Excess capacity and the sluggish U.S. economy are affecting the duct-fabrication market, according to a recent SMACNA survey.



Excess capacity and the sluggish U.S. economy are affecting the duct-fabrication market, according to a recent survey commissioned by SMACNA.

The results suggest that in the short-term, market growth for spiral duct is likely to slow and the trends toward duct-fabricator consolidation and fabrication-only firms may reverse, according to the Sheet Metal and Air Conditioning Contractors' National Association's "2002 Duct Fabrication Market Survey."

Construction industry researchers FMI Corp. polled more than 120 union and non-union sheet metal contractors, along with a number of general-construction firms, for its update of SMACNA's 1998 survey. The results were released at the association's annual convention last year in Las Vegas.

According to the survey, spiral duct's share of the market is expected to hit 30 percent this year, an increase of 5 percent over 1998 levels. Although FMI called this growth "very significant," it said future growth for the spiral-duct market would be "extremely difficult," since any additional market share will have to be taken from the large installed base of rectangular ductwork.

Spiral markets affected

"(In 1998) a lot of that growth came from oval and a lot of other types of duct," said FMI's Jay Bowman, one of the study's authors. Although the number of engineers who specified spiral duct four years later held steady, the "markets that it was strongest in were hit the hardest," such as commercial and industrial projects, Bowman said.

In its 1998 survey, FMI predicted spiral duct would have 31 percent of the U.S. duct market by 2003. However, officials now say the recession, combined with continued over-capacity and the fragmentation of the HVAC market, will likely keep it from reaching that figure.

"Going back to 1998, the construction industry never looked like it did before? 25 percent growth and everybody thought it was going to keep happening," Bowman said. "People just forget that that is the most phenomenal growth you can see. People have short-term memories."

Bill Stout Jr., owner of Eastern Sheet Metal Inc. in Cincinnati and president of the Spiral Duct Manufacturers Association, said there's no consensus among member companies on the current state of the marketplace.

"It's a mixed bag," Stout said. "Some of our members report that their business is way down because there's simply no work to bid."

But others members say they're very busy, Stout said. However, he added that many fabricators say prices are soft, which is preventing them from meeting profit goals.

He agreed with FMI's conclusion that the spiral marketplace may have hit a temporary plateau. "We're not seeing a huge shift towards more spiral," Stout said.

However, at Eastern, which makes both rectangular and spiral duct, the spiral business continues to grow, Stout added.

Long-term prospects better

Long term, the survey notes that spiral duct's market share will likely begin to grow again when the U.S. economy picks up.

"The current setback represents more of a market anomaly than changing market dynamics," it said. "Those markets where spiral duct has its strongest representation, such as industrial buildings, have been affected the most by the current market downturn and resulting drop in construction activity.

"Even though many of spiral duct's best markets have been affected the most by reduced construction spending," the survey added that "spiral duct has been able to increase its overall market share" through small gains in traditionally weak spiral markets, such as institutional buildings.

Overall, however, rectangular duct remains king, with an estimated 65 percent of the U.S. market, and most experts say it will stay that way. The survey says "there is a probable ceiling at which point spiral duct can only gain limited additional market share," although it noted survey respondents still predicted strong growth for the foreseeable future.

Fab-only contractors hit hardest

The outlook for fabrication-only sheet metal contractors is a little less clear. They appear to have been hardest hit by the U.S.' current economic woes, and their share of the market dropped from 32 percent to 28 percent between 1998 and 2002. In the last FMI survey, contractors predicted non-installing firms would supply up to 44 percent of the duct in the U.S. by 2003.

"We just weren't seeing quite the separation as much as it had been," Bowman said. He added that the drop in U.S. construction probably meant most firms could now handle their work in house, making it unnecessary to contract it to outside companies. "The need for all the excess duct just isn't there."

Firms surveyed by FMI in the past have consistently said that in the event of a recession, they would either keep the amount of duct they bought from outside sources the same or make more of it themselves, and that is likely what is happening now, FMI officials said.

According to the survey: "In a market downturn, the existing contractor base, which is dominated by small, closely held firms, has a lower 'tolerable' threshold for return on investment than larger fab-only firms. These firms often have less sophisticated accounting systems, which inhibits economically rational? make/buy decisions on duct.

"Additionally, these firms typically own a certain amount of production capacity that has a negligible resale value, due to the age and condition of the equipment and industrial over-capacity. Finally, these firms tend to place a premium on retaining the employees that they have, both out of a sense of loyalty and a desire avoid the rehiring and retraining expenses that will surely come when the market rebounds. All of the factors tend to favor the status quo in an economic downturn."

You don't have to tell that to Frank Tambe, owner of Tambe Metal Products Inc. The Victor, N.Y.-based non-installation contractor has had to lay off a few workers in recent months, due to a drop in demand.

"They probably hit the nail right on the head, as far as the trend here," Tambe said. "Competition is heavy and the work has basically slowed down. Whatever they can do in house, I think they're doing," he said.

However, the study also notes that the decrease in non-installing contractors' share of the duct market "does not mean that the amount of duct fabricated by fab-only firms has gone down," adding that many of the non-installing contractors had actually seen slight increases in revenue.