Panelists (pictured from top to middle to bottom row, left to right):

• Jim Coulson, president, The Coeur d’Alenes Co., Spokane, Wash.
• Miles Donovan, vice president, North American Steel Alliance, Elgin, Ill.
• Orlando Garcia, vice president, Everglades Steel Corp., Miami, Fla.
• Tom Harrington, president, DuBose Steel, Roseboro, N.C.
• Charlie Hurches, president, Scion Steel, Warren, Mich.
• Clifford Kane, president, Kane Steel, Millville, N.J.
• Rich Merlo, president, JDM Steel Service Inc., Chicago Heights, Ill.
• Denton Nordhues, executive vice president, Leeco Steel LLC, Darien, Ill.
• Fred Prine, president, Westfield Steel Inc., Westfield, Ind.
• Don Sazama, president, Pioneer Steel Corp., Byron Center, Mich.
• Roger Simmons, president, Simcoe Steel Ltd., Mississauga, Ont.
• Bert Tenenbaum, president, Chatham Steel Corp., Savannah, Ga.
• Lonnie Terry, president and chief executive officer, North American Steel Alliance, Fullerton, Calif.

Metal Center News Editor Tim Triplett moderated a roundtable Jan. 23 in Las Vegas with members of the North American Steel Alliance. Looking ahead to 2007, NASA board members debated the outlook for steel demand, pricing and inventories, and their strategies for success in a market where both suppliers and competitors are rapidly consolidating. Following is an edited transcript:

MCN: What’s your take on current market conditions?

Harrington: Our market remains strong. Nonresidential construction has been strong for the last year, and we expect it to continue that way through 2007. Our customer base is primarily general-line fabricators, who have a strong backlog in their workloads. So we are fairly optimistic at this point.

Kane: We’re significantly involved in the residential market. We have seen a drop-off of 20 to 25 percent over 2005 levels, recognizing that all the major players consider 2005 the high water mark for residential. The market got a little overheated. All our major homebuilder-customers consider it an inventory issue. They think underlying demand is still decent and that the market will come back as soon as the housing inventory works through the system. Most predict conditions in residential construction will start to improve by third quarter of this year.

Hurches: In the automotive market, the Big Three are all expected to increase capital spending this year, and we expect a second half pickup. They have plans on the books to redo a few plants, so we are optimistic. There are reasons for optimism on the capital expenditure side, even in Detroit.

MCN: What about on the automotive production side? Is there much changeover to new models?

Hurches: Quite a bit. New vehicles on display at the auto show showed some promise. Maybe it’s just me being optimistic and praying they are coming out of it.

Tenenbaum: Manufacturing is about half our business and nonresidential construction is the other half. In general, the manufacturing side is pretty bullish in terms of markets such as tank manufacturers, transportation-related manufacturing, even farm equipment. There is also a lot of bidding on the table for construction of ethanol plants and other energy-related projects in the Southeast.

Nordhues: For the plate market, we see volumes being relatively flat this year vs. last year. It will be good but not great. At the service center level, margins will continue to be compressed. In our view, supply has finally caught up with demand on the plate side. You could argue that’s not true in the line pipe area, but for the most part supply is right where it needs to be and is probably surpassing demand right now. Yet at the same time raw material prices are going up, so our buy-prices are going to continue to rise. I think for the rest of this year it will be very difficult for service centers to pass that cost along.

Coulson: Our steel margins have increased from ‘04 to ‘06 and into our first quarter of ‘07, so I don’t see the same falloff as the group. I see a very, very strong market coming in 2007. We manufacture a lot of parts for the jet boat industry, and that is doing great. That’s a product we weren’t in five years ago. Maybe that’s the difference.

Simmons: In southern Ontario, our manufacturing base has taken quite a hit because of the high Canadian dollar over the last two or three years. Though the dollar has lost a little strength recently, it’s too little too late. We’ve seen a significant drop in consumption. Con­ sequently, margins have suffered. We’re forecasting a fairly flat year in 2007.

Garcia: We do some residential business, which has gone down significantly in south Florida. Commercial construction is still pretty good, but residential is in the tank. We also export structurals to Central America and the Caribbean. That’s been pretty bullish, and we expect it to continue at a pretty good pace this year.

Sazama: We see a lot of activity, but the market is very competitive right now. There seems to be a lot of people going after the same business.

MCN: What’s the inventory situation?

Merlo: In the Midwest, there was an inventory buildup at the end of last year. We’re starting to see it come down. It’s getting under control, though the prices still aren’t stable. The key is the end-use markets. We service a lot of railroad tank car and electrical box manufacturers, those kinds of companies, and their business is very strong this year. We expect if consumption continues, we will see those inventories level out.

Prine: Our inventories are probably 7 to 8 percent higher than we want them to be. As the year goes along, we will try to work them down. Business is good, but we don’t want that high an inven­ ­ tory level.

Hurches: When you talk about inventories, you really have to break it down by product. In beams, tubing, some minimill products, you can’t build inventory fast even if you want to [because of tight availability]. You can’t generalize about inventories.

Tenenbaum: Our industry, traditionally, has struggled with trying to manage inventories. The mills, through consolidation, have done a pretty good job in most cases to match production with demand. The real bugaboo is that service centers don’t seem to have that same discipline. A lot of the margin pressure is coming from too much inventory in the pipeline at service centers. Until we as an industry can begin to get our arms around that, we are doomed to keep repeating this boom-and-bust cycle with inventory and profitability.

MCN: Has speculative buying by service centers added to the inventory excess?

Tenenbaum: I come from a background where you buy for need, not for greed. You can take the position that if you think prices are going to go up, you then speculate and buy a little heavy. You may make an extra buck if prices go up, but if you don’t shift gears quickly enough, you can get caught on the way down. Service centers loaded up last summer into the third quarter, then in the fourth quarter were canceling orders and asking mills to delay shipments. That just wreaks havoc on the mills’ ability to manage their production and their costs. If we are consistent buyers, the mills appreciate us much more. As an industry, we have to be much more disciplined. In turn, that will help the mills continue their discipline and, ultimately, we’ll be a more profitable industry.

Prine: With the cost of steel today, it is becoming more of a money management issue from quarter to quarter, at least at small companies. To bring in more inventory means you have to put out more cash.

Merlo: I think we have gotten smarter at managing inventory. Service centers are carrying three or four month’s stock rather than six months like we used to when more people were making speculative buys. But we still get caught at the end of the year when demand slacks off and we repeat the cycle of downward pressure on prices.

Tenenbaum: Some of the inventory build resulted from import shipments arriving early. Some service centers that buy heavily foreign found themselves with more inventory than they anticipated. When you buy foreign, you should only buy a piece of your inventory. If you buy too much, and it comes in either early or late, your inventory is out of balance. From a money management point of view, it can put a real crunch on you if you import 25 to 50 percent of some products and they arrive at the same time as your domestic mill orders.

Coulson: The best thing that could happen to solve that issue is for the domestic mills to meet the foreign price at the time it’s quoted. Typically what they have done is wait until the product arrives on the dock and then cut their price. That just makes the situation worse. If they would meet the price that’s been quoted by the offshore mills three months before the product would be shipped, they would head off those imports. Some domestic mills have started to do that occasionally in the last few years.

MCN: So what do you expect will happen to the steel price the rest of this year?

Nordhues: Our view is that it is going to slide a bit, but probably trade in a pretty narrow band, at least in plate. It may end up a few percentage points less by the end of the year. The larger question is whether we’re getting ready to prompt another [buy-sell] cycle right now. I’ve never seen an industry so intent on shedding inventory as we’ve seen recently. By the end of March, we could have some pretty empty houses. Will that start a flurry of buying in April when people start to worry about not having enough material, causing prices to jump $80 a ton? Then will it crash again when everyone realizes how much steel they’ve bought? I could see that happening. Personally, I don’t think prices will be affected by many plate imports in the first half of this year, despite the fact that tariffs were lifted on 11 countries.

Prine: We see prices going up this year. As scrap goes up, so will prices. Originally, I thought it would be a pretty stable year, and it still might in the end, but the first half will see more increases.

Sazama: I agree. Some mills have already announced price increases for the first half. We should see a gradual increase in plate throughout the year.

Kane: My concern with pricing in 2007 is something we don’t have much control over, the cost of metallics. We saw some increases in scrap this month, and more are expected next month. I am on the East Coast, and you can hear a giant sucking sound as scrap is drawn offshore. The exchange rates are also a factor in the cost of metallics worldwide, and that is starting to put a higher price floor on our steel. I don’t have a prediction, and that is one of my concerns. As a small distributor, I really don’t have a good handle on where pricing is going.

Merlo: Hot-roll pricing last year actually got lower than it has so far this year. The mills are telling us this year that they are not going to wait a few months to raise prices; they are going to push them up as fast as they can. Prices are trading in a narrower band, but there is still quite a bit of fluctuation.

MCN: What does that mean for service center profitability?

Merlo: No question, when lower prices come out you take a hit on the bottom line. It’s that same game: how much did you buy at the low and how much did you buy at the high? Hopefully it averages out at the end of the year.

MCN: Mills have adjusted production, cutting back along with demand. Do you expect them to ramp back up again once the inventory correction is complete?

Merlo: I think flat-rolled buyers expected the cutback in production to have more of an impact than it has. We heard about all the furnaces that were being idled, but it hasn’t had much effect yet. Prices have continued to slide, which was not their intent, obviously.

Hurches: Beams haven’t come down at all, and availability is an issue.

Kane: There’s been an 8 percent increase in beam prices this year, with long lead times from the mills. They are booking 12 weeks out at least.

Tenenbaum: And there’s very little foreign structurals coming in at this point.

Harrington: So I think we could see another increase in beams in March. The U.S. price is one of the cheapest on beams in the world market, so you wouldn’t expect a serious threat from imports coming into the country.

MCN: How does mill consolidation affect distributors like you?

Tenenbaum: We can complain all we want, but these have been the three most profitable years our industry has ever seen, and the consolidation of the mills has been a large part of that. It’s a double-edged sword, but anything that can be done to better match supply and demand is healthy for the industry.

Harrington: Consolidation has actually helped NASA. The mills look for our business more as a group.

Terry: The bigger an entity we become and the stronger the relationship we have with suppliers, the better. Mills are reducing their number of targeted customers as they consolidate; what one of our members may have been able to buy by himself and gain attention five years ago may be overlooked today. Becoming part of NASA gives members leverage they didn’t have before. As they purchase more product from NASA suppliers, it helps other NASA members because mills are looking at us as a group of tons rather than 97 individual organizations.

Donovan: As far as consolidation is concerned as it relates to NASA, what mills are looking for has certainly evolved. It’s not all about price or just a big block of tons. I think they are looking for more in terms of the relationship. NASA offers value to them in bringing 97 good customers together in a single way. That’s very important in the current environment.

MCN: How have the competitive dynamics changed in your regional market as the big have gotten bigger?

Hurches: In 1980 in Detroit, there were 14 service centers. Today there are just five of us in hot-roll. Consolidations, mergers, bankruptcies. It has affected everything.

Harrington: We see that we are competing against much bigger corporations as a result of the consolidation. So, being part of NASA becomes really vital to our continued survival. Being part of this bigger entity is really important for us to remain independent.

MCN: What would you like to see mills do differently? Any bones to pick with suppliers?

Prine: Right now business is good and everyone is getting along fairly well. But when the cycle changes, the pressure becomes much worse in a down market. They say that if business gets bad again, they won’t go after service centers’ customers, but who knows?

Tenenbaum: Just like the mills, we want some kind of predictability to our business. One thing the mills can do to help us control inventories and maintain customer service is to stick to the rolling schedule and ship on time. Deliver on time. Then we can manage our inventories, which will minimize some of the peaks and valleys that are self-induced because of the unknowns of supply.

MCN: How significant is Esmark’s planned purchase of Weirton and/or Sparrows Pt.? Will we see more of that type of vertical integration?

Donovan: Maybe not service centers buying mills, but you’ll see more vertical integration. I’m talking about mills trying to secure their own slabs, their own metallics, their own raw materials upstream. It’s a natural part of consolidation.

Garcia: Consolidation of the mills is becoming global. If it keeps going the way it’s going, it will help balance out the peaks and valleys of imports, because it’s a world market.

Tenenbaum: I don’t necessarily think we’ll see vertical consolidation. At a recent meeting, someone asked Nucor’s John Ferriola if the minimill had any plans to venture into distribution. He answered no, because if Nucor bought a distributor, it would start to compete with its biggest customer base. But if a company like Nucor aligns itself with a service center, it would change the whole dynamic of our industry in a heartbeat. That model works in other countries, but I’m not so sure it would work here.

MCN: Service centers all seem to be expanding the value-added side of their business, but doesn’t that strategy carry some risks?

Coulson: You have to get into processing if you want to grow your business.

Prine: You can’t just sell steel. You have to be able to add value to it, not just to make money, but to survive.

Hurches: Granted, you have to toe a fine line because you can step on some customers’ toes [if you compete with them]. But eventually you have to go there. One part of the customer base is asking us to do more and more, and the other part is getting upset.

Kane: Most manufacturers just want to assemble, so they come to us to produce the components. For our industry, I think that’s the future.

Tenenbaum: To be a contrarian, there are some old-line bulk distributors out there that are still fairly successful running low-cost operations, and though we don’t like it, still selling at low prices, as well. There are a few of my [Reliance] family members who don’t do any processing and do an even better job of putting money on the bottom line than I do. You can make money in this business and not necessarily have to process if you have a product niche that is very specific. There are lots of ways to make money in this business.

What concerns me most right now is that a lot of people have made a lot of money the past few years and are increasing their capital spending. I think we are going to end up with a glut of processing equipment out there. As a result, in order to keep the equipment loaded, we’ll see pressures on margins. Worst of all are those people who feel they have to get into the processing business in order to grow, but they don’t understand their costs and they don’t have the technical expertise required to be successful. So they go in and pull the rug out from under the market [with unprofitably low prices]. In the end, it can hurt all of us. It doesn’t do any good for an industry to add bad players.

MCN: You often hear of service centers that buy a new piece of equipment to win a new account, and then that customer disappears, leaving them with an underutilized machine.

Merlo: Those are the guys that get in trouble. You need a broad range of business that you are sure you can service. We’re a small player, but we just invested $5 million in an SCS [hot-roll brushing] line. Why? Because it’s a new technology that will do different things. It is risky, though.

MCN: The risk must be particularly significant with SCS, which is a brand new product. You must have to educate every customer.

Merlo: That’s true, but it’s a great competitor to pickled and oiled, and we all know how huge that market is. We won’t have to penetrate a lot of the P&O market to make SCS successful.

MCN: So, to wrap up, what else is keeping you awake at night?

Simmons: Receivables. People’s credit lines just keep going up and up, and you have to keep an eye on that much more than before [to avoid bad debt].

Tenenbaum: People. Finding qualified people. We all offer some training, mostly on-the-job training. However, we have to shift our efforts toward cultivating a more technically skilled labor force. In the not too distant future, virtually everyone will have to use a bar-code scanner or a computer, or run a complicated piece of equipment. At the end of the day, we have a big personnel challenge.

Nordhues: The value of the dollar. In the short term, it should stay fairly weak. But we had record imports last year with one of the weakest dollars in many years. An increase of even 10 percent could open the floodgates [to more imports]. It’s a real concern over the next three to five years.

Merlo: I worry about the next market downturn. We’ve had quite a few good years. How long can this continue? We all remember 2001, the days when it was dog eat dog and no one was buying product. Dan DiMicco [chairman, president and CEO] at Nucor was quoted recently as saying we are in a 10- to 15-year cycle now, and I was so excited. Let’s hope he’s right. 

NASA Going Strong After Decade of Change

The merger and acquisition trend among steel distributors was in its beginning stages a decade ago when a group of small, independent service centers banded together to form the North American Steel Alliance. As they anticipated, the consolidation frenzy since then has changed the face of the industry, but NASA remains a familiar feature.

A buying co-op similar to True Value Hardware or Ocean Spray, NASA gives its 97 members some collective clout with suppliers. Each member, regardless of its size, has an equal share of ownership in the organization and benefits in proportion to its participation in NASA programs.

Though it’s a buying group, NASA purchases nothing as an organization. It negotiates programs with preferred suppliers on its members’ behalf. NASA offers over 30 steel programs and 50 operational programs to its members, ranging from coils and beams to trucks to office supplies. Members in turn negotiate their own pricing and maintain their own relationships with suppliers.

Once a year, each member receives a rebate check, which is a lump sum based on their participation in all the various vendor programs. They never know the rebate dollars from any given supplier. Thus, suppliers are protected because NASA members can’t take a specific discount to market and push down prices, explains NASA President and CEO Lonnie Terry.

“There’s been more change in the past three years than in the prior seven, but it has made NASA stronger,” says Terry. “What we try to do as an organization is stay out in front of the curve. The market changes rapidly, so we constantly evaluate the structure of our organization as it relates to the composition of our members and suppliers.”

One change, for example, is that suppliers can now become members of NASA, as well. They can participate in operational programs, such as purchasing paper goods or maintenance supplies, and receive a patronage dividend at the end of the year just like service center members.

NASA is always open to new members, but companies must pass muster with the membership committee, which carefully scrutinizes what they can bring to the co-op and suppliers in terms of product, geography and leadership.

“NASA has continued to evolve, perhaps differently than originally envisioned, but we react to what is happening in the market,” says Tom Harrington, current NASA chairman and president of DuBose Steel, Roseboro, N.C. Participation in NASA is a key piece of his company’s strategy, he adds. “As a member of this organization, we are part of a larger entity. NASA has been tremendously successful and helpful to my company. It’s an important part of my company’s future.”

“It’s almost like people are out there choosing sides, looking for their best means to survive and prosper,” Terry concludes. “It’s all about becoming part of something greater than yourself.”