The North American steel industry has a lot going for it in the first half of 2018, as panelists and attendees to the Platts Steel Markets North America Conference in Chicago outlined.
The economy has been expanding at a healthy clip, with GDP growth between 2.5 and 3.0 percent forecast for 2018.
Industry participants are enjoying rising prices, and tags on steel products are expected to go even higher in the coming months due to trade actions.
Washington passed significant tax reform in 2017, leading to more business-friendly conditions for mills, service centers and the rest of the supply chain.
Infrastructure spending remains a priority for the Trump Administration.
The energy market, a major source of steel consumption, is getting stronger.
“Things appear to be great in our industry. We have such wonderful tailwinds,” said Ratner Steel President and CFO Steve Gottlieb during the final session of the conference. “So why is there not the euphoria there was in 2008?”
Gottlieb and co-panelist Michael Garvey, CFO of Bedford Park, Ill.- based Alliance Steel, set out to answer that question during the service center segment of the conference. They outlined a series of concerns that sent conference-goers home on a cautious note.
“The first thing is people. We’ve got locations in three parts of the country. We cannot find new workers any-where,” Gottlieb said, echoing a common complaint throughout the manufacturing industry.
The labor issue is manifesting in wage inflation, as it takes more to lure a new employee to an operation, which in turn pushes up wages for others on staff. And, Gottlieb notes, it also is going to threaten the anticipated growth in the economy. “When we talk about infrastructure, who is going to man that? Who is going to build the bridges and fix the schools? We can’t find people to manage what we have now, let alone an infrastructure package.”
Given the difficulty in finding new employees, he said it’s imperative now to make sure no quality workers leave. They must be retained.
Another threat to growth is logistics, specifically trucking, both Gottlieb and Garvey said. “We’re looking at a $2 million increase in our trucking spend this year,” says Gottlieb, whose Roseville, Minn.-based company does not maintain its own fleet. The federal change to electronic logs for the entire industry has resulted in a capacity squeeze. “We have truckers coming to us and saying they’re going to be up 20 percent this year. We’ve tried to secure long-term contracts with them, but right now they don’t want to do it.”
Garvey agreed. “Truck availability is definitely a pain for all of us and the man-hours it takes to find transportation for the customers. In most cases, they’re the ones on the hook for the extra cost. But that’s increasing their cost at the same time the steel price is increasing, making them less competitive in the global marketplace.”
Gottlieb said there aren’t any obvious answers to the problem. “We’re trying to figure out what can be done to mitigate the freight issues, but I don’t know if it’s going to happen short of the government easing some regulations. And from what I hear, that’s not about to happen.”
Of course, while service centers benefit from rising prices, they know there’s a downside risk to them as well. Most of those issues involve the sale to their customers.
“Every time you go to buy more steel, the balance sheet will be growing over the next couple of months. That will stretch people’s balance sheets, stretch their credit limits with vendors, our credit limit with our customers and our credit limits that insurance people have on our company and our customers,” Garvey explained. “We’ve been very proactive with reviewing our customers’ files to makes sure we have the ability to increase their credit limits. If they keep buying the same number of tons, the amount of sales we make to them is going to be significantly higher and our credit exposure to them is going to be significantly higher.”
And sometimes, those sales won’t get made, Gottlieb said. “Those mom and pops are hitting that level where they can’t bring in enough steel because they don’t have the borrowing capability. What we’ve already seen, those service centers are probably going to go from two to two-and-a-half months of inventory down to a month to one-and-a-half months. They’re going to do a lot of buying as needed. They’ll be looking at lower margins, but it’s the only way they can take care of themselves.”
Additionally, higher prices could result in some steel not getting purchased at all. “We’ve had some customers who have reduced their tons. One of our major customers, when actions started coming two years ago, started off-shoring some of their production to China. We lost two-thirds of the business from that customer because of trade actions,” Garvey said. “We’re concerned about these trade actions and what other businesses are going to shift to offshore to be competitive.”
Furthermore, steel availability is already tightening, a situation that would be exacerbated if too much foreign material is priced out of the market by tariffs, the executives said. Garvey said the availability of spot tons of downgraded material from the mills, for example, has sharply declined over the last five years. “That is a challenge for the mid-sized service center.”
Gottlieb concurred. “Right now, if you’re not a contractual buyer at the mill, and we’re about 80 percent contract, good luck finding the steel.” He said the tight market has resulted in his company selling almost half of its tons to other service centers. “We are inundated with calls from other service centers. The first question is not what the price is. The first question is, ‘Do you have steel?’”
Finally, there’s one other factor that could be tamping down the euphoria: long memories. Distributors have not forgotten the last time the industry experienced price increases like this, and the damage wrought on the way down.
Garvey pointed to a pricing chart over the last 10 years, featuring heavy swings in pricing. “Every time it goes up, it comes down. And in the service center business, we really get hurt by the down. Most of our tons are spoken for, we have sales orders for them. But when it happens, not every customer fulfills the order they placed, and we get hurt.”
Ratner Steel experienced the same thing during the last downturn. “Everybody remembers the crash and burn in 2008. That’s what everybody is trying to guard against,” said Gottlieb, who suggested hot-roll prices will hit $900, and could top $1,000, particularly if slabs are not excluded from the Section 232 case. “If you go from $900 hot-rolled down to $600 hot-roll, there will be carnage. There will be carnage at the mill level; there will be carnage at the service center level.”