DEJA-VU IN THE BRASS ROD INDUSTRY

Thank you on behalf of the people who are Extruded Metals. It is an honor to be able to address you today and share a few memories, hopes and thoughts about our company and our industry in these rapidly changing times.

Our company is located in Belding, Michigan. Belding was, and is, a small Midwestern town on the banks of the Flat River. Its claim to fame, other than being the home of Extruded Metals, was that for the 50 years prior to 1930 the silk mills in Belding were the leading producers in the world of silk, thread and yarn. However, the markets and sources changed with moves to New England and the South. Finally, the depression hit and the silk mills were closed. A major shock for this once world class prosperous business community, but an all too common story of those changing times.

Extruded Metals traces its roots to 1938 when three young men came to Belding, Michigan, acquired a few of the abandoned silk mill buildings, a used extrusion press, and started the company. At that time, the major focus was aluminum with brass as a sideline. As the company grew during World War II it expanded rapidly as a major independent extruder.

Eventually, Extruded merged with Detroit Gasket which in turn was purchased by a conglomerate, Indian Head, Inc. In 1976 our current owners, TBG, acquired Indian Head and today we are still a part of this large international business group.

On the manufacturing side our company expanded vertically in the 50's, 60's and 70's and was fabricating and finishing parts in addition to its traditional extrusion operations by the time TBG arrived on the scene. Extruded Metals started with a few employees in an abandoned silk mill, and a used extrusion press. From it's inception it engaged in continuous investment programs to increase output, productivity and products to meet its customer's demands. By 1980 its plants in Belding housed a full compliment of melting, casting, die making, extrusion, fabrication and finishing equipment for both aluminum and brass products. However, the basics of the market, and manufacturing technology, were about to change. The driving force for this change was the introduction of indirect extrusion to the brass rod industry in North America.

I will return to this "revolution" in a moment. First let me relate the changes that took place in our company.

In the early 1980's it became obvious that there was enough difference between the brass rod part of our business, and the aluminum extrusion related operations, to separate the two into independent operating organizations. After the separation, the successful aluminum division was spun off and sold in 1987. This company is still in operation in Belding today.
The path was then clear for us to focus attention on the brass rod operations. Major capital was invested to support this decision which included:

- An entirely new melting and horizontal continuous casting facility

- New scrap drying facilities

- New finishing equipment for both coil and straight length material

- A new 3,500 ton indirect press and the buildings and infrastructure to support this equipment

By 1990 virtually the entire facility that existed in 1980 had been replaced. Change did not stop there. As of today, 2004, it has happened again. New equipment and technology including finishing lines, heat treating facilities, melting and casting lines and a second 4,400 ton automated indirect extrusion press now are in place.

The changes are not limited to equipment. Quality procedures that began with SPC in the late 1970's have progressed steadily into ISO certification in 1997 to standard 9002:1994. Extruded has continued to expand its quality commitment and was the first brass rod mill to be re certified to the new standard ISO 9001:2000. This happened in January 2003.

I relate this story, somewhat out of pride for what our company has accomplished, but, our experience is not unique. There are several companies represented in this room that can relate very similar stories. The North American brass rod mills are the most efficient and competitive suppliers of brass rod products in the world.

Looking at our industry from the point of view of the available rod supply, lets return to the 1980 revolution I spoke of previously. In the 1975-80 timeframe there were roughly 12 brass rod companies operating from 17 locations with 26 presses supplying a demand for the brass rod in the U.S. that ranged from 508 million to 854 million pounds. The average press was producing between 20 and 33 million pounds, and they were virtually all direct presses. During this period the first indirect press was put into operation at Chicago Extruded Metals and the revolution was "on".

Three years later at the 1983 CBSA convention in Maui, Frank Wright, the general manager of the Chase Brass Rod Division, declared that a properly supported and supplied new indirect press could produce 200 million pounds of rod per year, and four such presses could supply the entire market demand.

In short order four more indirect presses were added to the mix and by 1985 there were only six of the previously mentioned 12 companies still in business, only seven of the 17 locations still shipping brass rod and the industry supplied material from 10 presses versus the former 26. The market was 705 million pounds.

It is tempting to dismiss this as ancient history, but it's not all that ancient. We must question whether or not we are now about to repeat that cycle.

So, what is the current industry supply base? In the year 2000 imports peaked at 156 million pounds up from the historical 50-70 million pound level. This was an indication that the domestic industry supply was at practical capacity. Supply from US mills to the free market was approximately 1.0 billion pounds.

There were 6 indirect presses supplying the 2000 market which roughly equates to 160 million pounds per press - not quite the 1983 prediction of 200 million but close enough considering product mix differences. In the last three years the market has declined but three new presses have been added. If the math holds then we can conclude that modern, efficient, in-place capacity of about 1.3-1.4 billion pounds of brass rod exists to supply the North American market which in 2003 was 793 million pounds. Clearly supply shortages should not occur.

But what about the "other half" of the story, what has happened to demand?

The brass rod market follows the overall copper fabricated products profile in that about 60% of sales pounds end up in building/construction or consumer durable end products. Therefore it is not surprising that there is a strong correlation between housing starts and brass rod shipments. We did the analysis and found this relationship exists over the entire 30 year period from 1970-2000, and for each 10-year segment within that time frame. However, in the period from year 2000 to 2004 the relationship between these trends falls apart. Housing starts and consumer purchases remained strong but domestic US brass rod shipments dropped sharply. In the recently completed study on Plumber's Brass Goods, by BBF & Associates, it was noted that US consumption of copper and brass related end products increased steadily during this period.

What happened? It cannot be a short-term issue of timing between the data trends because it has lasted for over three years; it cannot be that the plumbing fixtures, refrigerators, washer, dryers, etc. that are being installed in the new homes are suddenly no longer using brass parts. The BBF study confirms that brass and copper parts are in fact being used and at even greater numbers. What happened is that the end product parts are increasingly not being made in the US The industry model that we spoke about previously indicates that in the years 2001-2003 as much as 200 million pounds/year of brass rod was diverted from the US market to end product goods made elsewhere and imported. That is the critical issue relating to our future, and yours.

The consumer cares about the price paid for a quality product at the point of purchase. In the ever shrinking global marketplace, for those products whose cost/price at point of purchase is dominated by the labor content, the supplier will tend to be the country with the lowest labor cost. However, there are many cost factors that can outweigh labor cost in this equation. For example raw material costs, transportation costs, energy costs, support services such as repair, warranty and spare parts, etc. The distance from the source can be an issue, for example shipping availability, and dock strike, disruptions of supply due to the source country's political or social issues can effect the equation, for example China and Taiwan, SARS or "bird flu". The point is that it is not always just an issue of cheap labor costs. We should focus on the products and services that utilize our cost strengths.

Since the market demand turned down in 2000 and domestic supply became available, brass rod prices have been competitive enough to drive the imported rod supply back down to traditional levels. This market data supports the conclusion that in the US the "value added" price to produce brass rod is competitive. However, about 80% of the total rod price represents the raw material cost of the metal, most of which is copper based scrap. This raw material cost input is one of the other costs we just spoke about, and is the major factor in the price of our rod. In past recessions the scrap supply was generally strong and increasingly available. This encouraged metal prices to decline. The lower prices supported a lower cost for our customer's products and this translated into lower prices for the end products purchased by consumers.

Surprisingly, in this recession the US supply of our raw material has tightened due to the voracious increase in scrap exports to Asia. In 1999, 866 million pounds of copper alloy scrap was exported and China was 10% of that total. In 2002 total exports of copper based scrap had increased to 1.127 billion pounds and China was 54% of the total. Last year exports of our raw material jumped by an additional 35% to 1.518 billion pounds and China was a whopping 79% of the total. The 1.2 billion pounds of copper based scrap shipped to China last year exceeded the total shipped to all countries in 2002. These purchases and exports accomplish two objectives, they provide raw material to China that China does not have, and at the same time the resulting scrap shortage drastically drives up the costs of goods made in the US from the higher priced raw material. This makes exported rod based products, when manufactured in Asia, more competitive when re entering the US and sold to our consuming markets.

But why should we care when these low priced imported products merely help to sustain our standard of living? The answer is that these products are no longer merely a minor irritation affecting only the fringes of US economic activity. They are a growing threat to our manufacturing base in the United States, and to the extent they are supported by an ever growing system of subsidies this makes the trade activity anything but fair or free. These subsidies effecting raw materials and parts made for export can take many different forms, for example:

- The most obvious is the currency pegged to the US dollar. This is said to understate the true cost of Chinese goods by as much as 40% or more.

- The import/export value added tax scheme by which a net rebate is paid on goods made for export.

- State-run organizations that control everything from banks, making non-performing (bad) loans, to shipping companies underwriting the transportation costs.

When parts are manufactured under this system and then sold for export to the US market, there is a lot more going on than just cheap labor.

Since the US recession has technically ended, GDP has begun to expand, but manufacturing has not kept pace. Increased unemployment in this sector is now estimated to be 2.3 million since year end 2000. The deficit in the US current year trade balance has reached a record high, above $500 billion, and fully 5% of the GDP. The total trade account imbalance is about $4 trillion or 40% of our annual GDP. The US economy is not generating exports to offset the massive amount of imports and has not done so in almost 25 years.

This already affects all of our business. Every producer and distributor in this room depends on a healthy manufacturing sector. The lackluster numbers reflect the export of US manufacturing jobs and if they can't be replaced then there will be less need for brass fabricating mills and less need for copper and brass distributors in the US

A few more numbers bring focus to this problem. In 2003 Dr. Joel Popkin and Associates completed a study for the National Association of Manufacturers titled "Making America's Future: The Case for a Strong Manufacturing Base." Among the things that this study revealed were:

- Manufacturing activity has a multiplier effect on the economy generating $2.43 for each $1 in final demand. The financial and business services only produce a multiplier of 1.5. The increase in demand for manufactured products increases the demand for both manufacturing and non-manufacturing jobs, and at a rate higher than any other alternative.

- Almost 2/3 of all private sector R & D is generated by manufacturers activity. This is the seed corn for our future business.

- During the 1990's 30-34% of all corporate taxes for state and local government, social security, excise taxes, import and tariff duties, environmental taxes payroll taxes and license taxes were paid by manufacturing corporations. If the same level of public services is to be maintained and manufacturing companies disappear, then other sources of tax revenue must be found.

- Considering employment using year 2000 data manufacturing employs 16% of the workforce of those with less than a college degree, the second largest employer in this category. The largest employer is now in the retail trade. However, the wages in the retail sector are $8/hour less than manufacturing and the health, pension and other benefits are not as good- if this is the future that we hold out to our children then there will certainly be a decline in the standard of living for our middle class.

The overview of this picture, from the standpoint of the large multi-national companies is that they are moving their operations to what is called "LCC" least cost countries. These companies believe that they are supplying the best products to the consuming market at the lowest cost. In doing so they are maximizing profit to their shareholders which is their legitimate objective. However, the fact is that many times the LCC in which they relocate is really the MSS, most subsidized source. This is of great consequence to us but not to them, it is not and perhaps should not be their concern. For US manufacturers or service centers to be viable we must be able to supply a competitive product to our marketplace, but we have a right to expect that the competition will be fair and open.

US manufacturing should not have to compete with subsidized foreign sourced product or the financial manipulations of Asian central banks, for the opportunity to supply products to the US market. This is not a call for protective tariffs, but rather for a trade policy that recognizes the need to offset the artificial economic factors that undermine a true fair trade environment and our basic manufacturing businesses. We can't let our raw materials leave the country in a subsidized manner.

The US does have considerable power to deal with this situation if it chooses to act. First of all the end markets are here. The multi national corporations and the countries subsidizing their trade activities all want to export to the United States. Secondly, in case of brass rod based fabricated products, the raw material, copper based scrap, is also here although a lot less now than there should be.

The erosion of our manufacturing base; the loss of millions of middle class jobs in an election year; and the dangerously large and increasing trade deficits call out to our government for action. Trade deficits must be eliminated, manufacturing jobs must be expanded and our raw material resources must be properly directed to support our domestic manufacturing activity before they are further pillaged by offshore subsidized purchasing. The government must address the structural and budgetary sources of our trade crises or risk the consequences of a falling standard of living for the next generation of Americans.

Since we all have a stake in this debate we should not stand on the sidelines waiting for our reluctant government to do the right thing, and we are not. On January 29 the Fair Currency Alliance, a group of trade associations and unions, announced they were moving forward on a "Section 301 Petition" regarding the Chinese currency manipulation. Many here participate in this through NAM, National Association of Manufacturers. The Copper & Brass Fabricators Council is also taking action regarding a short supply petition which addresses the massive export of scrap. I urge your continued support of these and other forceful steps to establish fair trade for our products, our customer's products, and the manufacturing industry.

There is a silver lining around this cloud. Remember when the "revolution" of the 1980's was taking place and Japan, Inc. was going to own the world? It didn't quite happen that way. In fact, companies like Honda and Toyota began to produce their cars in the US and created manufacturing jobs in the process. This happened because it made economic sense at the point of sale to do so. When the world class silk mills closed and left Belding in the 1930's the prediction was that the city would turn into a ghost town. However, new business was created in the form of a brass mill, an aluminum mill, appliance manufacturing plants and other industries. Most of which are there today. History does repeat itself and change begets opportunity. The strengths that we have, the strong end market demand, the supply of raw materials, and our world class manufacturing and distribution base encourage me to look optimistically to the future. I hope you join me in that optimism.

Thank you for the opportunity to share these thoughts, and have a wonderful time in San Antonio.