Generation S²
Steel’s Successors

Panelists:

• Mike Barnett, Grand Steel Products Inc.
• Desiree Ellerholz, Bean Steel Co.
• Lisa Goldenberg, Delaware Steel Co.
• Stephen Margles, Jade Metals Corp.
• Jennifer Moore, Anchor Bay Steel LLC
• Jon Richeson, JM Steel Corp.
• Matt Skillman, Ken Greco Co. Inc.
• Tom Taylor, Lee Steel Corp.
• Dominic Vitucci, Vitco Steel Supply Corp.

MCN: How’s business? Which markets are strongest, which are weakest?

Barnett: It was an interesting January for Grand Steel. We actually had a very good month in January, but I wish I could say the same for the fourth quarter of 2007. Last year, we hit the fourth-quarter wall sooner than usual, and it lasted a little longer. So it’s pleasant for our company to come into 2008 and have a record month. Hopefully, the strength in the market will continue.

MCN: To what do you attribute that mushiness late in 2007?

Barnett: Well, inventories. People had high inventories, and they were slow to buy throughout the year. Inventories have come down and people see steel prices going up [so they are in a buying mode now]. It’s no secret that the mills have successively raised prices. It makes for a crazy market right now. Good, but crazy.

Margles: But do you believe it’s an increase in demand or an adjustment to the supply situation? This whole industry is focused on the supply chain: where the steel is coming from, what’s available and inventory levels. As we read about the economy, I don’t see demand being particularly strong. There’s less volume out there. It’s a question of who has the steel at the right point in the marketplace. We had a good January, too, but that’s because we had inventory at the right price for people who needed it at that time. I’m not sure the volumes are going to be there for the rest of the quarter.

Barnett: Right. The mills are citing scrap increases and increases in demand [as the reasons for their price hikes]. Well, we know about the scrap increases, but we haven’t necessarily seen the increases in demand. Our company sells mostly secondary and excess steel. Less than 5 percent goes to automotive. Demand in our sector is average.

Vitucci: The same goes for us. It’s hard to adjust with the cost of steel going up so quickly. The rising cost of raw materials, freight, etc., all that is included in the mill’s pricing, which we have to pass along. A lot of our customers, the end-users, can no longer afford to buy as much steel as they need to cover their markets.

Skillman: The problem we’re seeing is that it’s not a supply-driven demand, it more of a price-driven demand. People are trying to get as much steel as they can at the best price [before prices rise further]. We’re on the brink of a recession, and automotive and housing are down. The real demand for steel isn’t there. So the price is driving the buying we’re seeing right now.

Margles: One of the things I would like to find out is whether the weaker U.S. dollar will actually help manufacturing? In theory, it should help generate exports and reduce imports. If that helps manufacturing, that’s going to help all of us down the line, in terms of increasing that demand base.

I’d also like to know how much mills here are exporting, now that we have global ownership. Is ArcelorMittal making steel here with the weaker dollar and shipping it to higher revenue markets such as Europe, so they can keep their U.S. mills busy and still reduce the supply and raise the domestic price? I don’t know to what extent they are doing this, but I would suspect that is one of the benefits of global ownership.

MCN: The weak dollar isn’t a good thing for a Canadian [like Margles], is it?

Margles: No, and that’s been a big problem in Canada. The market there in general has been a disaster because it’s a small market for manufacturing. We’ve benefited for so long by having a weak Canadian dollar vs. the U.S. dollar, but now that it’s at par there’s a lot less steel flow from Canada into the United States. And Canadian service centers are facing more competition from U.S. service centers shipping product north of the border. It’s even hard to get a truck to make that run because there’s nothing coming from Canada into the U.S.

Barnett: What’s your percentage of sales between the U.S. and Canada, on average?

Margles: My personal business right now is 95 percent U.S. The U.S. is a bigger market and, over time, I’ve found more opportunity here, as the Canadian economy has suffered from a shrinking manufacturing base.

MCN: The automotive market is shrinking on both sides of the border, isn’t it?

Taylor: From a service-center perspective, we’re trying to pass the mill price increases along to our customers. We’re about 80 percent automotive, which makes it a tough battle. A lot of our customers are telling us they are not going to accept these price increases. We’re caught between a rock and a hard place right now.

Ellerholz: The same goes for us. We supply the steel for people who make automotive racks. All the Big Three were down last year, and a lot of jobs were put on hold.

MCN: How serious is the downturn for the steel market in this part of the country?

Barnett: For some, it’s brutal right now. With prices increasing so rapidly and distributors passing on the increases to customers in the Midwest, where demand is down, it is those end-users who really bear the brunt of the current economic conditions. We have to pass along our costs—though price adjustment is not only related to the mill prices, but also to economic conditions and what we think the market will accept.

MCN: And the scary part is the cycles aren’t the same as they used to be, right?

Margles: Right, they’re more volatile. The swings are bigger. The periods of time are more condensed. It’s like an EKG, and you’re just watching the monitor go crazy. I think the service center model has to change. In general, there is less business. Unless we have resurgence in U.S. manufacturing, there’s less volume out there to go around. Service centers that are based on volume—putting so many coils through the slitter each month—I’m not sure they’re going to be able to sustain large overheads going forward because the volumes may not be there. If their cost basis is X dollars when putting 10,000 pounds through the slitter, and 5,000 pounds is the new norm, that model has to adjust.

Barnett: Plus they’re carrying less inventory.

Margles: Everybody’s running leaner with their inventory levels. The end-users seem to be run now more by accountants. When steel was cheap, they had extra tons in the back and it really didn’t matter. But now, with steel so expensive, the end-users are really watching how many tons they’ve got on the floor. They only want to buy what they are going to use in the next 20 days because they are going to have to pay the bill on that steel in 30 days, and no one is going to cut them any slack. Everyone is pushing that up the food chain. Who is going to take the risk of holding that inventory? It’s going to be the service center.

Richeson: It makes a huge difference what markets you serve. Demand is obviously down in automotive, but that is almost none of our business. We serve fabricated parts and building products. We’ve seen demand stay pretty even. I have to agree with Matt—I don’t see an increase in real demand. I think people are just trying to beat the next price increases. The demand is price-driven right now, that’s all there is to it.

MCN: The price trend is counterintuitive to the economic indicators, isn’t it? The economy is weakening, but steel prices are still going up.

Margles: Try to explain that to a customer who is not busy and asks “If the economy is down, why am I paying 20 percent more for steel than six weeks ago?”

MCN: How has industry consolidation affected your companies and the competitive dynamic you face? 

Ellerholz: If there is too much consolidation, a handful of mills will be able to dictate where the market should be priced. It’s going to put everyone at a higher price and it’s going to force a lot of small businesses out of the market.

MCN: Consolidation is taking place among your mill suppliers, your peers  and your customers, right?

Margles: There are more consolidations to come in the service center sector. With fewer mills and fewer end-users, a lot of service centers are trying to figure out their role in this marketplace. Given the amount of volatility, I think there are going to be some challenges in the future. People are going to merge or be bought out. Certainly that’s one sign of too many service centers in a market with diminishing volumes.

MCN: Is consolidation at the mill level a good thing or a bad thing? Is there too much concentration there in terms of pricing power?

Richeson: It’s a little bit of both. It allows mills to specialize a bit more. Some do automotive product, for example, while others are more service-center focused. As a service center, it lets us know that our tonnage is going to be there every month. We’re going to be able to get product. But the downfall is, how much will we have to pay this month? At this point, Mittal, Nucor and U.S. Steel can pretty much control the price. Everybody else is just following suit.

Barnett: Mills are the lifeblood of our business. With consolidation, there are only so many places to get what you need. We had an interesting scenario where one of our suppliers was bought out, and we were worried we would lose this source because we didn’t have a relationship with the person coming in. Fortunately, based on our good relationship with the past supplier and how we conduct business, we were able to establish a new relationship. But there are situations where service centers or distributors  aren’t big enough to maintain their clout and can lose suppliers during such a transition.

Richeson: How mill consolidation affects you depends on how big you are. For little guys, it can make it tougher to get tonnage. For larger companies that can handle bigger contracts, it provides stability.

Skillman: Consolidation of the mills is going to be really detrimental to the small guy who can only get a certain amount of tonnage. Of course, the bigger players are going to get more of the steel as the mills consolidate. As mills gain more power, they can pretty much dictate whatever price increases they want.

MCN: Your companies are generally small to midsized. Do you feel threatened by consolidation, not just of your supplier base but of your competitors, as well?

Margles: From the service-center standpoint, I think it’s the medium-sized companies that are in trouble. I believe there’s room for very small operators who are creative and have good relationships with customers. And the big companies are going to continue to grow and get bigger. It’s the ones in the middle that might get cut out because they have plant and equipment but no longer the volume to support it. So I see us having some big service centers and a lot of little players out there who are filling in the gaps.

MCN: How did you decide on a career in the steel industry? I know for some of you, this is the family business. Did you always plan to go to work for the old man, or did you aspire to go off and become a doctor or a lawyer?

Barnett: I came into the steel industry after three and a half years in finance, which bored me, and immediately fell in love with it. We’ve never discussed selling the company. This is a business I would like to run one day, and that I would like to grow.

I think that our generation, as a whole, is optimistic, aggressive and entrepreneurial. We want to make things happen faster. When I joined the company, it gave my dad the opportunity to consider moving it in a different direction. There was never a doubt we were going to continue the business, just whether we wanted to step it up a level.

Skillman: I’m not family, but I work in a family business. I’m the fourth generation to work in the steel business. I had no plans whatsoever to get involved with steel, but I worked there in college and ended up staying. It gets in your blood. As future leaders, one thing we have to offer is more advanced knowledge of technology and communications.

Ellerholz: I started out in the medical field. In jobs outside this industry, you tend to do the same thing over and over again. There’s constant change in the steel business, and you always have to come up with new ideas. That’s what keeps it interesting and keeps people in the business.

MCN: As you transition to a more active management role in the company, how does your outlook differ from the past generation’s?

Barnett: Other than the general characteristics of our generation, I think we bring technology to the table. I probably do 10 times more e-mails a day than I do phone calls. I’ve been razzed about it and told I need to get on the phone. I really do understand that’s important—e-mails cannot replace phone conversations or personal relationships—but it does dramatically increase your exposure. I can send my updated inventory to 200 people with the click of a button in far less time than it takes to call 200 people.

Moore: It’s like when fax machines came out, everyone lamented that it was going to ruin the business by making it so impersonal. We still get that with fax and e-mail. You have to strike a balance. The only reason anybody looks at your e-mails is because of the relationship you have developed with those people. I think it’s important to use technology, but you need to put the face with the name. It’s relationships that make the business work.

MCN: How do you respond to old-timers who say young people have a poor work ethic?

Group: We work smarter....

Barnett: We need more young people in this business. That’s an underlying issue—the lack of people in our age group to take over. It’s difficult to break in if you are not family. I was at a presentation hosted by the Association of Women in the Metal Industries where John Surma of U.S. Steel dedicated a portion of his speech to the lack of a younger generation in the business. U.S. Steel recruits heavily on college campuses and focuses on making steel more attractive to the next generation.

Margles: It’s not sexy. It’s not information technology or Wall Street. When you tell people you are in steel, they get this glassy look in their eyes. They don’t understand how important steel is to the economy. So it’s hard to attract people.

MCN: As your generation takes on more responsibility, will it be easier for you to recruit younger people and convince them that distributing steel is not just a dirty, boring job?

Margles: Certainly our generation has had the desire to take on more responsibility earlier, not to bide our time taking 10 or 15 years to move up the food chain. We want to get the responsibility, and the payoff, faster. There’s that drive to succeed that creates a positive energy and hopefully will attract new people.

Moore: Our generation is a lot less patient. We expect things much faster. That’s just the environment we all grew up in.

Skillman: I don’t think that’s all bad. You do need manners and to not come off as pushy. But our generation is used to instant answers. Having younger people involved [may spur productivity].

MCN: Do any of you have siblings in the business? Does that cause any issues?

Taylor: I have a younger brother who recently got out of college and started with the company. He works in Grand Rapids, I work in Southfield. It’s good to have family members on both sides of the state.

MCN: Is it difficult to make sure all is equitable in terms of responsibility and compensation when multiple family members are involved?

Vitucci: My brother Bill is my partner. It works out well for us. Bill handles finance, IT and human resources and I handle production, purchasing and sales—and there’s a Mason-Dixon line between us. We don’t have to interfere in each other’s business as long as the common goal is achieved.

Parents have to try to look at their children objectively. Some are going to be good at sales, some at production, some at logistics. The mistake that parents make is to assume their children can all do what they do. Often they can’t. You should evaluate each child’s talents and how they can best support the family business.

Goldenberg: In any company, you look to maximize each employee’s talents. It gets cloudy in a family business, but it should be treated as in any other.

MCN: What happens when you disagree with the old man?

Group [laughter]: He can’t fire me because he doesn’t know how to send out e-mail....Mom backs me up. n