Editorial Advisory Board Roundtable
Thursday | 02 June, 2011 | 9:06 am

Pressure points

Written by By Lauren Duensing

Peter Baines, Corporate VP Communications and Corporate Affairs, Samuel, Son & Co. Ltd.
John Campo, Vice President - Market Development & Contract Management, O'Neal Industries
Dan DiMicco, Chairman, President and CEO, Nucor Corp.
David Hannah, Chairman and CEO, Reliance Steel & Aluminum Co.
Michael Hoffman, President and CEO, Macsteel Service Centers USA
Scott Kelley, President and CEO, Service Center Metals
Frank Kevane, President and CEO, ThyssenKrupp Materials NA Copper & Brass Sales Division
Robert Levey, General Manager, Commercial, Gallatin Steel Co.
Richard McLaughlin, Director, Hatch Beddows
William Peluchiwski, Senior Managing Director, Houlihan Lokey
Lonnie Terry, President and CEO, North American Steel Alliance

May 2011- Daily life can be fraught with unexpected pitfalls. A late train, endless traffic or an unexpected thunderstorm can affect a simple morning commute negatively. For both individuals and businesses, navigating these and other unforeseen circumstances tests preparedness and tenacity - especially in the case of the unexpected storm. Modern Metals’ editorial advisory board forecasts improving conditions for 2011, but the bigger shocks to the economy could stop growth in its tracks.

In April, the World Steel Association released its short-range outlook, which forecast a 5.9 percent increase in steel use for 2011 following 13.2 percent growth in 2010. Steel demand will continue to grow further by 6 percent in 2012. Much of that demand will come from emerging and developed economies, as the outlook predicts by 2012 steel use in the developed world still will be 14 percent below 2007 levels.

However, the association pointed out this outlook is based on a "stable and steady recovery of the world economy." Potential setbacks to growth include financial fragility in Europe, unrest in oil-producing countries in the Middle East and the earthquake in Japan. These events have a ripple effect far beyond the immediate, tragic toll on the people living in the impacted areas.

"The crisis in Japan is having a short-term impact on the auto industry, as some production has slowed because of parts shortages and shipping problems," says David Hannah, chairman and CEO, Reliance Steel & Aluminum Co., Los Angeles. "On a longer-term basis, the rebuilding in Japan should be more positive. As far as the Middle East and North Africa, the impact on oil prices has not had much of an effect yet but could, long-term - especially if prices continue to rise - have a negative impact on growth."

"Ultimately, when you have a nuclear reactor meltdown in Japan and you have instability in the largest oil-producing regions of the world, that’s clearly going to have an important impact on everything from retail gas prices to the cost of industrial power," says Richard McLaughlin, director, Hatch Beddows, Pittsburgh. "We are quite concerned about the potential increase in energy prices. The United States has not sorted out its energy policy to anyone’s satisfaction, and the possibility of rapidly rising costs and/or shortages in some regions is actually quite real. If rising energy costs affect customer confidence and spending, the effects will eventually be felt in lower automotive, home and appliance sales."

Although consumer confidence is improving, Rob Levey, general manager, commercial, Gallatin Steel, Ghent, Ky., says he doesn’t think "we’ve seen the full impact of high oil and gas prices."

Oil prices have a "huge impact on consumer spending," says John Campo, vice president - market development and contract management, O’Neal Industries, Birmingham, Ala. "Gasoline prices are now up almost a dollar from a year ago. That affects the average consumer. Their spending power decreases dramatically, and, as we all know, this economy is driven by consumer spending. Oil prices have to be brought under control. If they continue to rise, we have even more uncertainty and a real likelihood that we’ll go into an economic decline."

Waiting for the other shoe to drop
Despite these global events, underlying demand in the United States "doesn’t seem to have changed," Levey says. "It’s improved and it’s maintaining that improved level."

"Our customers seem to be busy and have a better backlog now then they have had for quite a while," Hannah says. "When you stop and think about all of the negative events happening around the world, it is a little surprising that our recovery in the U.S. is coming along like it is. We should keep our fingers crossed that nothing else too negative happens because the worldwide economy may not be able to take it."

"The current challenges we face are due to some of the uncertainties in both the U.S. and world economy," says Campo. "As a result, we’re focusing on watching our inventories very closely and managing our overall costs to make sure we can respond to any potential downturn, should it occur."

Lack of stable footing means U.S. businesses aren’t considering investing even if they have capital available.

"There are no clear trends," says Peter Baines, corporate vice president of communications and corporate affairs, Samuel, Son & Co. Ltd., Mississauga, Ontario. "Consumers are concerned, and they have a lot to be concerned about. From where I sit here in Mississauga, even though half our business is in the United States, day-to-day, things are different here in Canada than they appear to be in the United States. While we’re obviously concerned about our largest customers in North America, threats seem to be everywhere, and I’m not at all sure that our world can solve our current economic problems fast enough to be able to deal with the variety and complexity of the new problems that seem to appear constantly."

"Today, after downsizing and strengthening their balance sheets, most U.S. businesses are cash rich, however, they are not ready to invest," says Lonnie Terry, president and CEO, North American Steel Alliance, Laguna Hills, Calif. "They are reluctant to spend due to the uncertainty created by the administration and Congress. Will the debt ceiling be raised? Will corporate taxes ultimately be increased? There does not seem to be a near-term plan to resolve the critical issues that impact the business community to give them confidence to pull the trigger."

Economic fuel
Sitting idle isn’t an option, though, for companies that want to move forward and take advantage of reinvigorated markets. Even the once-maligned automotive industry is showing strength, but new markets also are fueling the recovery.

"The automotive industry has rebounded, if not spectacularly, solidly," McLaughlin says. "We’re not at 2006 or 2007 levels, but we’re certainly above the floor by a substantial amount. However, the construction markets are still jammed. There’s no question that there’s an overhang of excess residential supply and of commercial supply. New construction is still very low by historical standards and the banking system is still tight on credit. I’m afraid we might be in for a relatively slow period of construction growth for at least a few more years."

However, certain types of commercial construction could show growth in 2011, says Bill Peluchiwski, senior managing director, Houlihan Lokey, Chicago. "It’s going to be very specific," he notes. "It’s no longer the Florida, Arizona or Southern California market. New York will be pretty good, and that’s going to be helpful for the recovery of overall construction demand. I see more increase, actually, in corporate construction in terms of industrial properties. We see a lot of activity on the semiconductor, chip fab - big facilities that are being built here in the United States. This type of corporate building is going to continue to help out the commercial construction marketplace."

Samuel, Son & Co. has needed to rethink its market strategy as manufacturing that was once done in Canada has moved south to the United States and Mexico. "Because we have locations all over North America, we can move with our customers, but with respect to what’s left in our largest market in Ontario, it’s a problem, so we continually have to look for new markets," Baines says.

Growth markets will be solar and wind energy, he adds, and Campo agrees. "Longer-term, I think there’s some implications in terms of energy supply," Campo says. "We felt here in the United States that the power generation provided by new nuclear plants was a real possibility over the next couple of years, and I think there are going to be a lot of questions put forth about the viability of the nuclear plants. Because of that, we think there is going to be renewed emphasis on other forms of renewables, specifically solar and wind, which have been in the process of growing over the last couple of years, and we think that’s going to be a major initiative going forward in terms of power generation."

Another market that potentially could help the industry is infrastructure. The challenge will be funding these types of projects.

"The question of U.S. fiscal policy, particularly when it pertains to infrastructure investment, is an interesting thing to talk about," Peluchiwski says. "We see the need to further improve and rejuvenate our infrastructure. But whether the states and federal government have the money to do so weighs heavily in terms of when this market is going to recover for the metals industry."

He points out the answer may be privatization of more roads. "Will states say, ‘I don’t have the money to do this, but I am prepared to sell this,’ akin to the Chicago Skyway, which required a huge amount of rehabilitation? The question is, will we see a trend where governments are looking to privatize certain roads and the maintenance of those roads because they require significant amounts of capital?"

Easing momentum
Peluchiwski characterizes overall demand for metal products as "choppy," but he says in the long-term, demand will increase because of inventory replenishment and improving markets. "The United States has a positive population growth, positive GNP growth, and that will lead to overall increases for demand."

Until there is a significant, stable uptrend, companies are reluctant to invest in inventories. Levey says his customers are emphasizing shorter leads, more flexibility and quicker response times.

"Since the upset conditions in 2008 and 2009, the bulk of the consumers can’t see more than 60 days out with any clarity, and if you’re only 60 days out with any clarity, you’re not sure what’s going to happen next," he notes. "The whole issue comes back to working capital. The less working capital they have tied up, the better off they’re going to be. So instead of buying one large order, many customers are buying four smaller orders totaling the same volume but over a period of time."

Many service centers still are moving the last of the material bought at the peak and are adapting to an environment of price volatility, McLaughlin says. To combat fluctuating prices, "one of the mechanisms available to them is simply to lower the level of inventory. I think we’re seeing a fundamental new era where sitting on inventory, especially on slow-moving products that might take nine, 10 or 12 months to move, is going to be a thing of the past."

Although Frank Kevane, president and CEO, ThyssenKrupp Materials NA, Copper & Brass Sales Division, Southfield, Mich., sees "steadily increasing demand" for his company’s products, the upward mobility in material price is a constant challenge. "[Demand] is not a rocket ship upward but it’s a nice, steady increase from one time period to another," he says.

"The biggest challenge that we’re seeing is the cost of copper," he adds. "For the last two months, copper has been in the $4.25 to $4.50 range. That’s super high, so it causes the cost of inventories to increase and the cost of our investment is significant. That presents a challenge not only for us, but it’s a challenge for our customers because they have to pay those high prices, too."

Scott Kelley, president and CEO, Service Center Metals, Prince George, Va., also sees "relatively good" business conditions, albeit ones that are encumbered by price swings.

"We see metal volatility as a big issue," he notes. "It’s one of our biggest challenges because it impacts buying patterns, inventory levels and undermines the visibility in our business. April was a perfect example. Metal prices ran up about 10 cents per pound from the beginning to the end of the month. When you have big month-to-month swings like that, it impacts people’s confidence. There’s a lot of speculation involved, and it begins to impact customer buying patterns and influence inventory levels."

The market volatility stemming from prices is creating an atmosphere where companies need to stay on their toes. They are turning to "strategic inventory management practices and procedures," says Terry. "Our members/owners are saying that they just can’t afford to get on the wrong side of the market on any product. If you do, you’re underwater in a hurry.

"Last year, when we were coming out of an extremely difficult 2009, where businesses were forced to reduce employment, conserve cash and do everything they could to get through that tough environment, many companies re-engineered their organizations. Most responded positively and are doing a much better job of managing their assets," Terry says. Now, companies are confronted with managing inventories, getting them in the right location and selling the material for the right price at the right time.

"We’re all dealing with new sets of circumstances compared to the old models," Levey says. "Volatility means [metals] consumers and distributors try to limit their exposure. They don’t want to invest their working capital in an asset that is potentially going to depreciate very quickly. Or, if you are a gambler, do you gamble and try to buy at the bottom? The problem with volatile pricing is that consumers constrain their inventory levels, so it puts the pressure on suppliers to be timely and flexible."

Stick to the plan
The lessons from the downturn remain fresh. Companies still are focusing on internal costs and streamlining operations to minimize the impact of factors outside of their control.

Campo points out O’Neal is "looking at ways to control its own internal costs" as a reaction to high material prices, and Baines says to stay competitive he looks at a "careful selection of markets" to discern which ones seem to be growing. The current climate requires "more market research than we’ve done before," he notes. "We’ve been in the business 157 years so we know a little bit about what we’re doing and we can select the markets that are going to be the winners. We have also increased our emphasis on customer service and with our manufacturing divisions, we have the ability and the knowledge to go further up the value chain with more services and products."

Copper & Brass Sales is focusing on productivity, Kevane says. "We have put in place some fairly significant year-over-year productivity objectives that we measure in our plants and in our sales offices," he notes. "We’re looking for improvement, and we’re achieving our desired improvements in regards to productivity. We’re managing our inventories very surgically, closer than ever before to make sure that we have the right amount of inventory but that we’re not overinvested. We’re managing our overall expense level and keeping our business as lean as we can to save money and remain competitive."

"By responding to the recessionary pressures, we have made ourselves better, and of course, that’s what lean manufacturing is all about," Kelley says. "We continue to develop tools and incentives for our employees so they want to increase productivity and reduce costs. We took a page from the NASCAR handbook and created a program called Pit Stop Challenge that offers monthly cash rewards to press operators with the lowest die change times. We’re also increasing the use of internal Web-based tools to analyze data and improve performance.

"We’re real big on celebrating when we hit production records for our key metrics," he continues. "We feel like we’re competing against ourselves. We set high targets, and when we break them, we make a big deal out of it."

Ultimately, "our economy works like a pendulum," Levey says. "It swings too far in one direction and then it swings too far in the other direction. Either direction past the norm causes more volatility than the reaction to it.

"We’ve all learned to run our businesses in a more lean fashion, and we continue to work to be flexible and serve our customers," he continues. "You have to learn to deal with the uncertainty by controlling those things that are within your control and reacting to those things that aren’t. Flexibility is critical in terms of being responsive and listening to what’s going on."

"Having come through what happened in 2008 - that was so significant that the shock of it doesn’t wear off," Kevane says. "I think it’s good, though, because it makes us all prudent. We’ve reached a point where we’re trying not to look back - we’re much more forward looking. We’re profitable, and our business is right-sized to the current demand. Looking back can bring you down. We’re forward looking, we’ve done some new planning and strategy work, and we’re moving on." MM

The race for raw material
The World Steel Association’s Short Range Outlook forecasts China’s apparent steel use in 2011 is expected to increase by 5 percent. However, the Chinese government’s efforts to cool the country’s overheating economy will have an impact on both steel use and the need for raw materials.

Because of the recent insatiable demand from China, new capacity for raw materials has been coming onstream regularly around the globe. However, "China is already showing signs of a pretty dramatic slowdown," says Richard McLaughlin, director, Hatch Beddows, Pittsburgh. "They are trying to source more domestic iron ore, and at the same time, the other iron ore producers are producing a lot of new capacity. If China, first of all, has a relatively limited amount of demand growth and satisfies more of that internally, it could put significant downward pressure on iron ore prices. I think that will cause some concerns across the value chain."

The scale at which China is operating leads to boom and bust cycles, McLaughlin points out. "China might slow down in the 2011 to 2012 time frame and then speed up in 2013 and 2014," he says. "The numbers are just so big, the odds favor them creating surplus or shortage conditions in raw materials as their economic growth rate varies. Keep in mind that steel consumption today will yield scrap in the future; so we haven’t yet experienced their full impact on the global scrap markets, but that time is coming."

"We’re all dealing in different ways with new sets of circumstances," says Rob Levey, general manager, commercial, Gallatin Steel, Ghent, Ky. "Raw material volatility is an issue, and to a degree, availability can be an issue. The key point that needs to be understood is we all see more volatility than we’re used to."

As a result of the volatility, companies that are self-sufficient in raw materials have an edge. "You have the haves and have nots," says Bill Peluchiwski, senior managing director, Houlihan Lokey, Chicago. "I believe that the producers that don’t have their own raw materials long-term have to figure out a solution for that - either buy it, [enter in to] a joint venture or sell your business to someone who can better manage that commodity flow. Because if everyone else has their own supply, you’ll never be competitive just by being transactional with the marketplace. You will have no choice, even if you’re a great operator. It’s just not how it’s going to work."

Continued globalization
It’s a small world. Participating in an interconnected world market forces companies to focus not only on how globalization affects their domestic business but also their interactions with global competitors and suppliers.

"I’m seeing a more cogent, thought-out view of the world," says Bill Peluchiwski, senior managing director, Houlihan Lokey, Chicago. "The world appears to be a lot smaller when it comes to the metals industry. At some point, it will be much more of a global industry than a domestic industry."

Global growth in emerging markets could open up the export market - a new channel for U.S. producers. Richard McLaughlin, director, Hatch Beddows, Pittsburgh, says markets like India have "the kind of economic development that would suggest increasing steel consumption," but bureaucratic hurdles to new capacity will cause the country to "remain a net importer for some time to come. India is a very attractive destination for a lot of potential investment, but it is an extremely difficult place to construct new capacity."

McLaughlin says these types of opportunities coupled with a weak dollar may cause American mills to become more active in export markets.

"There are two ways of being an exporter," he says. "You can be an opportunistic exporter, where in any given month you simply look around to where a high price might be had and you sell at a discount just to move the material. ... You also have strategic exporters. I think of the western Europeans who own a lot of the downstream assets here in North America. They export to their own subsidiaries and their own businesses. They are here year after year after year. The U.S. really doesn’t have strategic exporters to a large degree. If we think we’re in for a period of sustained weakness in the dollar, it might make sense for American mills to become less opportunistic and more strategic. Pick the regions of the world where there are imbalances and try to establish a reasonably consistent presence."


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