For small to midsize players, the service center business today is about consistently hitting singles and doubles rather than the long ball, agree members of the Association of Steel Distributors. Despite the steel industry’s many changes and challenges, they remain confident they can go the distance using a combination of smarts and hustle. Metal Center News Editor Tim Triplett moderated a panel discussion Feb. 16 with six ASD members in Detroit. They shared observations on current market conditions, supply and demand issues, industry consolidation, mill-service center relations, pricing trends, imports, logistics, the plight of American manufacturing, sales compensation and capital spending. Following is an edited transcript:

Panelists:

• James Barnett, president of Grand Steel Products, Farmington Hills, Mich.
  
• Doug Everhart, vice president of materials for Wyoming Steel Supply Inc., Camden, Ohio
  
• William Feniger, president of Universal Metals LLC, Toledo, Ohio
  
• Andrew Rasulo, materials man-ager for Action Steel, Astoria, N.Y.
  
• Brian Robbins, chief executive officer of Mid-West Materials Inc., Perry, Ohio
  
• William Vitucci, vice president and chief financial officer for Vitco Steel Supply Corp., Dixmoor, Ill.

MCN: Your companies are primarily carbon flat-roll distributors. Please give me your assessment of current market conditions and what you expect for the rest of the year?

Vitucci: We are seeing fewer orders being placed, mostly due to competitive pricing in the market right now. Inquiries are slightly higher. A lot more OEMs are calling us looking for pricing, as opposed to us having to chase them down. The activity level is good to steady for this quarter.

Steel prices have leveled out somewhat. In recent weeks, we are not finding spot market availability. Being a secondary house as well, our supply side is tightening up. We are being forced to use more prime or excess product and less secondary product. Secondary used to be our profitability advantage—to be able to upgrade secondary product and reallocate it to a different use. Being that secondary product is not as readily available, it has made our margins quite a bit tighter.

Barnett: Our order booking level is up 10 to 15 percent. Some of that is because we added sales staff, and some of it is due to increased pricing, which has gradually gone up over the past two quarters. Our sales are steady and trending up. We forecast a continued increase in sales at about the 5 to 10 percent level through the third quarter. At that point, my crystal ball gets real fuzzy.

MCN: So you’re 10 percent above a very good year last year.

Barnett: Yes. It should certainly not go unmentioned that a lot of that is due to the supply side pressure we’re feeling from our mill producers. They are continuing to ask for, and getting, higher prices, forcing distributors to raise their prices and, therefore, realizing a built-in sales increase. Overall volume, on a tonnage basis, is up as well, however, in the 5 to 7 percent range.

MCN: Is that a common experience?

Everhart: I would echo that. We are up probably 10 percent over last year. I also agree with Bill [Vitucci] that material is getting harder to find. There are price pressures...and a higher inquiry level. As prices move up, customers are shopping harder for the steel they’re buying. The first ones to raise prices are the mills. It takes service centers a little longer to recover that increase. So, we are seeing a bit of margin erosion compared to last year, but we will eventually catch up, with the normal historical lag of a couple months.

Feniger: Surprisingly, we are substantially ahead of last year. We are noticing a definite pickup in our order book, though the order book from the past has changed substantially. There is more daily, sporadic buying. [Spot buying has replaced longer-term purchase agreements.] We are not even looking to quote out any long-term [contracts] at this point because it’s just impossible to calculate where your costs are going to be. Only with customers we’ve had for a long time will we try to work with them on the pricing question for a contract.

MCN: So spot sales make up a bigger percentage of your total business?

Feniger: Most definitely. It was trending that way beginning in 2004 and spilled into 2005. Most of us have come to the realization that the short-term business is where we’re at. Purchasing big inventories at big prices for the long-term is too risky. The size of our business, the volume of our business, is directly related to the amount of steel we can buy, which is determined by the availability we have with the mills. There are five to seven major producing mills, compared to 30 five or six years ago. That has changed the whole perspective of our business. In my opinion, it has made us become more professional. Fewer suppliers means more continuity in what you can get, more continuity in what you can sell, more continuity of prices. It allows us to run our business a little bit more professionally in terms of budgeting, planning and projecting.

MCN: At the same time, business must be a lot less predictable with fewer contract sales and more spot business, right?

Barnett: The steel mills have pretty much determined what distributors of our relative sizes can do in the marketplace, as far as contract sales. Our abilities are limited. I think the pendulum has swung the other way. At one point, flat-roll steel distributors were taking in excess of 55 to 60 percent of the production, and the mills saw that as slicing into their pie profit-wise. With the consolidation of the industry, they have reduced the amount of contract tons available to steel distributors.

Everhart: As far as inventory management, those same customers that demanded [but no longer get] long-term contract prices still forecast their demand. We know how much they’re using, so we can extrapolate that into our inventory plans and buy accordingly, if we can find material. We still all look at inventory levels in order to satisfy customer demand. But as the mills give us less of those programs, we cannot give those programs to our customers.

Rasulo: I work on forecasts all week. I’m pretty much relegated to buying from history, overlaying it with sales forecasts, which is not always too accurate. The rest is just going out and chasing down steel. Some of the buying I do is for construction-oriented products. Our order books have picked up dramatically since the end of the year. Ironically, because of the supply-side problems, we find it very competitive. Availability is not consistent.

MCN: What kind of lead times are we talking about? Can you quantify how difficult it is to get steel?

Rasulo: For instance, here we are toward the end of February and we [won’t see steel until April, or about two months]. And we’re not even quite sure what the price will be.

Vitucci: Even if you place an order now for the middle of April, you probably won’t see it until the end of April.

Everhart: We all came through the roller coaster of 2005 with the devaluation of inventories in the early part of the year, followed by momentum building again. The old seven-year cycles have become three-year cycles, even one-year cycles. Everyone in this room has [many] years of experience with the old cycles. It’s very, very difficult to train yourself to break that fear: If I build inventory and commit to it, is there going to be another down cycle that will devalue my inventory by $140 a ton? That fear dampens our willingness to reach way out into the future, either on commitment to raw material or on commitment to price to the customer.

MCN: Yet you are tempted to order more steel than you need because it’s so hard to get, right?

Everhart: Yes, that’s the dilemma we all deal with every day.

Vitucci: More so now than ever.

Feniger: Most of us have experienced so many highs and lows over the years that, when it comes to taking that bigger risk as the price of steel just climbs higher and higher, our conservatism really kicks in. We haven’t been around a steady market long enough to have the guts to carry major inventories. What you make this year, you don’t want to give back in three months next year. A lot of people had that experience [inventory devaluation] at the beginning of 2005. That’s what can happen to you if you book wrong. Even the large service centers are being very conservative.

It’s going to be very interesting over the next four to five years. We’re seeing a whole new steel industry, a whole new cycle. I am totally convinced it will make for a much more attractive atmosphere in which to run our businesses. We can be more professional at what we do, rather than trying to guess the ups and downs. We can do real projections, real budgeting and real marketing in our buying and selling. Right now, however, everybody is just gun-shy.

Robbins: All the empirical data we have collected over 20, 30, 40 years is now very suspect. Everything we once believed has been upended in the last three to five years. For 50 years, this has been a demand-based business. The mills ran as much as they could [supply], while we tried to predict our inventory levels and sales goals based on economic data [demand]. We used to say if the economy was growing X percent, we knew the steel industry was growing. Now you’ve got the supply side making some interesting moves. With consolidation and change of producer ownership...we’ve seen drastic shifts to both the supply and demand curves in the last 18 to 24 months, and it’s causing us confusion. How do we react? I may think demand is going to be great, but will Nucor or Mittal shut down some lines to keep pricing up? A year ago, we had an erosion of pricing that hurt a lot of entrepreneurs who had taken positions. Today, because of such massive price swings, we’ll give up the home runs and be very happy with singles and doubles. There’s a whole new dynamic as to who is controlling what. It’s no longer just about the economy.

MCN: So it’s hard to tell if the urgency of your customers to get steel is a function of real demand or concern over availability?

Group: [Expresses agreement.]

Vitucci: Apart from that, manufacturing in America is going through a process called “lean.” Through lean manufacturing, they push their cost of inventory down on suppliers, such as service centers. As lean as they are getting, they are putting themselves in a predicament with supply. In the past, if one supplier didn’t have the steel a manufacturer needed, he had eight or 10 others to call on. Today, lean manufacturers are down to two or three suppliers. If they don’t forecast right, they are shut down.

Case in point, in the Midwest during December and January, not a single mill order was delivered on time to service centers. All of our competitors were in the same position. They placed orders in late October or November. Those orders were two to four weeks out. So, January orders were pushed out to February—and we still haven’t seen them delivered. If your customer is working lean, where does he go? To the spot market or other sources to fill the void. When the material meant for that customer finally arrives from the mill, the service center now has excess inventory. So what do you do? You drop prices to the next buyer just to move it, because cash flow is so critical, [and that hurts your margins].

Robbins: The risk of error is so significant today. Ten years ago if I took a position, foreign or domestic, with an extra 5,000 tons of quarter-inch sheet, big deal. The price might go up $20 a ton or down $20 a ton, but the actual cost to me, even if I had to hold onto it for four or five months, was not that great. Now we fear that $100-a-ton swing. So we’re very much focused on avoiding that error. When we hear of foreign steel—European or Chinese—at X price, we triple-guess before ordering it.

Barnett: Fourth-quarter 2004 pricing for hot-rolled was approximately $580 a ton. Second-quarter 2005 pricing for hot-rolled was $410—a $170-a-ton swing. If you bought offshore in fourth quarter 2004, you had $560-per-ton steel scheduled to arrive during March or April. By spring 2005, you were looking at domestic prices falling to $470, $460, $450, $440 per ton, and the boat still hadn’t cleared Iceland.

Like the other fellow said, we’re not in the home run business anymore. We’re singles and doubles hitters. 2004 was a great year. 2005 started miserably because the price of steel began plummeting, but when all was said and done it turned out to be a good year. 2006 is starting out well, but it’s a truckload here and three truckloads there. It’s not 1,000 or 1,500 ton sales. It’s hitting singles and doubles.

MCN: Do you expect import levels to increase or decrease in 2006?

Feniger: There is a lot of talk, a lot of rumor, about what’s going to happen with the March-April import situation. Many people say there are thousands of boats heading over here, while an equal number say there’s really not that much coming. The problem is: We don’t know. We are operating in a world economy now, so we can’t put our finger on the pulse to determine exactly what the import situation is going to be. It could have a definite effect on where we’re going.

Rasulo: Even though foreign offers at the end of last year were significantly below domestic prices, most people didn’t take large positions, thinking that after the first of the year, capacity would come back up big and strong in the U.S. and there would be cheap pricing domestically. That hasn’t happened. To the contrary, mills are still controlling the order books. I think we’re in for a supply squeeze. The next couple of months could be difficult.

Barnett: Our market in the Midwest is somewhat insulated from imports, but I’m absolutely flabbergasted when I see the pricing on the coasts, particularly on the West Coast, where imports are coming in at $70 to $100 a ton less than the price [domestic mills in the region] are charging—yet the domestic mills are sold out and they still have customers on allocation. They evidently don’t have to compete with imports. Apparently, demand for steel on the West Coast transcends the amount of import that can be bought.

MCN: Why don’t imports affect the domestic price more?

Barnett: There is a built-in risk when you’re buying foreign steel. If you can buy domestic at $600, you’re not going to pay $570 or $580 for offshore. With the domestic order, if push comes to shove, you can cancel it or you can modify it, provided the order hasn’t been rolled. Or you can renegotiate it. When you buy offshore at $570, that order is booked and usually noncancellable. They either have a letter of credit or some other leverage to make you commit to that order.

Vitucci: You kind of have to look at buying foreign material as buying futures in the steel market, because of the lag time and the fact that you’re locked in. We’re finding right now that nobody is placing 5,000-ton orders, but rather 1,000- or 1,500-ton orders because pricing will move between when they place the order and when they receive it. Meanwhile, people sell 100 tons here and 100 tons there to try to equalize where their profits or losses are going to be based on the domestic market. So, as the domestic price comes down, they spin off orders for their futures to other people. We aren’t an importer of record, yet we will buy from other service centers and importers that place foreign orders. We don’t hedge the market, but it’s available to us if we need to [by buying tons off a large foreign order made by another buyer].

Robbins: We do take positions [on foreign purchases]. Some of the larger mills came in this year with a price that was pretty close—only $20 to $30 less than domestic—for which it is not worth taking a large offshore position. Yet, we will take 500 or 1,500 tons because we can’t get enough 72-inch-wide or some other product. We’ll buy foreign [mostly for its availability].

We’re in the fifth month of stable prices, which is the most stability we’ve had in a long time. Yet we’re also skeptical: If it’s been stable for five months, it’s got to change. That stability has played well for the domestic mills. Because we’re predicting the price will erode sometime soon, we’re not taking the foreign position, and that is actually helping the domestic producers. People are reluctant to [buy foreign] because they think that by the time the foreign steel arrives, the domestic price will have lowered to the foreign price level.

MCN: Earlier we talked about how you are limited by how much steel the mills are willing to sell you. Are you suggesting that, as producers consolidate and the price of steel remains high, the mills are going to be taking some of those top-tier customers away from distribution?

Barnett: There’s no question about that. The mills have already done that, at least in the automobile industry here in Detroit, through the resale programs. In essence, they are taking orders from the automobile manufacturers and running them through service centers. A tremendous amount of that business heretofore was service center business that was contracted under the old dynamic: You would put together a deal with a mill and they would support you for a model year. You would buy it, process it and deliver it to the automobile manufacturer. That started to change 10 years ago. Such resale programs are now dominant in the industry here in Detroit. I believe that has happened in other industries as well, such as appliances.

Everhart: We see that with the mills going to the air conditioning industry. They offer see-through pricing, and form a partnership with a service center, but the mill has the controlling interest in the package and the service center becomes a processor rather than a seller.

MCN: How will the announced shutdown of auto plants by Ford and GM affect steel suppliers and steel prices?

Everhart: It might adjust the price regionally in Michigan. But if you look at total automobile consumption in the United States, it’s still going up.

Barnett: I think it’s misleading that the domestic car industry is in serious trouble and that it’s going to make fewer cars. The major reduction in capacity by the domestic automobile manufacturers is at assembly plants. It’s not at parts and components manufacturing plants, though many parts have been outsourced. There will be some of that as well, but it’s primarily assembly plants. So instead of running 10 assembly plants with one or two shifts, they’ll run five plants with three shifts, which is the Japanese model.

The domestic steel industry underwent a similar metamorphosis a decade ago, primarily because they were forced to in order to compete with the minimills and their foreign counterparts. They went from [a labor cost of] 10 man-hours per ton to one-tenth of a man-hour per ton. They had to make drastic changes because that’s what Nucor and mills in Japan and Korea were doing. The same thing is happening now in the automobile industry. Domestic carmakers are being forced by the Japanese model of manufacturing to produce at a rate that will allow them to sell cars competitively and make a profit, the same way Toyota, Nissan and Mazda do. It’s a change that’s long past due.

MCN: So the big scary headlines about GM and Ford are going to have a rather benign effect on supplier companies like yours?

Barnett: I don’t think that’s what we have to fear. As suppliers to automotive, we have more to fear regarding how they’re going to buy their steel than how much steel they’re going to buy. If you are a large distributor selling to automotive, you have to be concerned about the resale program. If an auto company says, ‘You sold us 47,000 tons of steel last year. We’re going to be buying that from the mills and trading companies now. But don’t worry, you’re going to get the processing.’ Well, your sales on those 47,000 tons of steel just went from $33 million down to $2.5 million for processing.

Feniger: A lot of us are steering away from that automotive dependency. We are making sure that our efforts are focused on construction, defense, appliances, farm equipment. We’re still in heavy trucks and trailers, because we think that’s a growth area. The construction industry has great potential for us. The economy is driving building in this country. I think it’s going to be solid for a while, especially in any weather-damaged areas. There are areas other than automotive that are critical to the steel industry today.

Robbins: I am the third generation at my company, which started out buying sheets from the mills [before mills quit selling end products and just produced coils]. More recently, we’ve seen U.S. Steel with its Internet site [Straightline], and a bunch of mill-service center partnerships. I’ve had run-ins with mill-direct sales to customers of mine. It seems like they’ve gone back to a slightly vertical model. Do you see that as growing?

Everhart: We all saw what happened with Straightline, which was a disaster [for U.S. Steel]. I think there is other integration going on, but it’s driven more by financial problems and mills attempting to recoup some debt. I see them as Band-Aids, rather than as expansionist plans.

Vitucci: We partner with mills all the time. We are bringing the mills into our customers. We are helping customers with quality through the mill’s metallurgical department. Mill specialists are coming out to help with design and implementation. We have yet to see any situation where we’ve been back-doored by the mill. That’s not to say that it couldn’t happen.

If anything, the consolidation has helped our partnership with some mills. That’s because we don’t sell to two or three big buyers. We sell to the guy who’s taking a load or two a week—and we sell 80 of those customers. It’s not cost effective for the mills to take those small-order customers. But because I can order up to 3,000 tons a month and disperse it to these small buyers, the mill wants to work with me. I don’t think we’re an exception. There are over 300 service centers in the Chicago area alone. No matter the size, we’re all doing the same basic thing. Yet some of the big guys might not have 500 pounds, 1,000 pounds or 10,000 pounds of one item, so they come to a guy like me. And I’m partnering with them on that. I’m still making my margin and they’re making their margin. Am I going to chase their customer? No, because I can’t supply that customer with 5,000 tons a month.

Robbins: There is a lot more transparency than there was 10 years ago, when we were literally chasing competitors’ trucks to see where they delivered. We kind of know whose customers are whose. I bring mills in to customers, too, and I don’t fear any backstabbing. The question is, are the mills going to start selling more directly into heavy truck and other markets instead of through us?

Vitucci: There is a lot more good outside processing out there, which has allowed the mills to go after some OEMs. They now can go to an OEM and say, ‘I know you buy this size and grade of steel from this list of suppliers. We can be competitive if you buy from us, and here’s how we can help you: You can get it processed [by our toll processor] and due to the volume we push through there with our other customers, we know you’ll get a great deal.’ So they help reduce the OEM’s cost.

Everhart: Regarding mergers and acquisitions in the service center business, there are 300 service centers in the Chicago area. There are customers who don’t want all their eggs in one basket [buying from only one giant distributor]. That’s where the regional service center comes in. It’s a peaceful coexistence that’s developing. There is room for everyone in here.

MCN: How does a giant merger like Reliance and EMJ affect smaller players like you? Does it make business more competitive?

Rusalo: They were both so big already, I don’t think it’s going to affect us.

Everhart: Reliance buys businesses and lets them run just as they did before. Reliance basically added a [long-products] business with the Jorgensen acquisition, so it didn’t create a new giant in one market segment. That’s different from the model of Metals USA, Ryerson or Esmark, all of which are primarily in the flat-roll business. We have to be more aware of those different models, but I firmly believe it’s something we will cope with.

MCN: So as the big get bigger, smaller regional companies like yours will still have an ongoing role?

Vitucci: If you have a niche and don’t try to compete for their market, there will always be room for you.

Robbins: Due to consolidation, there is a little bit more competition. Some medium-sized companies actually have to look to expand for logistical reasons. Logistics has become a significant portion of our cost structure. Next to steel, the cost of logistics has been our largest increase in the last 18 months. Due to logistical issues, we almost have to look at expanding—opening up more depots or another plant—because we’re no longer quite as competitive. Despite all the service centers already in Chicago, I would not hesitate opening a branch there based on my customers’ needs and the logistical issues we’re facing, as well as the increased competition from mergers. Competitor A used to be just in Detroit; now he’s in Detroit and Chicago. So, I’m competing with him for those Chicago customers with a $30 per ton freight disadvantage.

Feniger: I actually disagree with the panel on this issue. I don’t think there is room for all of us. We have to come to a realization. We have been through a change on the supply side, which has altered our whole perspective on how we buy and sell steel. The people who buy steel from us are operating with different patterns and in a different atmosphere than they did in the past. Service centers that continue to run their companies the way they always have are going to see some fallout. Some of the small guys, unless they happen to have a little niche, are going to disappear. Some in the middle, in the $20 million to $80 million range, will fail because of bad management. Companies that operate two out of three years like they’re at a craps table won’t survive in this much-more-professional industry unless they change their management style.

Vitucci: I don’t think any of us disagree with you. Some small, medium and large companies will go out of business. But I believe that those managed professionally, that are making strides to reinvest in capital improvements, will succeed. What I alluded to was small players getting together to form a medium-sized company. They put themselves in competition with well-managed medium-sized companies at the next level. I have to compete at my level, in a niche market, and I have to build my business without competing at the next level. The medium-size company that wants to stay independent has to do the same thing. They have to work their niche, grow, change and be productive without competing against the large service center. When you try to stay independent and compete at the next level in this market, you will be hurt. I think we will see a lot of that type of miscalculation.

Robbins: Consolidation has created a windfall of closures due to mismanagement, an alignment with one source or an inability to react.

Vitucci: Because we’re smaller, we can change faster. That’s one of the reasons we’re doing more business with larger warehouses—they aren’t able to adapt as quickly as we are. In turn, we are finding a market there. One of my jobs at my company is to approve credit. I’m incredibly difficult to get credit from. I get inquiries from 10 to 15 new companies a week, and I don’t approve more than 10 percent of them.

Feniger: When you have strong mills, they are becoming extremely critical in dealing with only strong customers. They tell their credit department [that they will only sell to people with a history of paying their bills on time.] That little practice, of only accepting business from customers who are financially strong, will mean that weaker service centers won’t be able to buy steel and they’ll be put out of business. Small customers have always tried to buy from the mills.

They used to let the small guy in, but that’s not going to happen anymore. The small guy who is already buying from the mill, who can’t keep up with that kind of payment, is going to be out. It’s not a question of maybe, or we’ll give you a second chance. They’re just eliminating those customers. I don’t think there will be 300 service centers in Chicago in three years. There may be 200. It will be the same in Detroit and in Cleveland. Well-financed and well-managed companies will be the only ones that survive—whatever size they are.

MCN: At the same time, American manufacturers are struggling to compete with China. What can you do to help American manufacturing in the aggregate?

Barnett: There is very little we can do because we’re a link in the chain of supply of primarily domestically produced steel that’s sold at a price. We’ve had significant swings, but the domestic price is still at least 15 percent higher than it is in the rest of the world, freight considerations aside. From the standpoint of the U.S. manufacturer, some of our customers have come to us and complained bitterly that they can’t produce a product because their counterparts in China are paying 40 percent less for their steel. We can operate leaner and meaner and try to save them a few cents per hundredweight, but....

Robbins: There has been some vertical integration to save manufacturing. Some [ASD members] have actually taken a financial interest or bought equity in a customer.

Feniger: I think we’re going to do the same thing with OEMs that the steel mills are doing to us—force them to be better manufacturers. I am tired of hearing the excuse that America can’t compete with China, because we can. We just have to operate smarter.

Vitucci: There are factors working against the American manufacturer today that need to be addressed through our political views of what really is free and open trade. We need to back our trade policies better. We need government at both the federal and state levels that is pro-manufacturing, that is working to save jobs. I’m not talking about handouts. I’m talking about following the policies that are in place and making them work properly. We as independent business owners have to find ways to assist in educating people to vote properly and elect officials who can do the job.

Robbins: We did a customer survey some years ago and price was not their No. 1 concern. It was service and quality. That’s a way to compete against foreign products. The domestic mills already compete against foreign mills from those strengths. As a service center, the biggest complaint we hear is not getting deliveries there on time. They don’t care if it’s [the trucker’s fault]. They only care that their order is not there [when we promised].

Vitucci: In our market, we use a delivered price. We’re selling delivered product, so it’s our logistics problem to get it there, not the customer’s. They don’t want to hear it. If you can’t live up to that, provide the service, you will be gone.

MCN: So the national trucking shortage is as severe as they say.

Everhart: We had 11 truckloads of steel produced in Youngstown, Ohio, going to Horicon, Wis. It took us three and a half weeks to piece together that delivery. We had to go begging.

Robbins: We can’t get to the Carolinas. Rail is crazy, too. Their rates have gone up 50 percent.

Everhart: The railroads have not built enough new cars or engines. You call a railroad and ask them for a rate from one city to another, and they say, `We’ll get back to you in two and a half weeks.’

Barnett: The transportation infrastructure in this country is lagging behind the productivity of both the domestic steel producers and the domestic consumers of steel—by a decade. When deregulation hit, it threw the trucking industry into an absolute tailspin. Tens of thousands of truck drivers and rigs were pulled off the road. They couldn’t compete. The prices for transportation went down 30 percent. Energy costs went up. They were losing money shipping steel. Today the pendulum has swung the other way: There are not enough carriers, not enough truck drivers. The rail industry is struggling because it is fragmented and unresponsive to industry needs. They took units out of commission and didn’t build new ones. Now we have too many shipments facing too few units to transport them.

Vitucci: There are large truck sales all over the place in Chicago and northern Indiana. Nobody is buying them because they can’t find drivers. They offer to pay people to train as drivers and they still can’t get them to come in and learn.

Robbins: Of all the driving, steel hauling is the least favorite. There is a shortage of drivers all over, but they are going to drive a van before they drive a flatbed carrying coil.

Barnett: The impact on our industry has been profound from a cost basis. You’re talking about a 30 percent increase on average for transportation. Two years ago, we were paying $1,350 per load to ship steel from Detroit to Miami, Fla. The price for that same load today is $2,800. And we can’t find haulers.

Everhart: We had a customer who asked one of our salespeople to find him some 0.14-gauge galvanized for close to $40 [per hundredweight]. I got a quote from California Steel for $37.25. No brainer, right? Until you go to the railroad and find it’s going to cost you $4.57 to ship it by rail from Fontana to central Ohio.

MCN: Metal Center News recently published the results of its annual sales compensation survey. With the rise in steel prices, have you adjusted the formula you use to compensate your salespeople?

Vitucci: Without giving away hiring practices, I believe that whatever agreement is made with an employee, that’s an agreement the employer must honor. But we also have to manage our business in a way that secures our future and the future of our employees. We use a formula that is an agreement upon hire.

There is also a profit-sharing program and a bonus program based on ownership’s discretion. As active owners, we approve or deny any sale that’s being made, so we don’t have salespeople out there just dealing willy-nilly. The salespeople know that if they make a better margin for the company, they’ll benefit through bonuses or profit sharing.

Barnett: I think the days of salesmen making $200,000, $300,000, even $500,000—which was not unheard of in this town selling automotive five to 10 years ago—is over. Companies, whether large or small, can’t afford those kinds of commissions because the margins aren’t what they once were. Salaries and commissions have trended downward toward more rational compensation, even for the upper echelon direct-sales rep. I don’t think the sales departments at steel distributors are underpaid, but they aren’t making what they once did.

Vitucci: I would like to ask the other panelists about their capital spending projections.

Feniger: [On the service center side], we are not going to be putting any more processing equipment in because there is already so much processing capacity in the marketplace.

Vitucci: With fewer players, there will be excess equipment out there. Would you consider buying some of that?

Feniger: Most of the used equipment that’s available is already antiquated. It should be scrapped. The only way we’re going to be competitive on a worldwide basis is to buy up-to-date new equipment that will make our operation better. Buying old equipment is not going to make us more efficient.

Robbins: In Cleveland, there is definitely used equipment available, and equipment being refurbished. My plan, over one to three years, is to replace some processing equipment and possibly truck trailers.

Barnett: I think there’s always going to be a market for used equipment. The smart companies will devote used equipment to the proper product. You don’t want to run Class I steel coils through a used line. On the other hand, a used line may be fine for secondary products.

I believe a revolution will take place in the steel pickling business as a result of the new SCS equipment coming out of Red Bud Industries and The Material Works. [SCS is a process by which hot-rolled black steel is brushed to give the surface a smooth, oil-free, paintable surface comparable to pickled steel.] I saw it, and it made a believer out of me. It’s not for every piece of hot-rolled steel, especially in automotive where there is a lot of precise stamping. But for certain products, it’s clear to me that brushing steel mechanically—at about a third of the cost of pickling and without pickling’s environmental constraints—will play in our marketplace.

MCN: Our recent surveys show capital spending has been on the increase for the past couple years. Has most of that investment been made already, or is the majority yet to come?

Vitucci: I don’t think you are ever done upgrading because there is always something new you can add, improve or replace. From WWII to the late 1970s, not much could be improved until mills went from 20-ton coils to 35-ton coils. Then everybody had to upgrade all kinds of equipment. If there is any change in how steel is produced, that might require different processing equipment. Over the next year, I think capital spending will remain the same or rise, but after that, it will level off or start to decline.