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FMA Annual Meeting

Cliffs' Notes

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MCN Editor Dan Markham The chairman of the nation’s largest flat-rolled producer kicked off three-day FMA Annual Meeting with his take on the state of the steel industry.

Lourenco Goncalves, the president, CEO and chairman of Cleveland-Cliffs, is known throughout the industry for his sharp mind and his outspoken nature. Both of those traits were on display at the FMA Annual Meeting in March in Miami. 

The steel veteran shocked the industry when his metallics company acquired AK Steel and most of ArcelorMittal’s United States operations over the span of 10 months in 2019-20. That made him the leader of the largest flat-rolled steel producer in the U.S., and an obvious choice to kick off the 2022 annual event as its keynote speaker. 

Goncalves was questioned on a variety of subjects, entertaining the hundreds of service center, fabricator and other supply chain executives in attendance. Here’s a look at a few of the topics that were covered by the freewheeling steel boss.

Acquisition Targets
Asked by panel host Ed Youdell, president and CEO of FMA, if his company was interested in moving downstream to acquire service centers, the former Metals USA boss offered an unequivocal “No.” He said a distribution business could not be effectively run as a satellite to the primary operation of making steel.  

“I had my time in service centers. It’s a great business, but it needs exclusive attention.”

In contrast, the company is much more likely to look at the energy market as an acquisition target, which would more closely follow the blueprint set by Cliffs when it purchased Ferrous Processing and Trade Company, a scrap producer. 

“I feel like energy is very important. It’s very expensive, and if you don’t have control, you’re going to suffer the consequences of not having it,” he said. 

Foreign Trade
Goncalves took dead aim at a noted “C” country during his remarks, but it wasn’t the nation anyone was expecting.
“The biggest problem we have is Canada. They have a weaker currency, different laws and regulations, a government that’s always ready to subsidize,” he said, “Despite all that, they feel like they need to compete as if they’re part of the United States.”

He wasn’t advocating for opening up a new antidumping investigation on the United States’ friendly neighbors to the north, but rather merely treating them as the U.S. would any other foreign country. 

In contrast, while Goncalves’ remarks were not filled with overriding praise for China and its policies (“China is a country that, if left unchecked, would be worse than Russia”), he believes the country will modify its behavior in the face of external pressure, something Vladimir Putin will not. 

“I believe China is already starting to move seriously on knocking down emissions. Every time we start to call them the biggest polluter, we see actions,” he said, noting the country has begun to reduce its steel production overall.

While other panelists talked about the rapid push toward electric vehicles, Goncalves believes the process is taking far too long. “It’s overdue that cars become electric. I don’t like cars that don’t make noise. I’m a Porsche guy,” he joked. “But at the end of the day, 29 percent of emissions in the United States comes from tailpipe emissions.”

He noted that shutting down Cleveland-Cliffs, Nucor, U.S. Steel and every other U.S. steel producer would reduce carbon emissions by just 1 percent, while more than half of the emissions result from the transportation and energy sectors.

“The government needs to tell GM and Ford and Stellantis and Mercedes to stop talking about it and just do it.”

Not surprisingly for a steel mill executive, Goncalves is a supporter of the Section 232 tariffs enacted in 2018 and still on the books, though many have been modified through negotiations and TRQs. 

“Section 232 allowed us to invest, allowed Nucor to invest, U.S. Steel to invest, Steel Dynamics to invest. That’s good for the country,” he said. “With local supply we can support people like yourselves.”

Fighting COVID
Cleveland-Cliffs heavily incentivized its employees to get vaccinated, offering cash to goose the process. That resulted in nearly 80 percent of all employees across the company becoming fully vaccinated. 

Just as noteworthy was his decision that all new hires would be inoculated against the coronavirus. 

“If you don’t want to be vaccinated, you have the right, “he said. “You just don’t have the right to work for me.”

Supply Chain Challenges
When asked what issues his company is facing due to the ongoing supply chain issues, Goncalves said, “None.”

He noted his company buys its feedstock, and other inputs, domestically, eliminating the issues that have cropped up because of port congestion, COVID shutdowns and other global hiccups. It’s a lesson he hopes society at large will take to heart. 

“We are now at the very moment paying the price of our mistakes the last 20 to 25 years when we as a country embarked on a story that globalization was a good thing, that by being able to buy cheaper, we would be doing something great for ourselves, for our country, for our society.”

And it’s not just a problem here in the U.S., he observed, pointing to Germany’s reliance on natural gas it doesn’t produce and how the Russian invasion of Ukraine will create major energy problems in Deutschland. 

“We transferred our ability to control our destiny when we walked away from something that was the best in the world,” he said of the move away from domestic manufacturing. “Cleveland-Cliffs is at the foundation of bringing something back. So far, it’s been very successful.”

Kuehl: Recent Events Change Outlook 
The Russian invasion of Ukraine, persistent inflation and other issues will lead to slower growth in the world and North America, Economist Chris Kuehl predicted during his presentation to close out the FMA event. 

Kuehl, a perennial guest at the conference, was originally anticipating GDP growth in the 3.5 to 4 percent range this year, slower than the rebound in 2021 but still well above normal. Now, that forecast has dropped to the 2.5 to 3 percent area, or about a normal year of growth for the United States. 

“Even the downside forecast acknowledges we get back to where we were in 2019. The problem is, we’re flattening out, and it’s not growing at the accelerated pace we were hoping for earlier this year,” said Kuehl of Armada Corporate Intelligence and the FMA’s economic analyst. 

After two years of extremes, growth in both the United States and Canada will resume a more normal pattern. The one difference is growth is slowing in the U.S. but likely to accelerate in Canada due to the role natural resources, most notably energy products, play in the Canadian economy. 

The war in Ukraine, and the sanctions levied by the United States and Europe, will have a dramatic effect on the economies of Russia and the EU. It will likely hit the EU first, as sanctions will cut them off from their primary energy supplier.
But they will hurt Russia in the longer term, as 70 percent of its oil now has no home. Some of that will be mitigated by China’s willingness to buy Russian oil, though the Chinese will only do so on terms very favorable to them. 

“It’s almost embarrassing to talk about economic stuff when there’s this kind of humanitarian tragedy going on,” said Kuehl, who was offering his remarks during the early days of Russian’s invasion. “The practicality of it, it’s the economic sanctions that are affecting us. What’s going on with commodity prices? What’s going on with trade sanctions and how is this going to play out?”

The war will only exacerbate the existing issues involving energy, which make up the bulk of the cause behind U.S. inflation right now. Kuehl said approximately 70 percent of U.S. inflation is based on elevated energy costs.  

But addressing the supply issues will be a little easier this time around than they were in 2007-08, the period of the last energy crisis. Then, there was little additional production capacity in the world that could be tapped. 

Today, major oil-producing countries such as the United States, Canada and most of OPEC outside Russia have some slack in their capacity, which will allow them to bump up production. Additionally, the higher prices will pull some marginal producing countries into the mix. 

Kuehl expects the supply-demand balance on oil and gas should be resolved within a year, with movement in the right direction starting by the third quarter. 

Because much of the inflationary pressures are caused by energy prices, as well as labor rates, Kuehl believes the Fed will tread carefully in raising interest rates. The Fed’s actions only impact money supply, and won’t have an effect on energy prices. 

“If they raise rates too fast, when the world economy is in dire straits, they could shove things back into a recession. So they’re going to be very cautious,” he said, noting that such an approach will not be limited to the U.S. Fed, but also carried out by the banks of the EU, UK and Japan. 

He expected the first rate hike would take place later in March, and then the Fed would sit back and see where things stood before acting again. 

Among sectors, Kuehl said nonresidential construction is finally starting to grow, while residential takes a slight step backward. Manufacturing construction experienced a slight decline, but will ultimately bounce back. Warehouse will remain the leading type of nonresidential construction project. 

“Everybody is coming back to inventory now. Just-in- Time isn’t completely dead, but people are looking at it very suspiciously. JIT is great as long as the world trading system is working flawlessly, which it hasn’t now for three years. Companies don’t trust it anymore.”

The U.S. should also see a return to a more normal balance between service and goods spending. The past year was overwhelmingly tilted toward manufactured goods due to the ongoing effects of the pandemic. 

“By the end of this year and into next, we’ll be back to where we used to be in balance with service spending and manufactured spending,” he said. 

China Bill Coming Due
There is very little the two political parties in Washington can agree upon. But one particular subject has near-uniform assent – the United States’ relationship to China. 

That has been the case for a while now, but it came into much sharper review over the past 12 months, when paralyzing supply chain issues revealed the dangers of relying so heavily on the production from any foreign entity, particularly one that is not an ally. 

“It’s one of the only areas of bipartisanship on Capitol Hill right now,” said Omar Nashashibi, founding partner of The Franklin Partnership, a D.C.-based government relations firm, who gave an update on all that was going on with the government. “Everybody understands now the U.S. has not kept its focus on domestic manufacturing supply chains.”

And that bipartisanship will likely lead to concrete action in the otherwise dysfunctional Beltway. By Memorial Day, congressional watchers and influencers such as Nashashibi expect passage of the U.S. Innovation and Competition Act, or the China Bill as it’s informally known. A Senate version of the bill had support from 18 Republicans, while the House version has less Republican support at the moment as it contains too many unrelated issues from the Democrats’ wish list. 

The compromised final product, however, is likely to be a comprehensive approach to a host of supply chain matters, issues that were brought to stark light during the pandemic. 

Until recently, manufacturing policy was largely ignored in the U.S., and the few times it was addressed the attention tended to focus on larger industries such as aerospace or automotive, ignoring the concerns of the thousands of small and medium-sized manufacturers. The new bill addresses that, creating private-public manufacturing hubs, among other things. It’s also set aside $52 million for semiconductor production, short-term Pell grants and college transparency. 

“This is the most consequential bill on manufacturing that we’ve had in at least a decade,” Nashashibi said. “It specifically focuses on China, with restrictions on exports. They want to see companies getting out of Asia and back into the United States.”

Some areas of the China-U.S. trade situation remain in flux. There is some debate on the Section 301 tariffs, with some business groups pushing to remove the 25 and 7.5 percent tariffs on thousands of Chinese goods. The more likely end result is the introduction of an exclusion process, which will allow for appeals on certain products that can be handled on a case-by-case basis. But the wholesale elimination of tariffs will not be on the table due to the politics of the issue, as politics will always come first in the capital. 

“I’m predicting tariffs will not be lifted prior to the 2024 election. You cannot win Pennsylvania, Ohio, Wisconsin if you are seen as soft on China,” he said. 

Rather than adding new tariffs or removing old ones, the Biden administration will instead focus on seeing how well it can hold China to existing commitments. 

O’Neal Honored as Fabricator of the Year

In addition to its schedule of educational and networking opportunities, the FMA Annual Meeting also doles out two awards during the course of the three-day event. 

The meeting kicked off with the presentation of the Fabricator of the Year award to O’Neal Manufacturing Services, an O’Neal Industries company. The Birmingham, Ala.-based company, which grew out of O’Neal Steel, was celebrated for a host of accomplishments, including its improvements in performance, safety record, and diversity and inclusion efforts, among others. 

“We’re really proud that we’re being honored during our 100th anniversary,” said O’Neal’s Russ Bagby, who accepted the award with Michael Richey. The family-owned company celebrated its 100th year in business in 2021. 

Later that evening, the Association of Steel Distributors bestowed its Steel Man of the Year to the industry’s biggest newsmaker, Goncalves. He became the 64th recipient of one of the oldest honors in the steel industry, but first since 2020. The FMA began managing the ASD in 2016.

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