Panelists:
- Lisa Goldenberg, chief operating officer,
Delaware Steel Co., Fort Washington, Pa.
- Charlie Trowbridge, vice president of flat products,
Macsteel International, White Plains, N.Y.
- Jeff Diener, general manager,
Lee Steel Corp., Southfield, Mich.
- Michael Bush, president,
Century Steel, Chicago Heights, Ill.
Barnett: With weakening demand in most industrial sectors, how will your company handle the concerns of your customers regarding escalating prices and reduced availability?
Goldenberg: Unlike in Detroit, there are sectors where demand has been steady. Delaware Steel is based out of a Philadelphia suburb, but we take positions on steel all over the country. I would say that demand is not lousy everywhere, just in some places. That being said, for most of the country demand is certainly flat.
People are beginning to plan for spring and summer and realize they will have to pay higher prices, but I don’t know how to explain to them why prices have gone up so rapidly in just the past few weeks. I am deeply frightened for American manufacturing in general. We are starting to see people getting bids for contracts that could bring jobs back to this country—and then we have to quote these high numbers.
Bush: It’s a simple scenario. If you want to keep your machinery running, you have to pay the increased price for steel. We have 10 companies across the Midwest that are part of Esmark’s Service Center Group [Century Steel is a subsidiary of Esmark] and every one of them is facing the same challenge—pushing through price increases forced by supply, not demand.
Diener: Most of the furniture manufacturers have gone to long-term indexed purchasing programs. We are really concerned about the automotive customers, which represent 60 to 70 percent of our business. Most haven’t exactly been making a windfall on margins from the parts they make. To take a 30 percent increase or more on the cost of steel, which in many cases makes up 80 percent of their product, can be devastating. I’m not sure whether to be more concerned about when this market crashes or when customers go out of business. On both accounts, we’re not real excited about where things are headed.
Trowbridge: I can only speak for the international trading side of Macsteel [not the service center side]. From a trading perspective, the recent domestic price increases have helped us with imports, but mainly in coastal areas for now—primarily the Gulf and the West Coast. The challenge for upper Midwest markets is to get barge or rail freight rates that make sense. Thus far that has been daunting.
Our other issue is that we are competing as a hub here in North America against all other regions of the world for steel from foreign producers. If our Middle Eastern or African or European hubs can pay a higher price f.o.b. the mill, then they are likely to get the steel. We fought that battle all through 2007. Now, with U.S. domestic prices rising sharply, this market is getting closer to where we might be able to import more. However, offshore markets are also experiencing pricing expansion.
Buyer interest in offshore sourcing has grown in this up cycle. The sharper buyers almost always dedicate a percentage of their buy to import, as a hedge. Those who did so over the last few months are reaping the rewards, as their relatively inexpensive steel now begins to arrive.
Barnett: Is industry consolidation having an impact on your sales or your purchases of raw material?
Goldenberg: Mill consolidation has caused a more unified approach. It hasn’t impacted our supply chain at Delaware Steel; our tons are up. It’s just scary to have so few people in charge.
Bush: People are under the impression that with the merger of Wheeling-Pitt [another Esmark company] and Esmark that they are our sole source of metal. But they are probably about 5 to 10 percent of our total purchases. Our supply partners include Mittal, U.S. Steel, Nucor, SDI, AK Steel and others. Are they helping us any more than they are helping you? That’s unlikely. We are getting as many orders cancelled or put on allocation as everyone else. Our purchasing team is working to get every pound they can and working to grow our supply base and tonnage with our historic suppliers. It’s a struggle. We’re all facing that same challenge.
Barnett: Jeff, does your relationship with automotive suppliers give you any better position?
Diener: I don’t see any advantage. The biggest change from the good old days [before consolidation] is that there was such a thing as a commercial decision. It’s now an accounting decision. Everything is based on economics, bottom line and invoice, rather than relationships.
Barnett: Charlie, Macsteel International obviously has people in high places trying to figure out when this market may turn around. Do you have any insight on when the market may crest and head the other direction?
Trowbridge: Given the cost pressure on producers, they will not give back dollars easily for awhile. An international mindset has finally hit U.S. steel production. Fewer mills are domestically controlled. In Canada, none of them are. Four years ago, few steel buyers here paid much attention to Arcelor, Mittal, Evraz, SSAB, Gerdau or Essar. Now they are major owners of U.S. production. Global steel executives are looking at their North American units and asking why they’re not attaining the price and profit levels of operating units elsewhere in the world—regardless of demand. Management today is demanding far different performance than at the disparate mom-and-pop mills of a decade ago.
A good example of this new global thinking is export business. Today, the more savvy U.S. producers are realizing that developing a targeted, consistent offshore strategy makes sense, regardless of what the domestic market is doing. Establishing a product reputation globally can especially help when North American demand is down. They are turning to major trading companies with a global footprint to manage the sales, financing, shipping, logistics and risk of entering these markets.
Despite the recent run-up in sheet pricing, there are mills that are not 100 percent booked, and some are turning to export to augment their order book with profitable, incremental tons. In the past, these same producers would have cut some price “deals” and undermined their own domestic marketing efforts.
Barnett: Any other comments or predictions on market?
Goldenberg: Economies tend to spruce up going into an election. It would be unusual to sustain the strength [steel prices] for that long, but there has rarely been an election year that hasn’t picked up somewhere near the fourth quarter.
Diener: It’s incredible that of everyone I’ve talked to in the Midwest, no one will admit to placing tonnage at the mills [at the current high prices]. The service center industry accounts for roughly one-third to one-half of all the flat-roll produced. If none of us is buying, then who is? Automotive has announced production cuts, so that accounts for another 30 percent of flat-roll tons. So it looks like two-thirds of the market is either flat or not buying. So who is actually out there filling the order books? That is the bubble I see coming.
Barnett: Personally, I think demand-driven bull markets typically have staying power. Supply-driven bull markets seem to crest rapidly and then head straight down.
Bush: You used to be able to buy steel for 9, 10, 12 cents a pound, so you got a lot more dollar out of your lines of credit. Now that your steel cost could be $750 to $800 a ton, you have to closely watch your inventories and watch your finances more. You can only buy so much, which is driving the shrinking inventories. The mills know you have less on the floor and you have to buy into this market.
Goldenberg: Peoples’ borrowing capacity is almost a bigger concern than price, especially in a market where banks are not so happy about lending money.
Barnett: Not to show my age, but I remember back in 1974 ordering 21-cent foreign hot-rolled, which arrived in a 12-cent market. Prices can drop real quickly. All I can say is be prepared, because it’s not a matter of if it’s going to happen, it’s a matter of when it’s going to happen.
Steel Price Hikes Proving Problematic;
Can Service Centers Dodge the Bus?
After knocking at death’s door a decade and a half ago, our domestic steel industry-through the machinations of government and private enterprise—has been given a new lease on life. It has consolidated, improved its operations, streamlined its businesses and returned to profitability. But has this transformation insulated domestic steelmakers from being “run over by the bus”? I think not, and their success or failure directly affects all of us who distribute steel.
Right now, the U.S. steel market is virtually insulated from imports. By administering production and marketing rates, mills can dictate the price at which steel will sell in this country. While the producers say that the recent 33-plus percent price increase was necessary to recover increased raw material costs, the real story is the spread between the cost of feedstocks and the price at which they are actually selling the steel. That’s why some steel stocks have suddenly become the darlings of Wall Street. While they are certainly entitled to sell their steel for whatever they can get for it, the aggressive pricing in the marketplace poses several problems.
First, though distributors can and will pass through these increases, the end-user must also pay more, pushing his product prices even higher. If he’s selling to discounters like Wal-Mart or Home Depot, they may no longer buy his products—and another U.S. manufacturer bites the dust. U.S. manufacturing output and employment rates are now at their lowest point since 1950.
Secondly, with every increase, mills raise their selling prices closer to the point where foreign steel will again become competitive. Despite the steel mills’ current prosperous business state, the bus is right down the street—and they’d better heed the warning signs that it’s coming.
While U.S. steel production overall has declined to under 100 million tons from highs of 125 million tons 15 to 20 years ago, global steel production has skyrocketed. Steel production worldwide increased to 1.3 billion tons in 2007—the fifth consecutive year of 7 percent increases. This includes China’s increase from 100 million tons a decade ago to over 500 million tons of finished steel produced in 2007. Brazil, Russia, India and the other BRIC counties also registered huge increases in production. With the U.S. economy teetering on recession, the world’s economic fortunes may turn down as well. What do you think those foreign countries—with their subsidized steel industries, manipulated currencies, unfair and unsafe labor and environmental practices and quasigovernmental trading companies—will do with all that steel if they can’t sell it in their home markets? My guess is that it will find its way into the United States.
Will this be the second bus to hit the U.S. steel industry? As stocking distributors, we know what a sudden influx of cheap steel can do to our market. Just seven years ago, foreign steel poured into this country at prices as low as $220 per ton. It has happened several times before—in 2004, 2001, 1982, 1974, and as far back as 1968. The effects are devastating, with prices always falling faster than they had risen, effectively assuring losses and cash flow misery to all stocking distributors.
What’s a distributor to do? Keep your eye on several factors—scrap prices, currency values and import licenses—so you are not caught unaware of changing market trends with a full or bloated inventory. Before the market starts to wane, get rid of all unneeded material, because when the market turns down it will be worth much less than you paid for it. These somewhat contrived bull markets rarely last more than four to nine months.
Here’s a thought: As reluctant as our government is to meddle in the free enterprise system, maybe it’s time for us to consider home scrap as a strategic economic commodity. If other countries need it to sustain their steel industries, let them or their suppliers pay a U.S. export tax to get it. This should reduce the amount of exported scrap and return the scrap market to normal levels. Cheaper scrap would mean lower surcharges and less costly steel—and help keep manufacturing in the United States where it belongs.
Maybe we can get the bus to stop at the light.
