Leading steel executives ponder pricing, profitability and purpose in the wake of industry restructuring.

By Corinna C. Petry,
Managing Editor

Sidebars and Tables:

• Is Bigger Always Better?
• Buyers' Worries Undimished

Mill consolidation has created companies that are more disciplined about matching their production to actual demand, reported industry experts at the Steel Success Strategies conference June 21 in New York—companies that so far are resisting the urge to discount prices in order to maintain market share. Of lingering concern, however, is the sustainability of recent gains in revenues, profits and prudent behavior.

Setting the stage with a brief recap of steel history, Donald F. Barnett, president of Economic Associates Inc., concluded that producers have increased their pricing power and are less reluctant to cut volume in a slowing market. “They are actually willing to lose volume in order to maintain profitability,” he said, which represents a great change from the not-so-distant past when mills pushed steel into the market at any price just to keep their furnaces humming.

Today, at least in North America, Barnett sees some reluctance by mills to add capacity for fear of recreating conditions of the past when repeated oversupplies led to rock-bottom prices.

Keith E. Busse, president and CEO of Steel Dynamics Inc., expressed optimism based on the industry’s performance last year. “Industry balance sheets are in better shape than they have been in decades, perhaps arresting the desperate acts of dying men.”

David Sutherland, president and CEO of Ipsco Inc., was less confident about industry behavior. While there have been important changes up and down the steel market value chain in the past 18 months, he said, the possibility of a return to past destructive behavior always exists.

“A stake in the steel industry wasn’t worth much for many years and for many people. The industry operated in a state of almost permanent turmoil,” said Sutherland. The changes came about “not because we woke from insanity and took a smart pill. They came about because of [larger, incipient] forces operating in the steel industry chain.”

Dofasco Inc.’s president and CEO, Donald A. Pether, argued that consolidation has not calmed the turbulent waters of the past. “Without question, consolidation has benefited the North American steel industry by taking out capacity and bringing greater discipline to the domestic market.

“Yet I believe we have experienced more rather than less volatility. This is an issue of supply and demand, and the volatility has been coming from the supply side. Global economic power is shifting, whether by market forces or nonmarket intervention. Today we are riding the tail of the Asian tiger, and the tail swings hard and fast,” Pether said. Slowing economic growth in China could have magnified implications for North American steel supply and pricing, he warned.

“Also, well over 100 million tons of new capacity has been announced around the world, and a lot of it is aimed at export markets. This is a behavior that must be changed if this industry is to be sustained. New capacity quickly counteracts the benefits of consolidation.”

Alejandro M. Elizondo, president and CEO of Hylsamex, agreed that steelmakers will be able to sustain the strong performance of the recent past “only if we can resist the urge to invest and expand beyond what the market dictates.”

For Ipsco, one positive result of last year’s high prices and short supply has been a change in customer behavior to accommodate mill production “by specifying grades, gauges, widths, forms and service terms that allow them to receive their required volume,” Sutherland said. “In so doing, end-use customers sought out relationships with mills with both energy and purpose.”

For the first time in many years, “steel could not be relied on to get cheaper and more plentiful. It needed greater management attention both in its purchase and in its use,” he added.

“We are delighted to be engaged in conversations about how to specify and how to use the material better and more productively with lower total costs, and not just [talk about] the price per pound.”

Dofasco’s Pether emphasized that the steel industry needs to focus on how to sustain its recent success, in part by commercializing innovations more quickly and becoming more customer focused.

“We must understand our customers’ value chains, find opportunity to generate added value, pursue competitive differentiation. We ought to know what’s keeping our customers up at night and be thinking how we can be part of their
solution.”

Buyers’ Worries Undiminished
During June’s Steel Success Strategies conference, co-sponsored by American Metal Market and World Steel Dynamics, steel buyers were asked to assess the market. Some see cause to rejoice, others to lament.

Laurenço Goncalves, president and CEO of Metals USA Inc., said that buyers often rejoice or lament for the wrong reasons. As an example, he cited the North American auto industry, which has a history of constantly pressuring suppliers to cut prices. This pressure contributed to the eventual failure and consolidation of many steel mills, leading to today’s higher steel prices.

Prices have fallen in 2005, yet many buyers are still purchasing as little as possible in the hope that prices will continue to decline. When something unexpected happens, buyers will find their inventories are artificially depleted. “At that point,” Goncalves said, “they will be complaining about having to pay much higher prices to get what they desperately need. They should have bought earlier.”

Joseph W. Harden, president of Worthington Steel Co., says the perspective of producers speaking at the conference contrasts dramatically with that of many steel users. Downstream, a buyer laments or rejoices depending on his position and circumstances in the supply chain.

“The competitive environment in which each of these buyers operates determines how devastating or advantageous last year was,” Harden said. In a sense, it’s not the price of a commodity like steel that matters, but rather whether a company is disadvantaged by what it pays vs. its competition.

Mills may have missed the signals a year and a half ago when demand rose sharply, he said, and again failed to manage supply appropriately when demand softened in fall 2004. But perhaps it was because buyers sent the wrong signals, he added, acquiring excess inventory in the face of moderating demand.

Any lack of restraint over a few thousand excess tons affects the psychology of buyers, Harden added. “Overcorrection becomes a self-fulfilling prophecy. As we cut back on our purchases because we think prices will fall, prices will fall. How many excess tons does it take to make the market deflate like a balloon?”
To rejoice in the second half of 2005, Harden believes each producer must do its part to stabilize prices, while remaining competitive with sources around the world.

Emerson, based in St. Louis, spends more than $1 billion a year on steel, counting components containing steel. Patrick A. McCormick, vice president of Emerson’s Global Steel purchasing unit, offered three laments about the steel market of the past year:

No. 1—The current state of buyer-seller relationships. “The heavy use of take-it-or-leave-it selling tactics has decimated the level of trust between buyers and sellers,” he said. Some sellers believed buyers “had it coming” to them, while a few distinguished themselves by maintaining a long-term balance in their pricing perspective.

“Once again, the steel industry has fallen into the cyclical pricing track,” McCormick said, “with a lot of wasted energy and damaged relationships in the wake, and what looks like a zero-sum gain of raising and lowering prices.”

No. 2—The steel industry apparently lacks any cost control over raw materials. “The current adoption of surcharges to transfer unforeseen costs down the supply chain does not instill confidence that these costs are being properly managed. While it is understood that the magnitude of some of these raw material cost changes were unprecedented, the practice of using surcharges to grow profits destroys trust,” McCormick said.

No. 3—Service centers were unable to honor their pricing commitments to buyers last year. “While some distributors took the honorable road, many simply abdicated their buying responsibility,” McCormick said. “Why should the OEM buyer have to pay for prior service center renegotiations with the mills unless the OEM benefited from those prior negotiations?”

Record profits by service centers last year “did not support the need to break contracts. While I accept that most contracts would have been under water, the increase in inventory valuations and spot selling opportunities could have funded some of the pain,” he added.

Dave Styka, senior sourcing manager for International Truck & Engine Corp., said manufacturers suffered last year from escalating steel prices. However, he praised ThyssenKrupp N.A., Ryerson Tull Inc. and Steel Warehouse Inc. for each honoring their contract prices while providing the company with enough material to meet its order levels.

International Truck & Engine is now making changes both to minimize negative effects of yo-yo prices and to take advantage of opportunities in a changing environment.

First, Styka said, volume is power. “We are expanding our steel volume next year to 150,000 tons,” a 50 percent increase over 2005.

Second, International is implementing a master coil program with its distributors. “Through this process, we’ll buy coils directly from the mills and ship them to service centers and processors for essential value-added services.”

Third, the company is standardizing its specifications on steel grades to optimize volume and, thus, pricing. “We are trying to standardize gauges and various sizes,” Styka said. The truck maker has seen particular benefits in standardizing high-strength low-alloy, going from six grades to two. “We pay a little bit more for the selected grades, but found it saved us a lot of money in total.”

The company is in also talks with other large OEMs (outside the truck business) in an attempt to form a steel-purchasing consortium, and has moved some of its buys to low-cost, high-quality mills in developing countries.

One day, predicts Metals USA’s Goncalves, the supply chain concept will be better understood and buyers and sellers will work together much more fruitfully. “At that point, we will all be happy for the right reasons.”