Consuming Industries Survey
Friday | 11 February, 2011 | 10:15 am

Tug of war

Written by By Lauren Duensing

January 2011- According to American author Ernest Hemingway, "The best way to find out if you can trust somebody is to trust them." However, trust is a fickle bond. Once broken, it’s not repaired easily. During the recent boom years, many companies and customers trusted the market with their businesses, 401(k)s and futures. Today, that trust is gone, replaced by a wariness and uncertainty that has brought commerce to a virtual halt.

The Dow Jones Industrial Average has risen from the high 700s in 1982 to more than 14,000 in 2007--with several peaks and valleys in between. It then fell to the mid-6,000s in March 2009 and, as of press time, stands at about 11,000. The dramatic, unpredictable nature of today’s economy was epitomized by the 2010 Flash Crash, where the Dow Jones fell 998.5 points, the index’s biggest intra-day collapse.

Respondents to Modern Metals’ Ninth Annual Consuming Industries Survey are being pulled in many directions, leaving them frustrated and worried about the future. Service center, fabricator and OEM respondents cited pricing, business activity levels, transportation costs, foreign competition, trade policy issues and energy costs among their top concerns for 2011.

With so many balls in the air, companies are finding it difficult to make major business decisions.

"Continued slow growth is hampered by continuing high unemployment," commented one service center respondent. Others pointed out that overcapacity in the industry, compared to the current market; material price volatility; and government policies are roadblocks to growth.

Fabricators cited U.S. federal policies, such as cap and trade, health care, immigration, and taxes, as well as a general lackluster economy among their top concerns, and OEMs feel uneasy about foreign exchange rates, globalization, health care costs, taxes, metals prices, business activity, market forces and the overall perception of the general economy.

Financing growth
Until credit becomes looser and investment rebounds, it will be difficult to change the general perception that the economy is weak.

According to PricewaterhouseCooper’s Private Company Trendsetter Barometer report, which tracks the business issues and standard industry practices of leading privately held U.S. businesses, "while private companies largely had the capital to meet their most pressing operating expenses over the past two years, spending in other areas was limited for many of the businesses surveyed--a sign that they may have been in survival mode for much of that period. A net 37 percent of businesses lacked sufficient capital to fund major initiatives, such as expanding in to new markets, pursuing M&A activities and upgrading sales/marketing operations."

One OEM respondent to the Consuming Industries Survey simply pointed out "banks are not lending." A service center said, "available cash will affect us as we are trying to grow and build inventory," and a fabricator pointed out, "a lack of competitive financing options will affect business in 2011."

Charlie Lanphier, controller and CFO, General Steel Inc., Macon, Ga., an independently owned service center that offers a full range of hot- and cold-rolled steel, stainless steel and aluminum products, points out, "one of the main areas we’ve changed is how we extend credit. In the past, we were able to be flexible. We used a variety of credit instruments, including post-dated checks, promises of payment and reputation. Many of our customers have simply not done very well in this new age of tightened credit. The customer who would use the current job to pay past bills was exposed when the new job was delayed or didn’t come at all.

"In our own case, the bank has become much more stringent on us," he continues. "Thankfully, we are well capitalized, and our business owners understand that the cash we hold today is for the accounts receivable and inventory growth we should see when we finally recover."

An uncertain future
Companies will remain tentative about business through 2011 or until the economy starts to show sustainable positive growth.

"A heavy dose of uncertainty about future tax rates coupled with a financing environment more evocative of the late 1970s or early 1980s is conspiring to create headwinds that are working against a more robust economic rebound. The global deleveraging of individual and sovereign balance sheets is helping to keep steel capacity utilization rates in the low- to mid-70 percentage range two full years after the onset of the economic crisis," says Mark Breckheimer, executive vice president, Namasco Corp., the U.S. subsidiary of Klöckner & Co., the largest producer-independent distributor of steel and metal products in the European and North American markets combined.

David Cox, president and COO of The Bradbury Co. Inc., Moundridge, Kan., a producer of metal-processing equipment, adds, "the economy is a concern. We are very focused on the global market. However, the U.S. market represents a significant portion of our business. The slow recovery is continuing to affect our domestic sales. This gives us pause for concern when we look to invest in our own business or add additional personnel. We are very focused on managing our costs and retaining cash reserves while trying to open new markets with new product lines and global sales offices."

Cox points out a major factor contributing to the current sluggishness in the economy is uncertainty. "The consumer doesn’t know where we are going as a country. There is world unrest with wars and fears of terrorism. The stock market is moving like a yo-yo. The U.S. economy stalled our recovery as businesses waited for the election to end to see if we were going to change directions, which we thankfully did.

"The leadership in Washington hasn’t come forward with a plan to cut government spending," he continues. "This lack of direction results in decisions being delayed, which reduces demand across the board. Without demand, businesses will not invest in their infrastructure, and they will not hire, no matter how much low-interest-rate financing is available. High unemployment and bad news reduces consumer confidence and they won’t spend, which further reduces demand. The government can’t create demand. What the administration can do is extend the tax cuts for all, cut spending across the board, put in place tax incentives for investment, sell the interests they acquired in private enterprise as our citizens do not want the government owning private enterprises and repeal the health care bill."

Lanphier agrees uncertainty will be a common theme in 2011. "We are not sure if our customers can survive long-term. We have no idea what might come out of Washington in the form of additional burdens on the smaller employer. Also, we do not see anyone actually moving forward. Almost everyone has battened down the hatches and seems to be riding out this storm. While the first to act may reap the greatest rewards, these early birds would be taking much greater risks. Right now is not the time to be taking additional risk if it can be avoided.

"We are still far from the times of the Great Depression," he also says. "However, I see very few signs in our market area that the recovery is looming. We are seeing some consolidation, some isolated restructuring and the occasional governmental job, but nothing I am seeing points to sustained recovery--at this point." MM

Working with lower inventories causes companies to rethink strategy

Despite doubts about the recovery’s sustainability, survey respondents believe demand is looking up.

"Orders for steel products based on actual demand and measured as a whole are poised for a modest increase, somewhere in the 3 percent to 5 percent range overall," says Mark Breckheimer, executive vice president, Namasco Corp., the U.S. subsidiary of Klöckner & Co., the largest producer-independent distributor of steel and metal products in the European and North American markets combined. "This accounts for virtually no increase to a modest decrease in building-construction-related materials, such as structural, and trend growth rates in flat roll and above-trend growth rates in plate products. These improvements are being driven by some price hedging as input costs push up the replacement price of steel products at the producer level."

Breckheimer points out that these improvements are coupled with true demand increases within specific sectors. "We are seeing an increase in infrastructure, energy and heavy equipment-related spending that is resulting in large part from the expectation that there will not be a double-dip recession coupled with a relatively weak dollar; however, these improvements are uneven regionally."

Service center, fabricator and OEM respondents to Modern Metals’ Ninth Annual Consuming Industries Survey all forecast the majority of growth to occur in the Southeast and Midwest regions in the United States.

Respondents are learning to do more with less while the economy is still in flux. Sixty-one percent of OEM respondents anticipate levels of customer orders to increase in the next six months, but only 35 percent of them are forecasting an increase in their inventory. Forty-nine percent expect to maintain inventory levels for the foreseeable future.

And, although a majority of service centers also expect orders to increase, only 35 percent of respondents plan to increase their inventory. Forty-six percent plan to maintain current levels. Fifty-seven percent of fabricators expect orders to increase, but only 21 percent of them expected to increase their inventories, with 60 percent maintaining levels.

The sweet spot
As demand increases, adjusting inventory levels to accommodate customers is a difficult task.

The current state of inventories represent historic lows, says Rob Loveman, vice president of Loveman Steel, Bedford Heights, Ohio. "Going through a recession, you get down to a low, low level."

In addition, he points out sales order booking levels are inconsistent. "We produce steel parts and fabrications. One week, we’ll have a really low week, and then we’ll have a week that’s three to four times that. Our people have done a really good job of getting the same amount of tons out per year in 2008, 2009 and 2010. That’s a tribute to everyone here."

As a plate fabrication job shop and a steel service center, "our order books are different every week and every month," Loveman says. "The mix has really changed a lot, I would say, not even year-to-year but six months to six months." He says six months ago customers were requesting 3-inch to 7-inch material, and "now there seems to be a demand for 1 inch and under."

"Our tonnages really have not changed very much," adds Charlie Lanphier, controller and CFO, General Steel Inc., Macon, Ga., an independently owned service center that offers a full range of hot- and cold-rolled steel, stainless steel and aluminum products. "Our turns have been affected. However, the lower price on the inventory we have makes the balance sheet appear to have slashed inventory. We are actually seeing more evidence of this from our suppliers. We seldom have to plan on rollings. Most items we can find somewhere relatively easily."

Ultimately, companies are keeping a close eye on the market. "We’re watching our assets and evaluating the best opportunities for us on inventories. We like larger, well-targeted inventories," Loveman says. "We look at it as turn and earn as opposed to just turns."

Quality and on-time performance
Lower inventories sometimes can lead to service bottlenecks, especially on rush orders; however, survey respondents consistently gave their suppliers good marks for performance. Eighty percent of service center respondents source their material through producing mills. Fifty-eight percent of service centers rate their suppliers a five or above on a scale of one to 10, with one representing poor performance and 10 representing excellent performance.

Service center respondents’ comments on supplier performance reflect a "wide variety of very poor to very good performance." Many commented on extended lead times, saying too many products are on backorder or hard to get, and others said there are too many price spikes and unmet delivery promises.

"Prices are all over the map," commented one service center. "We have no idea if we are getting the best price, but lead times are generally good." Another pointed out, "Lead times have moved up and down with demand. I have not been impressed with suppliers making any special effort to satisfy me as a customer."

Forty percent of fabricators source metal primarily through producing mills, and 56 percent source through service centers. Although they commented on inventory reduction resulting in long lead times, 96 percent of fabricator respondents gave their suppliers a five or better, with 32 percent saying that service stayed the same and 42 percent ranking them an eight or better.

"The various steel service centers we utilize have been able to supply us with our inventory needs at competitive prices," said a fabricator respondent. "Delivery has been good. Service has not suffered with lowered employment."

Many OEM respondents mentioned quality of orders--for better or worse. One noted "quality and delivery is good," and another pointed out service "has improved in the last couple of years." But others said, "the mills are rarely on time per schedule," and "some have long delivery times due to low inventories."

However, a majority of OEMs ranked their supplier performance as remaining the same or above. Thirty-five percent ranked their suppliers an eight on the scale.

"Most suppliers attempt to fill orders in the shortest time possible or will work to accommodate if issues crop up," commented one OEM. Another pointed out that his suppliers provide "superior customer service with 95 percent on-time delivery performance and less than 3 percent quality issues.""We’ve stood at what we feel is an appropriate inventory, and we do not chase the market," Loveman says. "If you get too greedy, it will kill you."

"The condition of the economy has definitely forced companies to reconsider their customer service strategies," Breckheimer says. "It is absolutely essential for the successful metal service center operating in this environment where there is some 25 percent less business out there than three years ago to retain existing customers and attract new ones with greater effectiveness than in the past. MM



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