‘Keep Close to Your Customers…
and Your Congressmen’
By the Staff of Metal Center News
Concerns about mill overproduction, volatile steel prices and poor-paying customers clouded an otherwise bright picture of the market painted by service center executives on an Association of Steel Distributors panel last month in Chicago. Following is an edited transcript:
|Association of Steel
• Moderator Bill Vitucci, vice president and CFO, Vitco Steel Supply Corp., Posen, Ill
• Jim Barnett, president, Grand Steel Products, Wixom, Mich.
• Gary Birnbaum, president, Charter Steel Trading Co., Chicago
• Jim Queen, Midwest regional sales manager, JM Steel Corp., Cuyahoga Falls, Ohio
• Doug Everhart, president, steel sales and processing, Greenpoint Metals, Franklin, Ohio
Bill Vitucci: According to various economic indicators, manufacturing was up 7 to 15 percent, depending on the category, in first-quarter 2011, excluding construction. Let’s discuss the relative demand you see in major markets for 2011 vs. 2010, and projections for 2012 and 2013.
Gary Birnbaum: At Charter over the last year, we have seen double-digit growth in most of the markets, except construction, which remains extremely weak and shows no signs of any pickup. We totally believe that going forward things will be steady with slow growth right through 2012.
Doug Everhart: We serve a lot of small machine and job shops, and they are busy, but they are operating with short staffs. The growth in the first quarter obviously was driven by automotive. GM has stated that they have basically ended their sales to fleets, which were bolstering them up, which is cause for concern. With current real unemployment hovering at 14 to 15 percent, I am a little more pessimistic as to what the outlook is for the second half of the year. You have to keep your nose to the grindstone and fight for every order that’s out there.
Jim Queen: At JM Steel, probably 10 percent of our sales are aimed at automotive. We try to avoid depending on that market because it goes up and down so quickly. Our main customers are roll formers, fabricators and heavy stampers, and that business has really increased in the past few months. We are hoping it maintains through the third quarter. In the fourth quarter, we are just hoping it stays the same. It is too hard to forecast right now.
Jim Barnett: Grand Steel’s sales are up significantly this year over last. If you take a look at overall steel production and assume overall rates of inventory the same as last year, you are looking at a 20 percent increase in steel manufacturing, which equates to a 20 percent better steel market than in 2010. What will it be the rest of the year? Probably the same or greater than it is right now. I don’t think you will see any fallback. What happens in 2012 or 2013, my crystal ball does not go that far out.
Vitucci: With RG Steel bringing back Sparrows Point and the opening of ThyssenKrupp facilities in Alabama, as well as other planned increases to steelmaking capacity, obviously distributors in North America will be affected. Let’s discuss what impact this has on your business forecasts.
Barnett: It costs about $30 a ton to ship steel 150 miles. RG Steel is about 800 miles from Detroit, ThyssenKrupp is even further. Based on my discussions with ThyssenKrupp, their target markets don’t extend north of Tennessee. So the effect on our market in the Midwest region is going to be
Everhart: We have several rail cars from ThyssenKrupp on our siding in southwestern Ohio right now, from a company that is a large processor with us. So it is coming. RG is working on Sparrows Point and Mittal fired up another furnace a couple weeks ago. I have bad vibes back to 2008 that this [possible oversupply situation] is developing very similarly. I think we are in for a rough road. I was even offered some Chinese import of hot-rolled this past week. We have not seen that for a while.
Birnbaum: I agree with Doug. I believe that, barring any significant uptick in business, this [oversupply] situation could cause a disruption in pricing. Customers are already holding back because they are seeing this situation unfolding. It could be a problem.
Everhart: With a local mill right in our back yard, I get an update on their lead time every week. They are an integrated mill. I used to work for a mill, so I know how long it takes to make steel. I can call and get hot-roll and cold-roll in three to six weeks for normal production items. That [short lead time] tells me a lot right there.
Queen: Our plant is on the Nucor property down in Charleston, just 200 yards from the mill. We don’t really think the imports will affect us much at all. We already have the freight advantage. The price is going to go up and down the same for everybody. It is just a matter of whether you can compete and make your profit off that price at the time.
Vitucci: The Great Recession has changed the way we do business in terms of inventory, which we will talk about in a bit. But we have all made adjustments to our staff, capital investment programs, maintenance programs and available credit. What has the past two years taught you, and what are you doing differently as a result, that you would like to carry forward in your business?
Everhart: It reminds me a little bit of Vietnam. Duck! Keep your head down! We have expanded and added employees. But just this week, we cut back from 10-hour shifts to eight-hour shifts. We started the year at 11,000 tons of inventory, but I am operating with about 5,600 tons today, which is about a 42-day supply. Anybody who slits narrow coil knows the old rule of thumb, that you had to have 90 days on hand to slit narrow product in less-than-truckload quantities to meet your customers’ needs. But I am able to find the steel I need. In 41 years in this business, I have never had to manage this close on a day-to-day basis.
Birnbaum: You have to stay within yourself. You have to really understand who you are dealing with, who your customers are. You have to understand the financial fabric these people are made of. You really have to understand if they will follow through on their commitments. In 2009, we had some major OEMs that pushed back on us. We had a lawsuit with one, and we won. The recession taught me you have to service the hell out of your customers, stay on top of it, and God knows you don’t want to speculate.
Vitucci: So, Gary, to expound on that a bit, are you spending more time looking into your customers’ operations and financials than you used to? How are you getting better acquainted with your customers?
Birnbaum: First, you have to know who they are, if they are creditworthy. There are major customers out there with a history of trying to bully you. You have to have good personal relationships with these people and know how they are going to react under stress. You really have to figure out who you are dealing with and if they are upstanding people, or else you can get stuck with a lot of inventory.
Barnett: In decades past, the way steel was purchased based on commitments from customers was on a quarterly or even an annual basis. A deal was struck and you placed orders at the mill based on 90 days, 180 days or 360 days, depending on your contract. 2008 brought a new paradigm in the way our industry operates. As a result, everything now is on a 30-day, 14-day or even seven-day cycle. Lead times have shrunk because no one out there in their right mind will place an order for a half year’s worth of steel, or give a contract at a fixed price. That is financial suicide. You can’t project, you can’t predict, and as a result inventory levels and lead times have shrunk. The economy is improving, but I don’t think we will ever see lead times stretch out to where they once were.
Vitucci: We know from MSCI’s April figures that current inventory levels are about 2.4 months on hand and are greatly reduced form the norms of 3.5 months or more in historical averages. ASD’s Pulse survey of 2011 shows that inventories are currently on the rise again, but the majority are still within that 2-3 month average. Is there a new norm in terms of inventory levels held by distributors, and will demand improvements affect the changes you’ve already taken to become leaner?
Queen: We just keep what we need. The mill lead times are not that far out. Customers know it will take four weeks to get the coil in if we don’t have it. You can get it that fast out of the mill. We inventory toward a particular market. We can switch our inventory around toward different customer bases and use the same steel for many different customers. We try to keep our inventory to 2.0 or 2.5 months, that is about as far out as we want to go. We used to take advantage of opportunistic buys, pick up a couple hundred tons of an item at a good price. But today, the market changes so fast, you can get stuck with it. So you have to be very careful.
Birnbaum: We stay within ourselves. We now usually buy for orders. We don’t really speculate. At one point, we were 50 percent contract, 50 percent speculative. Today, it’s at least 75 percent for contractual situations. And we know exactly where the balance will go. In 1975, if you got a deal, you bought it. Today, you see markets go from all-time highs to all-time lows within nine months. This is no time to speculate.
Vitucci: Talk about the availability of credit for you and your customers. Has it loosened or is it still tight? What will customers with working capital needs do if they can’t obtain loans?
Barnett: Credit availability at the mills has certainly been restricted since 2008. The mills want you to pay your bills in 30 days. As a result, in order to retain healthy cash flow, you have to require your customers to pay in a prompt manner. We rely pretty significantly on credit insurance and current credit information to make the proper decisions on whether to extend credit to customers. Quite frankly, we have been much more rigid about that than we ever were before the Great Recession
Everhart: At Greenpoint, we recently made the decision to insure our receivables. We have had significant customers jump from 45 to 60 days pay. When we investigated, they had reached their credit limit with their bank. That was the shove that put us in the credit insurance market. We will be there from here on out.
Queen: Not a sale goes out of our door without credit insurance. At least once a year, all our major accounts are reviewed with financial statements and personal visits by our credit department. No matter who it is, they get reviewed regularly. You just can’t take a risk anymore.
Birnbaum: We insure our accounts, too. But the question is what to do with customers who can’t pay. How do others handle that?
Vitucci: We insure our sales as well. There is a protocol we have to follow. In the past, if ABC Company was your fishing buddy, you could help him work through a situation. You can’t do that anymore and still be insured. You have to do your due diligence, file timely reports, or you lose your credit insurance on them anyway. On the relationship side before the sale is made, we have to find out more about our customers and their receivables. It is touchy because we are all coming out of some difficult times. Most customers are independent businesses and are not public companies, so it is difficult to get information. You really have to do more to get to know your customers. You have to understand their business and what their moral obligation is to their customers and suppliers. In my opinion, that is the new norm in terms of credit and establishing customer-supplier relationships.
Vitucci: Any other comments on the state of the steel industry?
Birnbaum: We need more support from the government to spur on manufacturing in this country. We just can’t keep losing companies overseas. It just kills the economy. The government has to understand we have got to be kept on a level playing field.
Everhart: I heard a statistic recently that scares the hell out of me because it speaks to leverage. In three years, the interest that we pay the Chinese will fund their entire defense budget. We are paying to keep them in power. They control our debt. They don’t want to hear about trade talks. That is scary. If you don’t contact your representatives and say this is serious, we are in a heap of trouble.
Barnett: I think the politicians want to hear from their constituents. They want to know what we need in order to be successful. It is up to every one of us to write a letter and express our concerns over the debt crisis and enforcement of our trade laws. n