A leaner, stable industry is optimistic about 2012; however, Modern Metals’ editorial advisory board says the volatile economy makes long-term growth trends difficult to predict
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
William C. Steers Jr., General Manager, Communications and Corporate Responsibility, ArcelorMittal Americas, President, ArcelorMittal USA Foundation
Lonnie Terry, President and CEO, North American Steel Alliance
March 2012 - Manufacturing is showing an improvement, but the numbers are relative. Business isn’t back to the levels of 2007, but the members of Modern Metals editorial advisory board have a cautiously positive outlook for 2012. “I’d say people are much more optimistic because the manufacturing business is better,” says Frank Kevane, president and CEO of ThyssenKrupp Materials NA Copper & Brass Sales Division, Southfield, Mich. “We are making real progress.”
“Things are certainly showing signs of improvement,” says John Campo, vice president–market development and contract management at O’Neal Industries, Birmingham, Ala. However, he is “certainly concerned about construction,” which is infusing the overall business environment with an undertone of wait-and-see.
Like Campo, David Hannah, chairman and CEO of Reliance Steel & Aluminum Co., Los Angeles, believes although most people he talks to are optimistic, the amount of optimism depends on the industries served.
“The auto industry looks like it should have a better year with above-average improvement,” he says. In addition, he expects good numbers from the aerospace industry, and “anything today that is energy related seems to be a really hot market. So you’re expecting above-average growth in those areas, and then you’ve got the laggard, the elephant in the room, which is construction.”
Naturally, upward trends breed optimism, but Peter Baines, corporate vice president communications and corporate affairs at Samuel, Son & Co. Ltd., Mississauga, Ontario, says there is a fair amount of uncertainty in the marketplace, as well.
“Things are OK,” Baines notes. “They’re never going to be like 2008, but there is nice, steady growth. ... Certainly our forecasts are higher than they were last year, and we’re looking for a good year.”
“There have been signs of improvement, but the economy seems very precarious,” says Richard McLaughlin, director at Hatch Beddows, Pittsburgh. “So many things could go wrong, from a collapse of the common currency in Europe and threats to their financial system to violence in the Middle East to the elections coming up having an unfortunate outcome. There are some very significant variables in play, all of which could have very dramatically different outcomes.”
Robert Levey, general manager, commercial, Gallatin Steel Co., Ghent, Ky., also says he’s seeing cautious optimism in the industry with many companies still wary of the short-term outlook.
Concerns 2012 could be a repeat of 2011 are exacerbating uncertainty. Companies began 2011 with a highly optimistic outlook, but the strong start quickly tapered off.
“Last year, we got off to a fast start, but there didn’t seem to be a lot of confidence behind the demand that was driving it, and I think there was a feeling that the fast start was due primarily to everyone driving their inventories down to the bare bones,” says Scott Kelley, president and CEO, Service Center Metals, Prince George, Va. “I think this time, the feeling with our customers and our competitors as well is there is a real pick-up in demand. I think we’re prepared for a stabler 2012. But in 2011, we started off fast and were very optimistic and things seemed to slow down, especially in the second half of the year.” Political pressure The upcoming U.S. presidential election exacerbates concerns about a second-half slowdown. It’s extremely difficult for companies to think about long-term expansion in the face of an unstable political climate.
“Politicians and governments do things to support the economy in the short term, but business people, particularly in the metals industry, do things based on the longer term, and politicians have a re-elect-me mentality that does not always do what is needed for longer-term success,” says Dan DiMicco, chairman, president and CEO of Nucor Corp., Charlotte, N.C.
A large portion of employment and investment in the United States comes from small companies. “Small Business Profiles for the States and Territories,” a report published in January 2012 by the U.S. Small Business Administration estimates, using 2009 data, there are 26.8 million small businesses in the United States and the share of employment by small firms was 49.2 percent.
“I am concerned about this administration’s policies regarding small businesses,” Kevane says. “Small-business owners are a lot of our customers. Although we deal with big OEMs and big national companies, we have thousands of privately owned, small-company customers. Right now, they’re allowed to take accelerated depreciation, which helps offset our high tax rates. Is this administration going to continue on with accelerated depreciation? In addition, what’s going to happen with health care? I was talking with a couple of small-business owners I know, and they’ve had health care increases of 40 percent. ... They have to hold back a certain amount of money that they might be investing. And if they invested it, that would create more jobs.”
The uncertainty surrounding the future administration in the United States hurts confidence and slows growth. “The fear of the negative consequences on the future economic strength of the out-of-control regulations, rising taxes and government-run health care are negatively impacting the thinking of business leaders and hence their job plans and growth creation,” DiMicco says.
However, Kelley says, “although a more stable political environment would be helpful, there is so much pent-up demand now that the business cycle is going to continue to move in a positive direction.
“You almost wonder what could happen if we did have a more stable political environment where you knew what the health care program was going to be and what types of regulations are going to continue and which ones are going to be discontinued,” he continues.
Information explosion
Editorial advisory board members also believe the unpredictable global markets in Europe, China and the Middle East are a top concern.
“While we are more optimistic about the future, ArcelorMittal and the steel industry as a whole continue to operate below pre-crisis levels. Uncertainty in the global economy continues to be a challenge for the industry,” says William C. Steers Jr., general manager, communications and corporate responsibility, ArcelorMittal Americas.
Globally, “the single most important government relations issue that impacts the steel industry is our ongoing relationship with China,” Steers continues. “In the U.S., China has chosen to follow a mercantilist strategy of unfair trade, government subsidization and dumping of products onto the U.S. market, not only for raw steel but also for products containing steel. The most important thing any administration can do is vigorously enforce the current trade laws and ensure China plays fair in its international economic activities.”
“The mercantilist trading practices of China in particular and the massive trade deficits and global debt on our books is a major drag on our economy and our financial strength as a country,” adds DiMicco. He points out since 1998, the United States’ cumulative trade deficit with China is more than $2.5 trillion.
“These unchecked and illegal trading practices continue to have a major drag on our economy and job creation,” DiMicco continues. “The metals industry has borne the majority of this pain.”
In addition to China, it’s necessary for the industry to keep an eye on the situation in Europe.
“We certainly worry about what’s going on in Europe and its impact on the overall world,” Levey says. I think that’s probably a key affecting the next several months.
“In terms of other things happening domestically, there’s a trend to run each business in a more lean fashion, which means the supply chain has become tighter and shorter and any disruptions to those changes become more dramatic,” he continues. “It puts more pressure on the suppliers to be more and more reliable.”
Wild swings in pricing are one of those disruptions, and unfortunately, they’ve become the new normal.
“Pricing is so much more volatile today than it was 10 years ago,” Hannah says. “Since 2004, pricing has been quite a bit more volatile. Rarely will we have a five-month period where prices are stable. For the most part, prices are changing direction at least twice a year. It makes it difficult for all of us. It’s more difficult for the mills, it’s more difficult for our customers and it’s more difficult for us. But that’s the world we live in.”
In today’s market, steel buyers feel vulnerable and often overreact to the fluctuations in the price of scrap, says Lonnie Terry, president and CEO, North American Steel Alliance, Laguna Hills, Calif. “If scrap drops, they feel they must react immediately to renegotiate more favorable pricing. No one can afford to get caught with high-cost material. The uncertainty creates a stressful and unsettled environment for buyers and sellers,” he says.
Kelley says the volatility in metal prices seems to be uncoupled from supply and demand. “It moves up and down dramatically over a short period of time. That combined with the outdated pricing methods we use in our particular industry is quite frustrating because it makes people less likely to want to keep metal on the shelf because they don’t know what the price of inventory is going to be next week. The bottom line is it creates instability.”
With all these disparate and often conflicting factors, it’s difficult for business owners today to “find the time to do everything,” Baines says. “There is the problem of following your markets, learning more about them, dealing with new technologies, dealing with the day-to-day in terms of getting it all done. And now, everybody is plugged in all the time; there is nowhere to go. It’s a double-edged sword. You get all this information but you can’t always do something about it and it’s frustrating that you can’t.”
Streamlined supply chain
Amid information overload, it’s important for each link in the supply chain to focus on reliability, which for service centers means staying on top of inventories.
“It seems that when people in the service center industry have a major problem, it’s because they’ve mismanaged their inventory. You have to stay on top of it when it is good and you have to stay on top of it when it’s bad,” Hannah says.
The industry learned its lesson about excess inventory during the downturn and has “implemented a lot of that strategic direction to try to improve productivity. We got hit harder and longer than we ever expected,” Campo notes. “There is a lot of credit due to participants in the steel value chain for working off lower levels of inventories,” McLaughlin says. “That’s a huge change because, in many cases, distributors compete on their ability to provide next-day service to a wide range of customers. In an environment with low inventories, that is more difficult. If you’re able to live on that lower level of inventory without losing a significant portion of your customer base, you’re doing something right. It’s good for the system. The value chain as a whole historically has had excessive levels of inventory in the system to protect from outages, bad weather and a whole variety of things. I think it’s a very significant change and an important improvement the industry has gone through.”
The last three years have resulted in a hyper-competitive environment, Kelley says, and successful business models are much more focused.
“Today, probably more than ever, people just aren’t going to tolerate mediocre products and service—if they have a choice,” he says. “The companies that have survived obviously are doing some things right, and that competitive environment is going to continue.”
Although the industry has taken huge strides since 2000 to become stronger and operate more efficiently, “the Great Recession of 2008-2009 demonstrated the industry’s vulnerability and provided the opportunity to further evaluate the sustainability of our business,” Steers says. “ArcelorMittal recognized the need to identify continued challenges and develop a long-term strategy that will create a business that is sustainable through the ups and downs of the business cycle.”
Companies “that have been successful have operated from a solid game plan,” Terry adds. “We see more strategic planning in place as organizations desire to move to the next level. To that end, there are many more joint ventures in play today between independently operated companies. Informed owners are searching for growth opportunities. They are willing to share their expertise to forge something greater than themselves. They realize they are better off being part of something more broad-based rather than going at it alone.”
Companies need to be alert, flexible, have their fingers on the pulse of new markets and the ability to “make the tough decisions to respond to changes in the business environment,” Hannah says. “Years ago, it was easier when things turned down to just plow through it—wait it out. The changes now can be so severe that you really shouldn’t do that.”
Levey says for a company to be successful in today’s market, it needs to focus on “flexibility and continually enhancing processes and products. It’s all about serving your current markets as well as finding those markets that are recovering and are growing.”
Ultimately, DiMicco notes, there is no substitute for hard work and mastering the fundamentals of business.
“At Nucor, our goal is to take care of our customers. We will accomplish this goal by successfully focusing on being the safest, highest-quality, lowest-cost, most-productive and most-profitable steel and steel products company in the world. In short, being the best we can be and never being comfortable with our success but always working to continually improve.”
He says companies should focus on external goals, such as striving to be “cultural and environmental stewards to the communities we live and work in” as well as internal goals—working together as a team to preserve the “financial strength of the company so you are preparing for the bad times in the good and the good times in the bad.” MM
Availability of credit
ARE COMPANIES ABLE TO GET THE FINANCING THEY NEED TO OPERATE OR EXPAND THEIR BUSINESSES?
Lonnie Terry: “If you have a strong balance sheet and a history with your bank, we hear that money is available and business loans are relatively easy to come by. The one area that remains tight is loans involving any real property. Banks remain very skeptical in that area.”
David Hannah: “If you’re a reputable company and you have a good history and you’re sound financially but you need money to support your ongoing business or even grow your business, I think there’s money to be had. Credit is better than it was over the last couple of years. The banks are in the business of lending money, and there’s a lot of money out there on the sidelines. People want to invest it, but the uncertainty makes them want to invest or lend it for shorter periods of time.”
Peter Baines: “Usually, that’s an ongoing problem in our business. I think business is in pretty good shape, generally. I think everybody in the metals business is making good money, and our manufacturing customers’ results are improving. They’re making it and reinvesting it and not hiring and keeping their inventories spinning. Nobody wants the inventory, thank you very much. Consequently, I think the cash flow has been fine.”
Robert Levey: “We haven’t seen situations of late where business does not occur due to a lack of financing. If you have the right situation, you can find financing, but you probably have to be more creative about doing it because there is a large degree of risk adverseness among those loaning.”
Scott Kelley: “We deal primarily with large service centers, so from a credit standpoint, our customers are in pretty good shape. They’ve been around a long time and have very strong balance sheets. As far as credit goes, it definitely has loosened up. You have to have a strong business plan and a strong management team to execute the plan in order to convince somebody to extend a loan, which wasn’t the case a few years ago. There’s a lot of pent-up demand in the financial community. If you have a strong plan and a strong team, I think your chances of getting a loan right now are pretty good.”
Richard McLaughlin: “One of the big problems is availability of credit in the system. Credit is a driving force in a variety of ways from providing inventory financing to supporting new construction projects. The banks are starting to loosen up a little bit, but our basic view is that the banks are persistently more conservative, especially in the metals markets because of the volatility in prices. ... People who need money can’t get it. It’s the age-old conundrum. If you have money, you can borrow, but if you don’t have it, you can’t borrow. The credit standards are tightening and the amount banks are willing to advance on inventory of metal is declining, so liquidity could be a major issue as steel prices fluctuate.”
Hiring trends
ARE YOU ABLE TO HIRE THE TALENT YOU NEED? IN ADDITION, ARE YOU SEEING A SHIFT IN THE TYPES OF EMPLOYEES YOU’RE HIRING?
David Hannah: “The people are becoming younger, which is a good thing. Our industry isn’t the most attractive industry in the world. Kids don’t wake up in the morning and say, ‘I really want to work in the metal service center industry.’ But I think our industry has gained some attention in recent years. We’re getting more young people to come into the company and come into the industry, and we really need that. For a lot of my career, the only thing we did as an industry is we’d trade people within the industry, and the age of the workforce grew because of that. We’re bringing in new blood, and we all need that.”
Peter Baines: “Finding people to replace the people that are leaving is a huge problem for this industry. It always has been. Sometimes it goes away because business gets bad, but the problem is still there in terms of enticing younger people to come into the business. I think that’s going to take a long time. I know the industry is getting together to promote itself some more, which I think we probably need.”
Dan DiMicco: “We have always attracted good people. I think companies need to do less complaining about a shortage of skilled workers and spend more of their time training them. The vast majority of the people we hire did not come to us with the skills to make steel, but they are the best in the world at doing it today.”
Frank Kevane: “We’re focusing on our talent, making sure we have the right people and developing the people that we have. We want them to provide a higher level of the type of premium service that we want to give our customers. We’re back to the basics in our talent focus. We’re looking for top people, smart people, service-oriented people, people who present themselves well and have poise. We’re paying a lot of attention to who we bring aboard.”
William Steers: “Today’s steel industry utilizes new technologies and develops innovative products, like the next generation of advanced high-strength steels which requires a highly skilled tech-savvy workforce. Like many steelmakers, ArcelorMittal has an ever-changing workforce, and we are preparing to fill the gaps left by retirements and attrition.”
Scott Kelley: “Attitude is everything with us. We’re looking for self-motivated people, positive, dependable people with great work ethic. These types of people will always be in great demand. That’s what we have been looking for since day one. It’s a never-ending search. We continue to hire. We’re operating 24 hours a day, seven days a week.”
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