Six prominent members of the Chicago-based Association of Steel Distributors participated in a roundtable Jan. 20, moderated by Metal Center News, to discuss their expectations for the economy and the state of steel in 2005.

Panelists:

• Steven Bergman, president, ASD; owner and president, Premier Steel, Englewood, N.J.
  
• James Barnett, president, Grand Steel Products, Detroit.
  
• William Vitucci, vice president and chief financial officer, Vitco Steel Supply Corp., Posen, Ill.
  
• Maurice F. Loeffel Jr., president, Loeffel Steel Products Inc., Barrington, Ill.
  
• Thomas J. Ferkany, general manager sales, flat-rolled steel products, Titan Steel Corp., Baltimore.
  
• Robert Pelles, president, Premium Metals, Cleveland.

MCN: What is your outlook for your business in 2005, based on current activity?

Barnett: The majority of our business is non-automotive. Our activity level at the moment is steady. Inquiries for new business dropped off by about a third since the second half of last year, but somehow at the end of the month our sales volume has been pretty steady.

Bergman: Premier Steel enjoyed a very nice year in 2004. Ever since the holidays, there has been a lull in order entries. We don’t see the activity that we saw the first 11 months of last year. People seem to have high levels of inventory, and the panic felt last year doesn’t seem to be evident in the market. Things have slowed down, but not dramatically.

Vitucci: We are a carbon flat-roll house. Our order and activity level is down seasonally, but our inquiry levels are up dramatically.

Loeffel: We came off a record December. Our inventory levels are also up. We are non-automotive and more in metal fabrication for construction. Customers are only ordering two to three weeks out, so we are seeing a softening.

Ferkany: Certainly, inventories are higher than they were over the past six months. Activity for January is starting to pick up. From Thanksgiving through Christmas, there was a drop-off compared to the previous four to five months. Our business is situated between automotive, construction and HVAC. Big Three automotive is slower than it was in the last year. The transplant business is still fairly robust. Construction and HVAC are still going along at a steady pace.

Pelles: We are a carbon flat-roll service center. Our business seasonally corrected in November and December through the first week of January. Beginning the second week of January, order entry has been tremendous, and our shipping level is starting to gain significant momentum. Our mix is automotive, automotive aftermarket and people who are supplying OEMs. In the last two weeks, business has picked up rapidly.

MCN: To what do you attribute your current market conditions?

Bergman: We probably have a little more inventory than we would like because last year presented us with a very uncertain supply, and we loaded up when we could. That was at the end of summer. Things started to ease off in the fourth quarter, and we had a lot of offshore steel coming in, which softened the market somewhat. It’s just an inventory quagmire that has to ease its way through the supply chain before things tighten up again.

Loeffel: The softening is occurring because inventory levels are high. Typically, at this time of year, the mills have more material available. With distributors having high inventories, we are not buying as much. We try to micromanage our inventories, and we try to buy for short-term periods as opposed to laying in for any length of time. With the uncertainty in the industry—with all the consolidations and control changing hands—we are all wondering how things will change. Our customers are only looking to buy two to three weeks out. They don’t want to book their shipments until they need it.

MCN: Is the excess inventory a result of orders placed late last year and just arriving now?

Ferkany: Part of that is import material that came in August through December. Warehouses up and down the East Coast are full of coils. When you run into the holidays, business slows down and your order book tends to drop off a little. Those are the two main reasons [for the excess]. Construction customers are confident about their forecasts for the first half of the year. The only sign of weakness we’ve seen is with the Big Three automakers. Other than that, every customer we talk to is upbeat about the first half.

MCN: So demand is not necessarily weakening; it’s an oversupply issue.

Vitucci: I would go a step further and say our end-use customer base—in fear of a first-quarter price increase announced in late October and early November—did a lot of hedge buying in a heavy inventory market. A lot of our competition undercut their pricing to move inventory for fear of where the market was going. Those orders are being completed now. So there has been a little softening on the buying side from your contract “fill-in” customers, but their inquiries are still coming through. They’re trying to figure out where the market is going, but they aren’t willing to make a commitment. In the Midwest, we aren’t seeing any import products. The prices were too high in August; nobody in the Midwest bought it. If it’s here, it’s in dealers’ hands. They’ve got money tied up in it and they are undercutting the market [with lower quoted prices].

Bergman: Imports came in between August and November, predominantly on the East Coast, and a lot of it arrived just before the close of navigation [on the Great Lakes] in Detroit. That’s the overhang tonnage. Going forward, because of the weakness of the dollar, there will be very little [import trading] activity going on during the first quarter or early second quarter. There are very few offerings right now. Once this glut of inventory dries up, the domestic mills will be able to raise the prices that they tried and failed to raise in January.

Pelles: As the year went on, with monthly price hikes, the domestic mills left themselves susceptible to imports. I don’t think the mills are feeling pressure to fill their order books. With the rescinding of the first-quarter price increase, and a little bit of moderation in the prices that we saw in the last few months, I suspect there is an attempt to block out imports. With the falling dollar and the mills adjusting prices a bit, there is less reason for steel to be traded in the United States. Perhaps other markets are more attractive. As this glut of inventory works out, the mills might be a little more responsible to domestic buyers and will try to attract them.

Between Mittal Steel, U.S. Steel and Nucor having over an 80 percent market share [in flat roll products], and with Mittal Steel being the largest global player, I think there’s going to be more sensitivity to a world price on a world market, and shipping logistics. It would not make sense for Mittal to try selling foreign-produced steel more cheaply in Cleveland than they can make [on steel produced] in the Ohio River Valley or along the shores of Lake Erie. So I think Mittal’s U.S. customers will be served by domestic mills. We could see more balance in domestic pricing and more rationalization of mill tonnage and capacity.

MCN: If less foreign product reaches the domestic market, will North American mills have the capacity to meet the demand?

Bergman: There will always be a shortfall between capacity and demand, in the neighborhood of 20 million to 30 million tons. That is usually met by semifinished steel coming from offshore producers. Right now, another reason we’ll see fewer imports this year than last year—and we didn’t see much until the second half—is that other markets are hot: the Indian-Asian market, the Russian market and the European market, which all need their internally produced steel. This year, I see China as being more neutral rather than a major importer or a major exporter. So there won’t be a lot of steel available for the world market anyway. Coupled with our unattractively low dollar, plus the fact that we need a certain amount of foreign steel to balance the equation, it is just a matter of time before prices stabilize and, in fact, go up.

Ferkany: Lead times are very short. You can still get products in February. Mills are going to start pushing it out into March, but they need orders. So there’s really no need for an increase, and probably nobody will accept an increase. Beyond March, it depends on the discipline practiced by the producers. One thing that led to higher inventories is that, during the second half of last year, converters like The Techs and Winner Steel got their substrate position into much better shape than it was at the start of the year. You’ve also got Weirton coming back up under ISG in the hot-roll and galvanized markets. Those factors have added more capacity, and more opportunity for people to buy steel.

MCN: So might the producers be more responsible about price increases going forward?

Vitucci: It will be interesting to see what the mills do in February and March. I think scrap prices will continue to fall through February. Forecasts from the scrap dealers show a sizeable decrease. Maybe that’s a marketing ploy; maybe it’s real. If [steel] surcharges have to be dropped because they’re based on a scrap cost formula, mills will raise their base prices. So we’ll see a neutral price change. You still have a coke shortage. One of U.S. Steel’s suppliers declared a force majeure. That could be a factor by late March or early April. Possibly, prices will be neutral through March, but after that we could see prices increase again, maybe more than we can guess right now.

Bergman: Further into the year, as Mittal Steel consolidates its exact positions, you have three players—Mittal, Nucor and U.S. Steel—that dominate the United States to the tune of 83 percent. That’s a lot of domination. That eventually has to have an effect on pricing, but it won’t be felt at least until the second quarter.

Vitucci: The mills’ goal is to lower the surcharge and adjust the base price to be more realistic. The surcharge is supposed to be a temporary mechanism to get them through a difficult market for raw materials. If raw materials stabilize, they still have a bottom line [profit] they have to make. They are now profit-driven companies as opposed to volume-driven companies. They know what their costs and profit percentage are supposed to be. If ISG’s philosophy carries through under Mittal, and they’re willing to cut production to maintain pricing, they will be able to control a smooth and even marketplace. If they don’t follow that goal, we will be back to where the market was two or three years ago with valleys and peaks.

Pelles: Regarding surcharges, U.S. Steel’s surcharge remained at $30 a ton throughout the volatility of 2004. At the end of December, ISG went to all-in pricing, so how will scrap prices be relevant to their equation? We’ve been reading that the integrated mills are faced with higher contracts for metallics, especially iron ore. The commercial departments should try to be responsible to the market to keep and build their share. I think surcharges will go away this year.

Vitucci: My point is not about surcharges going away or not. My point is that the mills have come to an equalized number that they’re comfortable with—whether it’s $600 or $800 a ton. How that number changes month to month won’t be driven by surcharges, but by base price. The change won’t be more than $10 or $20 month to month. If the mills can control the market through supply, which was the goal of ISG, they won’t have to worry about fluctuating their base price as drastically as they did in the past. During 2004, ISG never had to act on its promise to cut production to meet demand, because demand was so strong. But if demand does fall, they can cut production and keep prices where they are.

Barnett: I hope none of you are losing sight of the reason for the scrap surcharges. The reasons are the same today. If China comes back into the marketplace for metallics, for scrap, for finished goods, we’ll see surcharges in a heartbeat. The chance for that to happen is every bit as real today as it was last year or 18 months ago. This country runs on scrap. We’re the biggest recycler in the world. If scrap leaves our shores, it’s going to drive up steel costs, and it will be done through surcharges rather than increasing base prices. They won’t be able to do it [raise prices] fast enough.

MCN: Isn’t China trying to cool its economy?

Barnett: We hear that, but we also hear they’re building steel mills as fast as we build Wal-marts. So I’m not sure how cool it is over there. If they perceive a need for metallics, they’re going to pay for them.

Pelles: China has gone from 10 percent growth to 8 percent growth, a slowdown of 20 percent. But when you’re going 150 miles an hour, then slow down to 120 miles an hour, you’re still going damn fast.

Barnett: I have read there are new inquiries for scrap that haven’t been seen in three or four months coming out of the Far East. This is what happened 18 months ago, before scrap started escalating rapidly. We should all keep our eyes on that.

Bergman: We all know that China doesn’t have enough domestic scrap. What we hear is they might become a net steel exporter this year. Several brokerage houses have reported that, so the price of steel may drop. But they didn’t look at the other side of the equation. China needs a tremendous amount of scrap in order to feed these newly built mills. They have a tremendous desire to make higher-end steels, but they cannot do it yet, so they still need to import higher grades, particularly automotive grades. Some of those articles are misleading. I consider China to be neutral this year, but they will still have an insatiable appetite for scrap.

MCN: How might mill consolidation affect the market, good or bad?

Bergman: Mittal’s philosophy is as a world trader. They are into almost every major market in the world, and they will look at the United States as just another market. By the second half, that merger [Mittal and ISG] will have a major effect on the stability of pricing in the U.S. market, because they take a world approach to pricing. That’s a positive for distributors. We hold inventory. The worst thing that can happen to a distributor is having his inventory devalued. I look at consolidation as creating a pricing floor, regulating the ups and downs we’ve had in the past.

MCN: Does this not allow you fewer options on where to buy?

Loeffel: Not only does it mean fewer options, it creates less competition. Bethlehem, Acme, LTV, Weirton—all became part of ISG and are now all part of Mittal. Mittal may generate one controlled price for all those facilities, so you don’t have competition between [the former] Bethlehem, LTV, etc. Yet they are different facilities producing different qualities of flat-roll products, so a lot of that may remain independent. It will take away some of our ability to buy competitively. If the mills are consistent, if they don’t panic and don’t start dumping steel, it can only strengthen the whole industry. It’s a new industry; it’s a new game.

Barnett: We are in uncharted waters. Whether this is good or bad for distributors, the jury will be out for a long time. I agree with Steve that there will be a stabilizing effect with fewer players. The benefits long term: I think you’ll see an increase in the quality of each of the different divisions of the major steel companies. They will invoke benchmarking and best practices from the best mills to the lower performing facilities. So overall, product quality will improve. From a credit standpoint, the mills will be able to sell their products to their good-paying accounts and make their non-paying service centers buy from other entities—trading companies, larger steel distributors.

There will be a mixed bag of results from steel consolidation. I think it will drive consolidation in our industry. You’re seeing it already with Esmark and Ryerson Tull-Integris. I don’t think the large service center chains are done yet [with mergers and acquisitions]. They’ll grow regionally by buying other established distributors.

Ferkany: Uncharted waters is the right term. The larger service centers have lost their buying leverage against multiple sources. The spread in such buys is not as wide as it used to be, though there still is a separation between small buys and large buys. One of the bigger positives from mill consolidation is the mills’ ability to retain better paying customers. The integrated mills are now saying, if you don’t pay within 30 days, you won’t be buying our steel. That’s going across the whole marketplace. If I have a customer who won’t pay me in 30 days, I may decide I don’t need his business, or the hassle. Anyone going out to 60 days is leaving himself wide open, exposed to going bankrupt. It’s so easy these days. You ought to know your customers’ financial books as well as you know your own.

Barnett: Those accounts that are 60 days and longer will end up being serviced by smaller service centers that can’t buy mill direct. They will have to find another source of distribution to get their products because the big service centers won’t want to sell to non-paying accounts.

Vitucci: In the immediate term, we are finding that the big service centers are making the wrong decision. They are extending terms now, which they did not do three months ago. You can find very creative terms for steel sales right now. We are losing orders because of agreed terms. We only take 30-day accounts—45 days absolute max. We are not large enough to be the bank for these customers. Yet some large service centers took position on material and have the bulk of the inventory excess, so they’re giving away price and they’re giving away terms. We have seen this a lot in the Midwest in the last four to six weeks.

Bergman: The onslaught of the 30-day paid customers was during the shortage when nobody could get steel. The only people who could get steel were those who paid very quickly. That’s happening today even though steel demand has softened a bit. People are paying a lot better [on time] than they did for many, many years.

Ferkany: Across market lines, we’ve always found that non-automotive always paid better [meeting terms] than some of the automotive customers. About four or five years ago, the auto industry did itself a disservice with their cost cutting. They sent SWAT teams in to the stampers, telling them how to save money—extend payments to your supply base [steel distributors] out 60 to 90 days. That’s come full circle now because so many automotive stampers are on rocky ground financially. It’s very treacherous.

MCN: Any more thoughts on the positives and negatives of mill consolidation?

Pelles: We had a net gain in Cleveland. When our largest mill supplier, Weirton, was taken over by ISG, we were able to access product from different facilities. Also, they’ve changed their mix. As they shift production [among facilities], there are opportunities. The frustrating thing is finding out what those opportunities are. But consolidation has brought us new opportunities to acquire material.

MCN: Will the Big Three steelmakers ever go back to selling only through preferred distributors, as is common today in other markets?
Barnett: I think the mills are so surprised by their run of good luck that they probably haven’t crossed that bridge yet. I’m a firm believer in what comes around goes around. Steel mills had their own distribution divisions. That may come back, rather than creating a preferred distributor group. An outright purchase of a distributor by a steel mill is more likely.

Ferkany: If you continue to see an erosion of the manufacturing base, they may be forced to purchase service centers or to go after more direct OEM business.

Vitucci: U.S. Steel tried it with Straightline. As long as mills stick with selling only to those who pay their bills, I don’t believe it will be necessary [to get into distribution]. Where that comes into play is if a service-center customer gets into them heavily enough, reneges on terms, and they find themselves bankrolling a distribution business. A mill could take over a distributor that way. But as a profit center, I don’t see steel producers actively going after the distribution chain. I think they’ll try to sell the largest OEMS more. So they’ll take away business in automotive, appliance or even ag equipment.

MCN: A lot of processors tell us they have not been able to raise fees for toll work.

Barnett: But that business is always there. Ryerson, for example, has tremendous contracts with appliance manufacturers in the Midwest. Certain service centers in Detroit have major contracts under which they buy steel through the carmaker, process it and deliver it to stampers on a resale contract. But they are locked in to a very small profit on those orders. There are steel warehouses in this city buying hot-rolled steel for 16.5 cents a pound on a life-of-the-part contract, but they’re selling the product pickled, slit and delivered for 19.25 cents. They’re making virtually nothing. Meanwhile, everyone at this table is paying 30 cents a pound for hot-rolled. It’s crazy. Those are preferred deals that have always been around and they will continue.

Vitucci: Relationships will still be a big part of this business. That’s not going to change unless the mills’ structure changes and you have a redundancy in sales forces. Now, who goes? The LTV salesman, the Bethlehem salesman or the Inland salesman? Unless you had a relationship with all of them, you may end up being cut out of the deal. Today, you’re still talking to more than one person in a steelmaking organization because they have different facilities, making multiple products. There are preferred suppliers now, based on these relationships. I don’t see that changing to a formal program.

MCN: Will we see a rise in capital spending now that you all made so much money last year? What are you investing in the future and what competitive effects might these investments have down the road?

Pelles: If consolidation brings stability to pricing and less price differentiation between large and smaller service centers, where will flat-roll processors make our money? Well, we’re going to make it with high productivity. There has to be a constant attempt to increase efficiencies in your shop, in your equipment and in how you handle and move material. Premium Metals intends to look at increasing our value-added business. We are looking at two pieces of refurbished equipment now.

Barnett: I think there will be an uptick in equipment purchases by service centers driven by profitability and tax laws. There has been a dearth of investment in the last five to 10 years in major projects. In addition, there is a new generation of technology being brought on stream by some of the slitting and leveling machine companies. These machines are producing better product than they did 10 years ago. We’d all be shortsighted if we didn’t look at what is available now to improve the quality and productivity of the products we sell. Our customers will ultimately demand it.

Ferkany: We want efficiency gains. Last year, we looked at refurbishing older equipment, and we looked at new slitter lines from many manufacturers. The bottom line was the new equipment, the computerization, the efficiencies they give you, far outweigh buying an older piece of equipment and trying to upgrade it.

Loeffel: It depends on how much money you have to spend. To upgrade a piece of equipment and try to enhance its capabilities is a lot cheaper than buying new. Sure, prices [on new equipment] have gone down in the last three to four years, because the market for new equipment wasn’t there. We are looking at possibly adding a leveler to one of our slitters. [With the leveler], we can buy slightly off-grade material or correct shape problems on some prime material and eliminate problems for the mill. It will improve our relationship with the mill because we’ll have fewer rejects for quality. Our ability to enhance their material means they’ll look at us more favorably and sell more steel to us.

Back to your question about [toll] processing fees, I have not seen the price of slitting go up in 25 years. There are still companies slitting steel for 90 cents a hundredweight. Why are they still doing it? How can they exist? Through automation. Through technology. Ten years ago, I had 120 employees at my plant. Today I’m running the same plant on two shifts with about 35 people. We became more efficient. We got rid of the fat. The key is not becoming stagnant. If that means buying equipment, or expanding, so be it.

Vitucci: I look at mergers in our industry as being a capital expense. I can’t grow with a new slitter right now because my business is just not worth that kind of investment. Would I love gaining efficiencies? Sure. But I have World War II-era slitters that are putting out a damn good product, and they cost me nothing. I have gotten several mailings since January [advertising] facilities, buildings, equipment, inventory, everything. I might look at an asset sale. I have 40,000 square feet with five slitters and a cut-to-length line. I can’t squeeze another machine in. If the right facility became available, I would be interested. I am actively looking.

Loeffel: What’s affecting our business these days is freight. It is very difficult to get trucks on a needed basis. Rates and fuel surcharges are going higher. We tried to pass those surcharges along. Increases rose an average of 12 percent, yet we were charging our customers 6 percent [more for freight]. If I’m constantly increasing my price—it might be $18 to $30 per truckload or 4 to 6 cents per pound—that hurts customers who are working on very tight margins.

Pelles: Because it is so difficult to get trucks, more of us are considering a capital expense to bring in trucking equipment of our own to service customers.

Vitucci: Don’t do it.

Pelles: But you have to service customers. You can’t have loads sitting on the docks for days.

Loeffel: We have one tractor and three trailers. We do need that one truck. We had six at one time—we leased half and owned half—but we had major workmen’s comp claims with drivers. Every time a driver didn’t show up, the truck sat idle. We never treated it as a profit center, but as an opportunity to give our customers better service. Although it never really cost us money, it was hellacious to manage.

Bergman: The U.S. transportation industry, including the rail system, is in turmoil. There is a tremendous shortage of railcars in the United States. There is a declining number of trucking companies in the industry, some of which were squeezed by [Federal Motor Carrier Safety Administration] regulations that went into effect at the beginning of last year. There is a major problem in the movement of steel in the United States from the mill level to distributors and from distributors to customers. And it’s getting worse instead of better. Nobody seems to be addressing this problem. If you can’t get your product to the customer, I don’t care how cost-effective you are, you are no damn good.

MCN: Are manufacturing customers still fleeing offshore?

Barnett: At a gallop. The chairman of Delphi [J.T. Battenberg III] gave a speech recently and alluded to the fact that if government and industry do not collectively take a serious look at what’s driving manufacturing industries offshore, we could lose half again as much manufacturing as we already have. Right now, Delphi is hiring primarily Asian engineers and draftsmen to do automotive part design work that heretofore had been done in the United States. The cost per employee overseas is less than 50 percent of what it is here, to design the same part for manufacture anywhere. At this point, it’s design and engineering. It’s not a very long reach to manufacturing. If you can design and engineer it somewhere else, you can build it somewhere else at significant savings. We’re dealing with worldwide corporations—worldwide steel producers and worldwide manufacturers. General Motors, GE and all the major companies are building factories in China. Our [U.S.] manufacturing base continues to erode.

Vitucci: On the flipside, many parts that went over to China in the last 18 to 24 months are starting to come back because of poor quality, bad shipping scheduling, and pricing that wasn’t equal to the time and investment involved. By the time you got the product back here and corrected the problems, [domestic] pricing wasn’t that far off. Especially with freight costs escalating over the past 12 months, you’re seeing parts coming back here. Not enough, of course, but a lot of distributors are getting some of their former manufacturing business back.

Bergman: The reason the outsourcing has escalated is due both to labor and exchange rates. Although the cost of making steel is the same in the United States and Russia, transportation and currency play a major role. As China and other Third World countries develop their economies, their standards of living will rise. Eventually, that outsourcing will come back to us. Look at it as a cycle. We’re probably at a midpoint in the cycle. The boomerang will come back.

Pelles: Without government action now to rein in that gallop, if it takes 20 to 30 years to get manufacturing to come back, will there be people here with the needed skills? We will have lost a generation of tool and die people, a lost generation of expertise to handle this. We have to look beyond China. There are other places in the world cranking up their economic development, who will be cheap competitors.

Ferkany: I hope it doesn’t take more than three years for the [U.S.] government to impose tariffs or put incentives back into [domestic] manufacturing to keep some of it in place. Three years ago, you saw the steel industry lobbying for Section 201, and it resulted in consolidation. All the manufacturing associations are lobbying in Washington now. That drumbeat is getting louder and louder. It doesn’t take long for politicians to see the erosion of jobs and know their next election may be based on that.

Barnett: For every manufacturing assembly plant that’s being built in the United States by American manufacturers, 10 are being built overseas, not just in China. They’re building plants in Europe, in South America, in Southeast Asia. If you were to look simply at what that is costing in terms of jobs that could have been created here, making those same products, and exporting those vehicles, it’s just staggering.

Vitucci: We do not have free trade; we are not able to export our finished goods on an equal balance with enough countries in the world. That’s what we need to go after. We don’t need protectionism here against imported material. We have to open up the world so we can get our products there. Then we will have a manufacturing base here.

MCN: Will you provide a forecast for your business this year?

Barnett: I see 2005 as being another strong year. It may not parallel 2004 for profits, but on overall net sales we’ll probably be up. Our industry will parallel the economy. As long as growth signs are there for the economy, it bodes well for our industry.

Bergman: I think 2005 will be a good year, though not comparable to 2004, a year that comes around only rarely. The dynamics of last year are still in place. There will still be problems with raw materials, so supply will remain tight. Once the inventory glut dissipates, we’ll be back into a pretty normal market. We will be able to move more tons because availability will be better this year, but the margins will be lower.

Ferkany: During the first half, we hope to see the producers practice discipline. This is their opportunity to show they can do so. They have the consolidation they wanted, so we shouldn’t have to ride those bumps and valleys.

Pelles: Certainly last year was a bonanza for service centers. We took advantage of the market and made money despite our ineptitude. We all became geniuses. It’s important for the survival of our business and our industry that we become advocates, whether lobbying to retain jobs or enact change in trade policy. We are in business to provide service, and we remain relevant when we roll up our sleeves and do that well. That’s going to be what this year is about: We have to get back to work.