‘What’s the Forecast? We Just Don’t Know’
Members of the North American Steel Alliance, a buying co-op of small to midsize service centers, have been brought even closer together by the current economic crisis. In a roundtable discussion Jan. 20 in Las Vegas, moderated by Metal Center News Editor-in-Chief Tim Triplett, NASA board and supplier council members shared their views of the difficult steel market and their hopes for better times in the year ahead. Following is an edited transcript.
|Service Center Panelists:
n Richard Costantini, vice president, Scion Steel, Warren, Mich.
n Orlando Garcia, vice president, Everglades Steel Corp., Miami
n Tom Harrington, president, DuBose Steel, Roseboro, N.C.
n Clifford Kane, president, Kane Steel, Millville, N.J.
n Rich Merlo, president, JDM Steel Service Inc., Chicago Heights, Ill.
n Denton Nordhues, president and CEO, Leeco Steel LLC, Darien, Ill.
n Fred Prine, president and CEO, Westfield Steel Inc., Westfield, Ind.
n Don Sazama, president, Pioneer Steel, Byron Center, Mich.
n Tom Sennett, vice president and general manager, Samuel, Son & Co. Midwest Inc., Detroit, Mich.
n Roger Simmons, president, Simcoe Steel Ltd., Mississauga, Ontario
n Randy Boswell, vice president, North American sales, Atlas Tube Inc., Plymouth, Mich.
n Jim Dabney, director of merchants, Gerdau Ameristeel, Tampa, Fla.
n Corey Devitt, district manager, Alabama Metal Industries Corp., Fontana, Calif.
n Jim Kerkvliet, vice president of commercial mill sales, Gerdau Ameristeel, Tampa, Fla.
n Timothy Weed, partner, Plante & Moran, Southfield, Mich.
North American Steel Alliance Staff Members:
n Miles Donovan, vice president, NASA, Elgin, Ill.
n Randy Haas, director of marketing and program development, NASA, Chino Hills, Calif.
n Rick Matalone, membership development, NASA, Wexford, Pa.
n Lonnie Terry, president and CEO, NASA, Laguna Hills, Calif.
MCN: MSCI reports that service center steel shipments were down 10 percent in 2008. Shipments were off by 30 percent in both November and December. How would you describe the market today?
Merlo: In talking to customers, they certainly project business will be down this year anywhere from 5 to 40 percent. Their build schedules are OK going out two or three months, but after that they say they really don’t know. That is the issue we are facing. There is so much uncertainty because no one really knows if we have seen the full extent of what is happening to our economy. I think we have seen a bottoming of pricing as far as flat-roll goes, but demand is up in the air. With all the capacity taken out [by the mills], supply could actually be tight for a short period, but most people expect business to be soft for the balance of the year.
Prine: From what we are seeing, things are weak among our manufacturing customers. I don’t think anybody really knows what to expect. I’ve been in this business for 42 years and I’ve never seen so many uncertainties. Before, customers could get credit, but now they are struggling to get cash. Without money flowing, not a lot of projects will go ahead. Few of the customers we talk to, at least in the Midwest, have any backlog at all and they don’t see much order activity. In the near term, it does not look too good.
Kane: We have seen a drop-off in line with the MSCI reports. For the OEMs we deal with, specifically in November and December, we saw a complete stop of buying. It was inventory rationalization on the their part. They are uncertain about their build rates going forward into 2009. We saw a small bounce-back, which is traditional for our business in January, but on a seasonal basis it’s nothing that excites me.
Nordhues: A fair amount of our business is related to energy, in particular wind energy. With some of the larger wind projects, credit has been a major negative. But it could turn around fairly quickly if banks loosen credit and developers have the ability to finance projects again. Certainly the new administration is for alternative forms of energy and infrastructure projects.
MCN: So is money unavailable to everyone or just the less creditworthy?
Nordhues: I would not say it is unavailable to anybody. If you have an operating loan that is sufficiently collateralized, you are probably fine. Many large projects are term financed, however, and new loans are difficult to obtain regardless of creditworthiness. Even with $40-a-barrel oil, wind energy can offer a profitable alternative, but convincing banks of that in this environment is difficult. They are very skittish about putting any money toward [alternative energy] now, so many of these projects have been put on hold.
Prine: The public projects are still being funded, but the private projects have really dried up.
Kerkvliet: Construction loans grew by only eight-tenths of a percent in 2008. In 2007, the growth was 11.7 percent, and in 2006 the growth was 26 percent. A lot of the steel shipments in the back half of 2008 were to construction customers working off existing backlogs. The replacement of that backlog is not as robust as in the earlier part of 2008. A big part of that is due to the lack of liquidity for construction financing.
Sennett: Samuel Midwest is based out of Detroit and we do a fair amount with automotive. Right now, the funds available for automotive are very tight, to say the least. Most of the people we are dealing with in automotive supply are down 30 to 50 percent and are not expecting anything to change for six months or so. There’s still a lot of inventory in the system. It will take a while for that to move out and for the credit markets to start believing they can loan money to the auto sector. Another part of our business is the heavy equipment sector. What’s most affected there is the export business. We are still seeing a fair amount of exports going out of North America, but two of our biggest customers saw the 15 and 25 percent of their business that was exported dry up almost instantly because of the strengthening value of the dollar and the credit crunch that has hit the whole world.
MCN: Are you hopeful for the government’s bailout of the auto industry?
Sennett: It will certainly help, but there have to be some major changes in the auto industry for even the bailout to work. We will know by March whether they will be able to make the tough decisions they need to make to keep the companies going.
MCN: Should they keep all the companies going? Some would argue that we don’t need a Big Three in Detroit anymore.
Kane: If you use the model of what happened in the steel industry, the answer would be no. But at this time I don’t know if that’s politically the right thing to do, or whether given the fragility of the economy it’s something we should do. Under any other circumstances I would say let the same thing happen to automotive that happened to steel, [a shakeout] on the producer side. But given the state of the economy, I would second-guess that.
Boswell: Over 50 percent of our business is in construction. At the end of 2008, we saw a lot of projects put on hold or canceled. Early in 2009, we are seeing some of the shovel-ready projects coming back. But the disturbing part is the amount of work going through architectural offices for the second half of 2009. That is down 12 to 14 percent on residential construction and down 20 percent on industrial construction. There is still some pain yet to go, even after financing becomes available, to get projects pushed through the system. There is some overhang from 2008, so our customers are busy for the next two to three months, but there is concern after that about what little is on the drawing board.
MCN: If the federal government comes through with the infrastructure dollars it has proposed, how soon will it be before this stimulus has an effect on your business? Will you see it in the second half of the year?
Kane: I question whether we will see it this year at all. You hear the term “shovel-ready projects,” but what does that really mean? How ready are they really? I serve the residential construction community, and they’re pretty much projecting a flat 2009, about the same as 2008. No one is excited about how many holes they will dig this year. Our projections for this year are about the same as in 2008, which was off from 2007 by 20 to 25 percent and about half what it was in 2006.
MCN: What about the agricultural equipment market?
Boswell: The ag market has remained pretty stable. They were forecasting pretty strong increases for 2009, a lot of it based on exports, so I don’t know if they are as exuberant as they were. But it’s still going to see growth.
Sennett: Ag is one market that seems to have some legs. Right now one of our customers has work through the year and another through two years, so they are contrary to most other customers we work with.
MCN: I understand the steel price is at or near the bottom of the trough.
Garcia: I have seen more and more import offers popping up lately for flat-roll, plate, merchant bars.
MCN: So it’s possible imports may put additional downward pressure on prices this year.
MCN: Then describe your current inventory strategy.
Kerkvliet: What we hear [at Gerdau Ameristeel] from our customers across the board is that they are not going to buy it unless they have it sold. They don’t want to be long on inventory in this environment. Even though MSCI reports that inventories have gone down a lot, the months on hand is still in that 3.5 to 3.8 range because of the weak shipment levels late in the year. Even though there was a huge destocking in October through December, there is still a fair amount of inventory on hand relative to the pace of shipments.
Prine: Realistically, you can’t afford to be overstocked today. The trend we are seeing is a downward trend, and you can’t really speculate. Because of the volatility, that would be unwise.
Merlo: In flat-roll, the blood has already been shed. We’ve seen some big service center chains write down millions in inventories because the price dropped so far so fast. Now we are trying to work through that higher-priced material. Our buying decisions now are strictly month-to-month as we try to predict what kind of volume our customers are going to buy. But once you get your inventory to the level you want it, say 90 days, the buying decisions aren’t that tough because the price is at or near the bottom. So it’s just a matter of controlling the volume. The bloodletting has already occurred.
Boswell: One of the things Atlas Tube is seeing with our customers on the distribution side, in terms of inventory strategy, is a greater focus on inventory replenishment systems, like vendor-managed inventory. In the past, they were more likely to play the market and make opportunistic buys. VMI supersedes a lot of the foreign offers, because distributors are looking to manage their business and their cash flow a little bit differently than in the past. For American suppliers, that increased focus on supply chain management is a positive thing.
MCN: How does your membership in NASA affect your buying strategy and your relationship with suppliers?
Prine: Because of our relationship with NASA suppliers, we have a strong belief that we should buy from them. We have made that long-term commitment.
Harrington: Our relationship with our NASA suppliers has become increasingly important to us as we work through this challenging time. I actually have gotten closer to our NASA suppliers during this period.
Garcia: One huge asset of NASA is the information exchange. While I’m down in Miami, I can always get on the phone and call another NASA member in North Carolina or Philadelphia or Detroit and compare notes on the market. You don’t feel alone; you are fighting together to climb out of this.
Harrington: There is this NASA community that is hard to describe. I am real proud of the way this whole community has developed. You can pick up that phone and call any number of members. The information-sharing is invaluable to my company.
Costantini: Joining this group is probably one of the best things we’ve ever done for our company. We have relationships with suppliers we’ve never seen before.
Dabney: This is the only industry in the world where the supplier and distribution arms are at adversarial odds with each other at times. That has been eliminated in this community. As NASA members say, now is the time to try to help suppliers through this tough period. That is the cooperative effort you don’t often get from other customers. When times get tough, sometimes the boxing gloves come off and things can get bloody. But if we work in a sane cooperative manner, we can get through this together.
Donovan: Being a part of NASA, there is safety in numbers. There is always a lot of fear in bad markets about supplier loyalty. One of the intangibles of membership is the fact that there is a very high level of commitment among NASA suppliers to the community, and vice versa.
Kane: Given the current environment, I could not imagine what business would be like if I was not part of this community. It would be a lot scarier proposition for a small company like mine.
Sazama: At the end of this tough time, NASA will be around and will be even stronger than it is now. That will be the proof that there is this genuine cooperative relationship.
MCN: Is industry consolidation on hold now or will we see some opportunistic purchases this year?
Kerkvliet: I think mergers and acquisitions will be a continuing trend, but it will depend on liquidity and the ability to finance it, which would be hard to do right now. But there will be a continuing trend toward M&A globally.
Nordhues: It’s hard to get deals done right now, but it will definitely continue in the future. There are two issues today: valuations and credit. How do you value a company right now? What are the assets worth, what’s the A/R worth, what’s the inventory worth? The valuation issue is as problematic as the credit.
Donovan: One difference going forward is that deals among mills may be driven more by product diversification than a desire to get bigger. A lot of M&As in the past were attempts to become dominant in one area. Now I think you will see a trend where mills will want to strengthen several product lines.
MCN: Your employees must be anxious about their jobs. What do you tell them about current business conditions?
Harrington: The truth. We tell them what is really happening.
Prine: We’ve had meetings with all our people in small groups to explain to them what’s going on—as best we know. We’ve had some layoffs, but we try to reassure those remaining that their jobs are secure. We urge them to just worry about doing a good job and let us worry about the rest. You have to be truthful and up front with them.
Terry: This is a really difficult time. People are struggling. You have to remember that employees are impacted in every aspect of their lives. Their 401(k)s have taken a hit. They want to go get a great deal on a new car, yet they can’t get financing. The best advice you can give them is, No. 1, you’ve got to have patience. No. 2, continue doing what you can to the best of your ability. Try not to worry about the things outside your control.
Boswell: We try to make everything transparent to our employees, letting them know where our business is and where we are forecasting it to be. We ask everyone to be outwardly focused on what they can do for the customer. Provide even better service. We also encourage them to celebrate the little victories. You can’t always focus on the doom and gloom. You have to give them time to celebrate.
MCN: What are your predictions for the coming year?
Harrington: An increasing number of companies are not giving forward-looking guidance for obvious reasons. They just don’t know. It is very difficult to say with any degree of certainty what is going to happen. I personally believe that all the stimulus will have a bigger effect, and more quickly, than most people think.
Prine: We’re looking forward to [some positive developments this year], but we really don’t have anything to base that on.
Sennett: It’s not that we are overcautious. We just don’t know.
Nordhues: I think that this year may be OK. As much as we need to worry about our inventory, we also need to worry about the health of our accounts receivable through the course of this year. Our organization will be a lot more cautious this year about the orders we take.
MCN: You mean you will have to say no to some customers if you aren’t confident they can pay?
Nordhues: Absolutely. We’re not going to give steel away. Sometimes you have to walk away.
Dabney: We have lived in the “current day syndrome” all our lives. Whatever business conditions we are experiencing right now, that is all we can see happening for the foreseeable future. Even highly paid economists basically just extrapolate current conditions going forward. We live in a world where, when times are good, we behave like it’s always going to be that way. When times are bad, we pull into our shell and fear it’s always going to be that way. Friends, it’s not. It’s going to change. Nobody knows when or how fast, but it’s going to change.
Kerkvliet: The U.S. economy is one of the most dynamic in the world. It has turned itself around many times. [Unlike during the Great Depression], we’re in the Information Age where things happen (snap) just like that. So who knows, this stimulus package could turn matters overnight. The key is to make sure you are being responsive to the marketplace and your customers, and to give them every opportunity to be successful. If we all do that, we can help turn this economy around in a shorter time than everyone thinks.