisk and the residential market was strong, the year was not without its challenges, and these challenges impacted companies regardless of size, product or location.
Following are some of the views that have been expressed by DWM’s expert forecasters.
All of these fuel surcharges scare me. Raw materials and the
components we use are all [increasing] in cost. Everyone is
trying to pass these increased prices along but it gets difficult to track.
—Randy Ernst, FDR Design
Continued demand in the residential market coupled with the need to help door and window manufacturers operate more efficiently, and in less space, have been key factors for suppliers of machinery.
It was a year of exceeding projections for Bystronic, with a healthy order backlog going into the new year, says Marcel Bally, sales and marketing director. “All signs are that our projections for 2006 will be met.”
Bally says the major contributor to growth is the company’s new emphasis on the residential market. While market share of its commercial products will continue to grow, its thrust is with specific new products geared for the residential market, such as a series of economical laminating glass cutting machines.
Stürtz Machinery sees signs that 2006 will begin with a surge in demand for equipment, according to Mike Biffl, national sales manager.
“Several customers are looking at large scale expansions which will require equipment, and there are new companies looking to get into the vinyl windows business at a larger than normal start-up capacity. We are very optimistic about the possibilities for 2006,” he says.
A new line will provide high capacity in a small amount of space, which will help customers keep up with their increasing demand for maximum capacity in minimum floor space.
Integrated Software Systems
An attractive benefit of integrated software systems is helping manufacturers control their costs. As every manufacturer seeks ways to improve efficiency and reduce costs, the demand for software packages that have been developed for production will continue.
GED is forecasting a strong year, according to Pete Chojnacki, director of marketing and information technology. He says the company was pleased with the results for 2005.
“There may be some truth to a weakened market, but we feel our customers will be busy. One of the key features of our integrated system is adding efficiency and managing costs. It should help them improve lead time,” he says.
Globally, Chojnacki sees continued gains by Asians on components but not windows.
“I don’t see units coming in from Asia because customers (and consumers) are demanding service and delivery. Local training and support is part of our package.”
However, he says the Asian threat is out there and “we would be foolish to ignore it.”
Based on proposal activity in 2005, 2006 looks like it will be an exceptional year for FeneTech, says Ron Crowl, president. He believes the industry as a whole will face continuing downward pricing pressures.
“These pricing pressures will be passed down to the consumable vendors as well as the capital equipment manufacturers and software providers.”
For suppliers of spacers, sealants and desiccant, high quality and exceptional service are even more significant as they face the challenge of globalization while dealing with raw material price increases.
2005 was a pretty good year for Allmetal, according to Denny Raske, manager of international sales. He says there is guarded optimism for 2006 even though “raw material costs are up there.” He views globalization as more of an opportunity than a threat.
“The future is in selling product to the Chinese, not in trying to deal with imports. I believe there are many opportunities to promote to a market that is exploding. The bigger problem [than the threat of imports] is the potential for raw material shortages worldwide.”
Dave Mills, president and chief executive officer (CEO) of Azon USA sees a slowdown in construction, especially with interest rates expected to rise. He says commercial construction won’t slow down until the latter part of the year. He points out that the window industry has come a long way in terms of energy performance in the last few years. It is well ahead of other aspects of construction.
“Technology in windows is really moving along and windows will be viewed in a very different light. Smart windows and other technologies are going to take off. U-factors are becoming increasingly significant.”
Mills has expressed concern about price increases.
“They’ve been a shock to the industry. While they continue to creep up, the increases will not be as dramatic [in 2006] as they have been [in 2005].”
Looking ahead, Mills has reservations for 2006.
“I’m not pessimistic but I do not see a lot of optimism in the market,” he adds.
Edgetech IG is forecasting a strong year, according to Larry Johnson, executive vice president. He says 2005 was “right where we were projected to be.”
He points out that global demand for high-performance spacer systems is on the rise because of energy prices and more stringent test standards. He says that demand has not overshadowed the impact of raw material price increases, the company’s main concern.
Johnson views the impact of imports in terms of putting quality at risk. He says he is seeing knock-off products come in from overseas, “but I think most IG manufacturers are too concerned about the quality of their glass pack to look too seriously at these options. ”
2006 looks exciting for INEX Spacer, especially with the successful launch of new bending technology, says Sylvain Dubé, president. He points out that the challenge in a highly competitive spacer market will be to increase its presence in North America and open opportunities as an international player.
Saint Gobain Bayform sees a relatively strong year for 2006.
“We are very encouraged by what the signs are for 2006, especially on a regional basis,” says Roger Lewington, director of sales. He says that in 2005, the raw material challenges were the result of instability in the market due to hurricane damage. By the same token, the destruction has created a demand for building materials, including doors and windows.
Technoform expects 2006 to be a very strong year, according to Mark Silverberg, president of the North American division.
He points out that dramatic increases in energy costs this winter could likely lead to greater demand for energy-efficient building products. Broader public demand for energy conservation also could generate new legislation that boosts tax credits and economic incentives to save energy.
“In the commercial arena, many of Technoform’s customers are beginning to design based on the stricter 2008 energy codes. Performance enhancing improvements such as coated glass, high-performance warm edge spacers and thermal insulating struts will continue to gain significant market share.”
TruSeal Technologies is forecasting a reduction in total window demand based on declining residential housing starts, according to Ric Jackson, director of marketing and sales and business development.
“We do not see remodeling and renovation units making up the gap, let alone supporting real unit growth,” he says.
TruSeal has also been affected by price increases.
“We have seen significant raw material cost increases from both petroleum based and non petroleum based products in almost every component used in residential windows.”
Sika is optimistic about 2006 in all of its market segments following sustained growth in 2005, says Ron Smith, director of marketing. The real question, he points out, is which way the housing market will perform.
“Developments include a ground swell of opportunity in the rebuilding of the Gulf Coast and building code changes that will require different construction techniques,” he says.
2005 was very good for UOP, according to Tom Dangieri, senior application specialist.
“We exceeded our projections in both beads and powder desiccant. The demand for powder keeps growing as warm edge, matrix applied technology replaces beads in this market,” he says.
The company has been impacted by increases in raw material costs and natural gas prices, “which will necessitate a price increase to our customers.”
Insulating Glass/Laminating Glass
Stringent building codes requiring impact-resistant windows in areas affected by hurricanes could overshadow the effect of increasing mortgage rates and lower housing starts in some parts of the country.
The gradual increase in mortgage interest rates will have a dampening effect on housing starts, says Tom Kaiser, vice president of Cardinal Glass Industries Inc.
In terms of demographics, Kaiser sees six states (Florida, Texas, Arizona, Nevada, California and Georgia) as the key areas for single and multi-family new construction. A major factor for all of the primary glass manufacturers will be the high market price for natural gas. He says that building codes will continue to evolve as the cost of energy goes up.
Responding to the new rule governing total transportation time, the rising cost of diesel fuel and the market demand for shorter lead times, the company will add four facilities in 2006.
Kaiser views the market next year as “a bit off, tougher and rife with all sorts of challenges.”
But that’s not the case at Solutia.
“2005 was a very good year for us and 2006 will be a great year,” says Nanette Lockwood, legislative affairs manager.
She points out that demand for impact-resistant windows is driven by building codes in response to the destruction from hurricanes.
She says contractors and manufacturers are becoming more aware of the need to offer homeowners greater protection, especially in coastal areas, which are developing faster than other parts of the country but are the most vulnerable to hurricanes.
Will the demand from rebuilding in the Gulf Coast offset the impact of foreign imports and a softening market? Not everyone shares the same view.
HOPPE North America sees 2006 as a growth year.
“We are anticipating an overall 5-percent market growth,” says Paul Junker, vice president of sales. We are well ahead of last year’s sales pace and should finish strong this year.”
He says that overall, there is enough momentum to sustain fairly healthy growth rates for at least the first half of 2006. The upper end of the market should continue to stay strong.
As far as raw material price increases, he says that steel and copper will continue to stay at high levels, although not as high as 2004 and 2005. Globally, he points out that there are companies coming in from the Far East with goods that are being marketed as high quality and proven systems
“It has been said that imitation is the highest form of flattery, but in the end, it’s still imitation,” he says.
Truth Hardware views 2006 as a flat year, according to Jim Quinlivan, marketing director.
“Canada and the United States are on the down side of the building cycle. Remodeling and renovation in the residential market will be strong in North America while new construction will decline slightly.”
He believes rebuilding in the Gulf region will have minimal impact on overall business.
To what extent will price increases affect suppliers and how much will they pass along to their customers?
After a very slow start in 2005, FDR Design experienced steady growth throughout the year says Randi Ernst, CEO. He expects 2006 to be pretty much the same as 2005. His concern about price increases not only reflects the industry’s concern but shows their severity on a small business.
“All of these fuel surcharges scare me. Raw materials and the components we use are all [increasing] in cost. Everyone is trying to pass these increased prices along but it gets difficult to track. We have not set next year’s prices, but it looks like they have to go up 10 percent.”
He says in previous years, increases for company-produced equipment have been 3-5 percent.
Globally, Ernst sees the fenestration industry affected significantly.
“I still believe China is going to turn the North American fenestration industry on its ear. I am hearing reports of China companies striking key alliances and ramping up the import of their product to North America.”
What are the associations saying about the market and the suppliers and manufacturers they support?
Most builders and window manufacturers (serving the residential market) are expecting a drop-off in volume from 2005, says Rich Walker, executive vice president of the American Architectural Manufacturers Association (AAMA).
“The frenetic new home and remodeling pace set this year is already showing signs of abating in the last quarter [of 2005],” he says.
The big question, Walker points out, is how the overall economy will digest the effects of the three major hurricanes that ripped through the Gulf States.
“On the negative side, vinyl pricing is climbing fast, which will squeeze vinyl window profile producer and vinyl window manufacturer margins. On the positive side, there are now thousands of windows to replace.”
He says even if producers pass along some of the raw material prices to builders and homeowners, the demand for both new and replacement windows will remain strong, but not quite as strong as 2005.
Walker points out that concern over competition from China is evident on two levels: window components and finished units.
“Imports of finished units from China are not a huge blip on the radar screen at this time. The fabricating equipment, however, is in place in China and one needs only to examine the pattern of Chinese entry into different U.S. industries. They typically gain a toehold with components and work up to exporting the finished products.”
He says overseas producers view the AAMA certification program as a prerequisite for qualifying sash and frame profiles for fabrication in the United States. Domestic vinyl profile extruders are concerned about government subsidies and currency manipulation that pegs the pricing of imported Chinese profiles at 30-40 percent below U.S. market prices. He points out that there are a few U.S. manufacturers sourcing vinyl profiles from China.
Overall, 2005 has been a strong year for aluminum extruders, says Rand Baldwin, president of the Aluminum Extruders Council (AEC). He explains that there has been a continued comeback for aluminum since 2004.
“The building and construction market, in general, led the way as our biggest business segment. Times are good for aluminum extruders in these markets and we expect that will continue next year,” says Baldwin.
He says interest rates and energy prices will be key issues in 2006. The residential market, particularly the Southeast, should move toward greater energy efficiency, stricter standards of safety and recyclability.
“[This situation] will make aluminum a more attractive material choice for windows and door frames, sunroofs and screened enclosures.”
According to Jeff Lowinski, acting president of the Window and Door Manufacturers Association (WDMA), next year is a big question mark.
“Current housing and remodeling market economists continue to predict a downturn in new construction starts and remodeling permits. However, recent data still shows the adjusted housing market and remodeling market as remaining stronger than predicted,” Lowinski says.
He adds that economic indicators are indicating that interest rates will contain to rise to keep a cap on inflation. These rising rates may slow the construction pace. But, he also points out that reconstruction in the Gulf and Florida regions may be bolstering the need for doors and windows.
“Demand for improved products [impact-resistance and better water penetration resistance] will increase, but not significantly until local codes are revised to require them. The high costs for natural gas will elevate the demand for high energy-efficient doors and windows. If these costs continue to increase, homeowners and builders will find more justification to upgrade to better energy performing products,” he adds.
Door and Window Manufacturers
The comments from manufacturers are very similar to their suppliers, in terms of the economy, the impact of price increases and the potential in the residential housing market.
Following a slow start, 2005 turned out to be a good year, says Terry Rex, director of marketing for BF Rich. Energy conservation-minded consumers have helped drive business in recent months.
2005 was a much better year than anticipated for Kolbe & Kolbe Millwork Co., says Bob Kasten, vice president of sales and marketing.
Republic and Sunrise Windows also felt the surge toward the end of 2005.
“Our sales are up an unprecedented 25 percent over the same time last year,” says Amy Zimmerman, vice president of marketing.
For Sunrise Windows Ltd., a very strong finish in 2005 was beyond its expectations.
“The months of September, October, and, so far, November, have been well in excess of last year and also well in excess of what we budgeted for the year,” says Gary Delman, president.
Rex sees a number of positive indicators that will impact business. One factor is that coastal building codes require windows to be tested and certified as passing impact-resistant standards.
Based on new accounts, new products and a strong fourth quarter, Graef Windows is optimistic about 2006, says Pat Thompson, vice president of operations.
“We are looking for a 25 percent increase.”
Loewen is also upbeat about growth opportunities in North America for 2006.
“We do not foresee catastrophic environmental occurrences, political upheaval or import threats having a major impact on 2006 sales performance.”
Matt Petit, vice president of sales and marketing for Petit Industries describes 2006 as very promising.
“We are expecting a high percentage of growth [in the neighborhood of 30 percent] in the fiberglass door market,” says Franco Am, general manager for Plastpro’s Ashtabula plant.
Zimmerman says Republic looks to 2006 to be even better than 2005.
TLC Doors and Trim forecasts 2006 to be the most productive year of its three-year history, following an excellent year, says Gary Atkinson, plant manager.
Rex points out that the significant increase in home heating costs this year and the Energy Tax Credit, which became effective January 1, 2006, will have a positive impact on the market. On the other hand, he projects the new home market in the Northeast to slow a bit during the first quarter of 2006 and finish flat the rest of the year.
Thompson says some are predicting a 5-10 percent growth in the remodeling segment, with a 5 percent overall growth in doors and windows.
Kasten expects a significant slowdown of entry level home building in most parts of the country, Florida being an exception.
“There is just too much unsold product sitting out there, and it will sit for awhile because of interest rates and general uncertainty about the economy.”
According to Am, composite material has been quickly replacing wood as the product of choice by renovation and home building specialists due to the recent hurricane season.
Among the challenges faced by the vinyl door and window industry, according to Rich, are significant price increases.
Thompson says it will be hard to recoup raw material cost increases from the dealer base. He points out that these increases, particularly in glass and vinyl, make it difficult to remain competitive.
“Manufacturers can’t pass on those kinds of increases and have been ‘eating’ a lot of them. It seems that high energy prices are a signal to suppliers that now is the time to gouge your customers,” Kasten says.
Segal says Loewen has already been affected by price increases from suppliers and anticipates continued input cost pricing pressure from its suppliers well into 2006.
Petit says raw material price increases ranged between 20 and 30 percent. Although 2006 will not be nearly as high, the additional cost is still a factor. He also points to high rates from the trucking industry as a means of passing along the higher cost of fuel.
“We have no choice but to pass along part of these exorbitant increases as we try to minimize our costs.”
He says there is a need to be creative for the customer by finding ways to operate more efficiently.
“We try to use standard commodities; we have reworked our formulas; we’re making various changes without affecting the quality of our product; and we have worked closely with our vinyl extruder to get larger runs and reduce our costs.”
Am says that the positive side of price increases is greater demand for energy-efficient products.
“We have major concerns about material pricing and supply,” says Zimmerman. “Every one of our suppliers has assured us that the supply will be there to support our growth. We’ll just have to keep our eye on material prices.”
She says that resin and aluminum prices continue to increase. Although hurricanes were cited as the reason for the increase in resin prices, she believes the increase should have stabilized by now.
“We are not seeing any of those prices come down.” TLC has absorbed as much of the increases as possible, according to Atkinson, but price increases (to customers) are imminent he adds.
Our forecasters seem to be very optimistic about 2006 in spite of rising raw material cost increases and a residential market that is showing some signs of softening.
Alan Goldberg is a contributing writer for DWM. He has 31 years of experience in the insulating glass industry.
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