7-2009 From the Editor
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Blue Skies Ahead for ‘Good Customers’

By Tim Triplett, Editor-in-Chief
Debating whether the skies over the U.S. steel industry will ever be as blue as in the past, industry leaders at last month’s Steel Survival Strategies conference in New York highlighted a number of trends that have long-term implications for service centers (see full article).

Global steel production continues to undergo a structural change. Mills face further shakeout. There is still high-cost steelmaking capacity to purge, said the panelists. By some estimates, as much as 15 million tons of temporarily idled U.S. integrated steelmaking capacity and several million tons of minimill capacity could be shuttered permanently. Multi-plant companies, especially integrated producers, are likely to maximize output at their most strategic facilities and shut down or cut back smaller plants.

No doubt, service centers will continue to see changes in the companies and the facilities where they currently source their products, and in the relationships they have cultivated with their contacts at those companies.

Such changes could vary significantly from one product to another. As the panelists pointed out, the lengthy economic recovery, permanent shifts in demand patterns and the opening of new facilities are likely to leave the market with much more excess capacity in some product groups than in others. Thus one service center may be affected more than another depending on the company’s product focus.

In addition, service centers will find themselves dealing with more foreign-owned suppliers as ownership of the North American steel industry becomes even more integrated with the global economy over the next several years. Roughly half of North American steel capacity is already owned by companies with headquarters outside of the region. Foreign management may bring different ideas and attitudes toward distribution to the U.S. market.

Mills, service centers and OEMs have slashed inventory levels in reaction to the widespread economic uncertainties. U.S. steel service center inventories are now at their lowest levels since the 1980s. Some panelists predicted a spike in mill operating rates soon as companies begin to rebuild their depleted stocks. But full recovery will require a strong rebound in end-use demand, in addition to inventory replenishment, which is much more difficult to predict.

Assuming a worst-case scenario, where demand does not return to 2007 levels until 2012 or beyond, mills need to take strong action now to further reduce costs, lock in raw materials and outsource more back-office and operational support functions, said Accenture’s John Lichtenstein. It follows, then, that service centers should likewise be prepared to downsize their operations to a level where they could survive an even more protracted slump.

“[Steelmakers] should also get closer to their customers,” added Lichtenstein. “With utilization rates in the 40s, the temptation is to view every order as a good order and every customer as a good customer, which of course is not the case. While struggling to fill today’s order books, a company should also focus on tomorrow’s orders, in particular on those companies with whom they want to be most closely aligned.”

Therein lies the opportunity in all the current chaos. As the mills struggle with profound structural changes, they will come to rely even more on their good service center customers.




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Tuesday, September 23, 2014