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FMA Annual Meeting

Bracing for the Worst

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MCN Editor Dan Markham
At the FMA Annual Conference, supply and demand took a backseat to the ongoing novel coronavirus outbreak and its effect on the global economy.

At the 2020 installment of the FMA Annual Meeting, much of the attention was focused on 19. That would be COVID-19.

Speaker presentations on a wide range of subjects had to incorporate the ongoing global coronavirus concern. And none of those speeches was more terrifying, from both a health and an economic perspective, than the one delivered by veteran steel analyst John Anton.

The director of steel analytics, pricing and purchasing for IHS Markit, Anton didn’t mince words about his company’s perspective. “Coronavirus is bad, and it’s going to get worse,” he said. In fact. IHS Markit’s Chief Economist Nariman Behravesh has cautioned the entire group to stop “being so optimistic,” Anton relayed.

Anton said the economic effects of the novel coronavirus will be felt most severely in the second and third quarter, but its damage will linger into 2021. “A V-shaped recovery is no longer on the table.”

Driving the dire prediction from IHS Markit is the sense that the only way to stop the virus is quarantine, an event that is devastating for economic activity.

Whether quarantine is mandated in other areas, such as the Italian announcement after the conference was complete, or merely self-delivered by sick or wary citizens, the effect on the business community, and the industrial economy, will be severe. “Who can’t work from home?” he asked. “Factory workers.”

In early March, the problems facing the industrial economy as a result of the virus was the hit to supply chains. “This is the first problem: can you get your inputs?” Anton asked. He noted how an assembler that requires eight parts to complete a job can be blocked if one of those products becomes unavailable due to logistics.

Some economic activity, such as major purchases, may be pushed backward, mitigating the overall demand on the economy. But not all of them. “If you don’t go out to eat in the second quarter, you’re not going to go out to eat twice as much in the third quarter. Some consumer demand is just going to be lost and not replaced.”

At press time, Anton and IHS were revising their original estimates for global GDP downward severely. In the U.S., the original expectation for 2020 was for GDP growth of 2.4 percent. Post-virus, the anticipation is now for growth in the 1.7 to 1.8 range. Europe will experience a similar decline, possibly enough to take them into recession in 2020.

And even though China may emerge from the troubles earlier because of the country’s successful quarantine efforts, the damage there will be even greater. The already decelerating Chinese economy may lose a full point of GDP, down to approximately 4 percent, Anton said.

For members of the steel supply chain, Anton said companies should be prepared to respond quickly. “If you see things falling off the table like that, react quickly. I’d rather scare you to death for no good reason than have you stuck with unsold inventory.”

As expected, the effect of the coronavirus won’t just be felt by the economy as a whole, but on steel as well. His analysis originally pointed to improvement in the pricing environment for most steel products in 2020. However, he now believes that pricing will deteriorate further this year, fueled by China’s oversupply situation. He said Chinese steel inventory is 60 percent higher than the highest levels of the past five years.

“You’re already looking at prices below cost in China. They can’t sell to the U.S. because of anti-dumping. They can sell to Japan and Korea and Vietnam and Europe and India. That’s how it’s going to spread,” he said of the figurative virus of low steel prices.

Kuehl Counters
Following Anton’s presentation, economist Chris Kuehl of Armada Corporate Intelligence delivered his assessment of the economy, and his expectations for the impact of the coronavirus on the U.S. economy were far more muted. Though agreeing with Anton that the issue is primarily a supply-side problem at the moment, he believed the damage to GDP would be far less meaningful.

He said quick, authoritarian action by the Chinese on quarantine, as well as on production, will help limit the damage. “We’re seeing the reintroduction of production in China because the Chinese need it,” he said.

He noted that some traditional methods of dealing with shocks to the economic system have not been successful against this health-driven crisis. “The remedies have been limited because this is supply driven. The central banks lowered their rates, and nobody cared. Supply chains have been interrupted, so adding more money to the economy doesn’t really do much,” a thought shared by Anton.

On the other hand, he deviated sharply from Anton when it came to purchasing decisions. While Anton cautioned against getting stuck with inventory that can’t be moved, Kuehl believed sharp and aggressive enterprises may be able to pounce on cheaper commodities right now. “This might not be a bad time to do some stockpiling, particularly things like oil and metals.”

Overall, he anticipated the drag on the U.S. economy will be minimal, predicting only a 0.1 percent decline. “The estimation of a lot of economists is this will probably start to blow over by early summer, mid-summer, followed by a pretty substantial boom. A lot of that will be driven by demand,” he said
Beyond COVID-19, Kuehl outlined where various economic indicators are sitting, which is a decidedly mixed bag, with an equal number of metrics pointing to recession as growth.

The downside indicators included the recent declines in the PMI, since mildly reversed, the effect of the trade wars, lower levels of capacity utilization, a decline in industrial production and the all-encompassing “political nonsense,” with the never-ending stream of negative political activity serving to depress consumers.

Offsetting those downward signs are still strong numbers from the Credit Manager’s Index, little pressure from commodity pricing, healthy markets, confident consumers and strong employment figures. “The issue with employment has completely changed. The issue now is trying to find people to work and finding people with the appropriate skills to work.”

The Service Center Perspective
Steel pricing, capacity, transportation and labor were among the topics covered in the distribution roundtable at FMA. Lapham-Hickey’s Bill Hickey and Grand Steel’s Mike Barnett delivered the service center perspective, while Jim Burg of James Burg Trucking offered his insight into the issues the industry will have moving metal.  

Since the launch of the Section 232 tariffs ushered in a wave of proposed mill projects, the subject of future production capacity has been a constant topic at steel events. Noted steel analyst Timna Tanners trademarked the term “Steelmaggedon” to describe the oversupply situation that would result if all or most of the announced expansion projects come to pass.

Bill Hickey, chairman of Lapham-Hickey Steel, Chicago, doesn’t seem too worried about oversupply leading to a precipitous drop in steel pricing.

“My only correlation is when 26 or 27 years ago, Nucor built the first flat-rolled EAF in Crawfordsville, Ind. Within 4 to 5 years there were a lot of EAF projects, maybe 7 to 8 million tons, planned in the market. Those mills are still running, and there are a lot of mills that were inefficient then that aren’t,” Hickey said.

The sentiment was shared by fellow panelist Mike Barnett, president of Grand Steel Products, Wixom, Mich. “The reality is there are pieces of equipment that are antiquated and are going to go bye-bye. A lot of that new capacity will be consumed by other capacity going out. Anytime there’s a new increase or decrease in production, it’s a shock to the system. But after a certain amount of time everybody will assimilate that shock to the system and it won’t have a huge net effect.”

Conversely, the two service center executives are eagerly following the developments in Ohio, where raw material company Cleveland-Cliffs was in the process of completing its acquisition of AK Steel. Hickey believes that given the advances in productivity, an integrated mill can be competitive if it has a reasonable supply of iron ore, and “There’s a real-live example of that going on with Cleveland-Cliffs. What you have is an iron ore supplier who has bought the customer, so you’re going to find out if you can do that model.”

Barnett again agreed. “It should be an interesting thing to watch, and I think it’s going to be a good thing. Lourenco Goncalves (CEO of Cleveland-Cliffs) is a brilliant guy.”

On the pricing front, the executives saw little reason to anticipate major changes one way or another. “I feel like I’m running my business at the fulcrum point,” said Barnett. “But I don’t think there’s anything in the market right now creating huge volatility. We got past some of those hurdles.”

Hickey said the short-term pricing outlook is relatively easy to tell these days. “It’s pretty transparent today. Seventy-five percent of the steel in this country is made by melted scrap. If you see where the price of scrap is going, you’re going to get a pretty good idea of what is going to happen.”

On the other hand, “I have no idea what demand is going to be,” he said.

Asked about the unusually large spread between hot-rolled band and cold-rolled and coated product, Hickey said the current situation won’t last. “You’ll either have hot-rolled go up, or galvanized prices will come down.”

As for their transportation costs, Burg said there’s capacity in the trucking industry at the current pricing and some room to go. However, “If capacity is needed beyond 2018 levels, you’ll see quick price increases and they could be dramatic.”

That expectation is based on some lingering issues the trucking industry has been dealing with that were obscured in 2019 by the lower levels of business activity. Headwinds to capacity, Burg said, include increased financial capital requirements, tougher drug testing rules through the FMSCA clearinghouse taking some drivers out of the pool and increasing insurance costs, among others. “When you look at the No. 1 issue affecting fleets’ ability to survive, it’s going to be insurance,” he said, noting some companies are going to be facing 30 to 40 percent increases in costs.

One issue facing both the service center and transportation industries is the scarcity of labor. Burg said the ongoing truck driver shortage is compounded by a shortage of qualified mechanics, which “takes out the lifestyle issue.” Furthermore, if the trucking industry were to ever get the major infrastructure bill it has been championing, it would come with the cost of pulling more individuals out of the potential truck driving pool.

Hickey said the current employment issue is compounded by declining birth rates in the U.S., a common problem in countries with developed economies. He expects the solution to the problem requires a comprehensive approach to legal immigration, though he doesn’t see the political will to tackle the subject. ?

[Side bar]
Hickey Honored as Steel Executive of the Year

On Tuesday March 3, the nation turned its eyes to Texas, and a few other places, as the Democratic party continued its attempt to identify a presidential candidate for the 2020 Election. The steel industry also was in the Lone Star State, but it was for the FMA Annual Meeting in San Antonio, a gathering of executives from throughout the metals supply chain to discuss the topics of the moment.
The first day of the event culminated with the presentation of the Association of Steel Distributors’ 2019 Steel Executive of the Year honor to Lapham-Hickey Steel Chairman Bill Hickey, the third-generation leader of the Chicago-based distribution company. “Today is my Super Tuesday,” Hickey told the dinner’s attendees.
Hickey became the 63rd winner of the honor from the Association of Steel Distributors, the oldest in the metals distribution space. He follows a distinguished group of executives from throughout the supply chain, from service center operators to mill executives.
Hickey, who previously was named the 2012 Metal Center News Service Center Executive of the Year, was honored for his decades-long career guiding his family business. Taking over the operation in his 20s, he has led Lapham-Hickey from a company with three locations and a little more than 100 employees to the 10-facility, 700-employee organization it is today. In 2018, he turned over day-to-day operations of the organization to the fourth generation, with sons Brian becoming president and Will becoming chief commercial officer.
Perhaps even more meaningful than his success driving his own company’s growth is Hickey’s tireless commitment to the U.S. manufacturing economy. “Everyone in the manufacturing chain creates value and creates wealth. We need to have the opportunity to the achieve more of this,” he said at the dinner honoring him.
For almost 20 years, Hickey has been championing the importance of manufacturing to anyone who would listen, from meetings with groups such as the ASD, MSCI and AWMI, to the people who really need to hear that message in the halls of Congress. But at the dinner, he pivoted away from the value companies such as those in the FMA create, and instead focused on the values that industry participants bring to business on a daily basis.
“Without the values of the people in this room – thrift, innovation, perseverance, vision, compassion, risk taking and faith, just to name a few – there would be no manufacturing value creation in this country,” Hickey said. “I salute you and your individual organizations and your individual people, and I’m really truthfully in awe of all the value you create.”