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Conference Report: Steel Summit

How Low Will it Go?

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If the audience at the August Steel Summit was looking for Ryerson President and CEO Eddie Lehner to put a pleasant spin on the current business environment, there were sorely disappointed. “Industry shipments are down 7 percent. We can’t call this demand environment great. We can’t even call it good.

“If we look at the entire picture, it’s certainly down from 2018, and 2020 is a question mark,” Lehner told host and SMU President and CEO John Packard during the service center panel at the event in Atlanta.   

His co-panelists provided some of the details. Precoat Metals President and COO Kurt Russell  said the construction markets his customers are heavily involved with are experiencing just minor downturns in 2019, the company’s other main end market, agriculture, is a much different story. “Farm income is the big driver, and you don’t have to turn on the news long, between crop prices, retaliatory tariffs and weather, to know what crop prices are doing.”

Though Russell Metals President and CEO John Reid noted the energy sector in Canada and the United States are both off double-digits, he was slightly more upbeat. He estimated that some of the success in 2018 was a result of demand pulled forward as a result of the steel tariffs, and thus the real level in 2019, if compared to 2017, is only down modestly. 

Business conditions were just one of the topics the supply chain executives discussed with Packard, a menu that included trade measures, index-based pricing and talent. 

Questioned about the effects of Section 232, 301 and other elements of the ongoing trade issues, Lehner said he feels like the tariffs are merely “the opening gambit.” 

“The truth is, there are structural issues with trade. Nobody likes tariffs, it's an imperfect mechanism. It's the mechanism that's being used to try to reset the global trade system.”

Russell has seen the effects in numerous ways, on the volatility in pricing, as well as how retaliatory duties have contributed to the woes in the ag market. “It was definitely a shock to the system. I love the fact we’re taking care of manufacturing, but from a customer’s perspective, it was challenging for sure.”

One of the recurring topics at the event was U.S. Steel Corporation’s announcement it would stop offering index-based pricing to its contract customers in 2020.

Obviously, the decision wasn’t exactly embraced by the home team, as SMU’s parent company, CRU, is the go-to for index-based pricing deals. But the service center executives also expressed some doubt. 

Lehner quipped, “My first comment is: good luck with that,” before explaining how the current level of transparency in the market has changed the supplier-buyer dynamic permanently. “If you want to know where the market is, it’s not that hard to figure out.”

Reid was also skeptical, even though his company operates mostly in the spot market. “I'm sure they thought this all through and how it will affect their business, but I feel in this market it's a difficult time to do so.”

As is common with any gathering of metals supply chain executives, the conversation eventually turned to the people problem so many companies are facing. Each executive was asked what steps companies can take to overcome the lost generation of talent and begin attracting younger workers. 

Precoat’s Russell said the clock on employee retention begins immediately. “If they've never seen a manufacturing environment, how you introduce them to it is key.”

“What we can control is to create the best positive opportunity for professionals to come into our organization and have a career. We promote people at unconventional intervals. Challenge them and get them into roles maybe they're not quite ready for, but it's the only way to found out,” Lehner said. 

Reid said he’s found that keeping younger hires abreast on their development and goals has been crucial to retention. “We meet with them every six months, make sure they see their progress and don’t get lost in the shuffle. If they don’t see where they can go quickly, they can get frustrated.”

The View from the Economists

A full-fledged recession is not bearing down on the U.S. economy. But the next 9-12 months will be a little slower for businesses connected to manufacturing. Such was the general consensus of the two leading economists who spoke at SMU: Dr. Alan Beaulieu or ITR Economics and Dr. Chris Kuehl of Armada Corporate Intelligence. 

“We will have a technical recession in industrial production, which will last until the early goings of 2020. Overall , a lot of people saying U.S. will be in recession in 2020, that next year is a bad year, full-on recession. That is no true. That is a lot of straight-line forecasting with no view of the future. There are solid reasons why that will not be,” Beaulieu said, noting the only threat to a macroeconomic recession is if the country’s global relations “go completely off the rails.”

Some of the anticipation of an impending recession is undoubtedly due to the record length of the current expansionary period. But Kuehl cautions that all business cycles are different. He noted this one had an unusual long, slow exit from the previous recession. “There’s no automatic end to this.”

ITR envisions difficult conditions in the first two quarters, but activity picking up considerably in the back half of the year. 

“By the second half of 2020, your businesses will be doing better. You’re going to see more orders, you’ll need more inventory, you’ll need more of everything,” Beaulieu added. 

Kuehl describes the low-growth environment the U.S. is looking at as “unforgiving growth. When you’re at 3 percent, you can afford to make mistakes, you can do things that may not turn out but the growth will cover up the mistakes. When you’re growing at 1.8, 1.9 percent, if you make a mistake you pay the price.”

While ITR anticipates a small recession in 2022, its big prediction remains 10 years out. The company is still forecasting a “great depression” in the 2030s, a global condition driven by demographics, health care costs, entitlements, inflation and the national debt. “When it comes to the Great Depression. Nothing has changed,” he cautioned. 

Other observations from the economists:
  • Beaulieu suggests service centers and other industrial enterprises spend the downturn looking for their companies’ “basset hounds,” which he describes as those people, products, processes or places that are beloved by an organization, but is not needed any longer. “You need to get rid of them now when things are slowing, which frees up space to get busier in the second half of 2020.”
  • One element of the existing recovery that has defied normal behavior was the failure of the job market to follow the Phillips Curve, where wages rise as the unemployment rate falls. But Kuehl said the condition shouldn’t be that surprising, given the fact many employers are hiring individuals who are “fundamentally unqualified people. We’re not paying what we would pay someone qualified. It’s keeping wages down.”
  • Beaulieu said not to count on the Fed to spark the economy, particularly how it will affect the dollar. “You can lower quite a ways before it has any impact on the dollar. What matters is the safety of the dollar. The world is in confusion, and they’re flocking to the United States. We’re stuck with a strong dollar. It is the reserve currency of the world.”
  • Kuehl concurred. “Part of the challenge for the Fed is it doesn’t have the ability to change much. Rates are already low, and lowering another quarter-point isn’t going to do much. There’s not a lot either the Fed or Congress can do to goose the economy right now, not without serious repercussions.”
  • Don’t expect tariffs to go away soon, or the trade wars to be settled quickly. We believe we’re a long way from the world settling the tariffs, not just the U.S. and China. In part because of growing nationalism around the world. That’s a feeding ground for protect me. One doesn’t see that going away soon while the global economy is cooling off,” Beaulieu said. 
  • Think local. While an infrastructure bill is needed and welcome, it’s still true that the regional activity is vastly more important to individual members of the metals supply chain.  “A lot of what goes into steel business is local. The vast majority of infrastructure is local. A school decides to expand, a new clinic is constructed. None of those decisions are made at the national level,” Kuehl said. 

HRC Pricing in 2020

The Section 232 shine is certainly off domestic hot-rolled coil prices. 

Two panelists over the course of the Steel Summit took a stab at projecting the hot-rolled price in 2020, and neither was terribly optimistic about the outlook. 

CRU’s Josh Spoores focused his remarks on the price of HRC, outlining where we are now and what to expect heading into next year. He believes the hot-rolled price will average $612 for 2019, a number that will drop substantially next year. “Our view is 2020 is the bottom, and we start to pick up from there.”

He said prices will fall to about $530 by December, then bounce around that level for a while before rebounding later in the year. CRU is anticipating the HRC price in 2020 will average $572 per ton.

Timna Tanners of Bank of America/Merrill Lynch also sees prices declining in 2020, but she doesn’t believe it stops there. The creator of the “Steelmaggedon” tagline, now trademarked, Tanners believes the capacity increases planned by North America’s mill community are going to be catastrophic for steel pricing.

Bank of America Merrill Lynch Research expects HRC price to average $600 this, decline to $540 next year and dip even further to $475 per ton in 2021.

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