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FMA Annual Meeting

Manufacturing Back in Favor

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MCN Editor Dan Markham After decades of disregard, leaders in the nation’s capital have begun to see the light on the important role manufacturing plays in the country’s future.

For more than three decades, the ruling class in Washington, D.C., treated the domestic manufacturing sector with ambivalence, if not outright disdain. The road to prosperity, it seemed, was not through making things here at home. This lack of interest was not owned by one political party, but spread throughout the nation’s capital. 

That’s changed. Starting with former President Donald Trump and continuing into the Biden administration, manufacturing is no longer a four-letter word in the Beltway. 

“Right now, manufacturing is the hot topic in Washington, whether you’re a Republican or Democrat. It’s happened over the last several years. We started to see that shift in 2015-2016,” said Omar S. Nashashibi, founding partner of The Franklin Partnership LLC, a District of Columbia firm that lobbies Congress on behalf of the manufacturing sector. 

Nashashibi delivered his presentation, “A Divided Washington United on Manufacturing” last month at the Fabricators & Manufacturers Association Annual Meeting in Las Vegas. 

The fact can be seen in how much legislative efforts are introduced, if not necessarily passed, in polarized D.C. In 2001-02, there were 596 manufacturing bills filed in Congress. In the most recent Congressional calendar, 1,403 bills dealing with manufacturing were introduced. 

“The reception [our clients] are getting on Capitol Hill is completely different from before the pandemic. Members of Congress are very interested in what you have to say. They want to hear about hiring, expansion, plans for cap ex. What are the challenges and what are the opportunities they can provide for you.”

Furthermore, there’s one area of policy where both sides of the aisle can find agreement. 

“We don’t have a lot of bipartisanship in that town, but when it comes to China, that’s one. In part it’s a national security issue, but also because of manufacturing. The manufacturing base in a lot of places has expanded politically,” Nashashibi said. 

Taking on China on the manufacturing side extends beyond semiconductor production. The federal government is looking to encourage the creation of manufacturing clusters based on a hub and spoke approach, one that incorporates different levels of government, training, partnerships, community colleges and for-profit manufacturing operations. 

Of course, just because both parties are focused on manufacturing doesn’t mean they’ll come to agreement on legislation, partly because of the strange calculus in D.C. where votes are based not on the common good but how it benefits each party politically. Additionally, the two parties approach the subject differently, with the GOP still generally aligned with the Chamber of Commerce perspective and the Democrats geared more toward organized labor, he said. 

Besides China, there are only a couple of other areas where the two parties are likely to come together enough to enact legislation, Nashashibi said. He anticipates an airline bill being signed, particularly given the issues that faced travelers this past Christmas. A railroad bill is also likely for similar reasons, and a farm bill will also be signed into law. 

“And that’s about it. There isn’t a whole lot to squeeze out of the rock. It’s not in their political interests as you get into primary season for these folks to work across the aisle,” he said. 

Of course, Congress will still be busy, hopefully preventing the economy from driving over the cliff in the near-perpetual debt ceiling debate. Nashashibi expects Congress to avert disaster, but negotiations will likely go down to the last minute (either in July or, after a stopgap measure is agreed upon, in September). But any delay will have consequences. “This will impact markets, it will impact supply chains and it will potentially impact taxes.”

In the absence of legislation, the administration will continue to turn toward regulatory agencies to accomplish some of its aims. That’s becoming an increasingly popular avenue in the past decade, as The Franklin Partnership now spends almost half of its time on the regulatory side, rather than the legislative field. 

One final prediction from Nashashibi concerns tariffs. The veteran lobbyist does not anticipate the Biden administration making any major changes to Section 232 or other tariffs implemented by his predecessor, with politics playing a large part of the decision making. 

“It’s not in Biden’s political interest to lift these tariffs. There’s no political scenario under which he can win Pennsylvania or Wisconsin if he looks soft on China,” he noted.

[Sidebar 1:]
CRU: Volatility Will Ease, Sometime Soon

The early-year price hikes notwithstanding, CRU expects a less volatile pricing year in 2023. Of course, it would be almost impossible to match last year’s 12-month ride. 

“2022 was the most volatile year on record,” said Estelle Tran, the prices lead for CRU. “In 2022, on average, the price increased or decreased about $43 each week.”

To put that into perspective, in 2009, the average week-to-week change was $9. 

The past year didn’t quite match 2021 for peak-to-trough spread, but it came pretty close. In 2021, the total price swing was $970 for hot-rolled coil. Last year, it only hit $845. 

And while mills have announced some ambitious price hikes to start 2023, the expectation from CRU is the pricing capriciousness will ease this year. “We think volatility will level out because of structural changes to the U.S. steel market,” she said. 

Those changes include a hefty growth in domestic supply. From 2021 to 2024, the U.S. market will add approximately 10.5 million tons of flat-rolled capacity. That supply will be able to support U.S. consumption even if foreign product is restricted due to tariffs, outages or improved demand elsewhere. 

Tran admitted CRU was surprised by the extent of the price hikes already put in place this year, particularly with the bearish economic indicators. The group forecasts a mild recession in the first half of the year. 

That recession has been stubbornly avoided, even with some negative indicators such as declining levels of industrial production, inflation and high interest rates. One market keeping contraction at bay is stronger than anticipated auto demand to start the year, she said. 

Still, the group anticipates the price for hot-rolled coil is likely to peak this month. 

“Generally, the prices should edge down after peaking in April as new capacity ramps up,” though she noted a few mills are “not living up to potential,” keeping down some of the supply. 

She also suggested the spread between galvanized and HRC will continue to compress, after reaching a high of $473 last year. CRU sees the spread between the two products sitting in a range of $180 and $220 this year. “Sometimes we see larger spreads between HRC and hot-dipped galvanized related to end-use demand or more active import penetration. Right now, those are very similar and there are a lot of tariffs on both products,” she said. 

The tariffs are just one reason why foreign steel remains an unattractive option. CRU and its affiliate Steel Market Update poll steel consumers on a variety of subjects, and the consensus is they’re not interested in importing material at the moment. Three-quarters of manufacturers and 61 percent of service centers were steering away from imported steel. “I’m not saying you should or shouldn’t, but Q3 is a very long lead time.”

SMU’s data shows inventories at service centers have been declining, as distributors engaged in aggressive destocking given fears of a first-half recession. Thus, if the historical trend of seasonally stronger first-quarter shipments remains the rule this year, service center stocks will likely dip into deficits by quarter’s end, she said. 

SMU also tracks lead times at mills, and its most recent survey pegged lead times at 5.1 weeks, up from 4.8 weeks in January. However, Tran said the suspicion was some mills were underreporting the amount of expansion taking place in lead times.

[Sidebar 2:]
A Sit-down with Simone 
The FMA meeting kicked off with its annual awards, which included the metals industry’s longest-running honor, the Steel Man of the Year from the Association of Steel Distributors. This year’s recipient is Valentino Simone, the founder of Target Steel, the 30th largest service center company in North America. 

Simone, who operates Flat Rock, Mich.-based Target with brother, Michael, sat down with the FMA President and CEO Ed Youdell to discuss his family-owned business and issues facing the metals distribution segment. 

Q:  How do you deal with price fluctuations? 
Val Simone:
  First of all inventory control is so important. Tracking the OEMs and Tier 1 and their scheduling and being able to track it through your ERP systems is crucial. With the amount of tonnage we’re dealing with, if you get stuck on the wrong side, it’s catastrophic. 

Q:  How do you work with your customers on pricing? 
Val Simone: 
Transparency with the customers, trying to be proactive instead of reactive. We’ve had some huge fluctuations the last couple of years in steel pricing that we haven’t seen before. Management of inventories is crucial.

Q:  Among the variables, what will have the biggest impact on pricing? 
Val Simone:
  Consolidation of mills is playing an important part. Imports haven’t been a factor the last few years, and I don’t see that happening any time soon. Consolidation and the amount of capacity, staying on top of those. 

Q:  What are you doing to bolster your workforce?
Val Simone
:  Every year we have interns that come in. We bring 5 to 10 interns into our systems. We’re going to high schools and colleges. We’re trying to make young people understand the steel industry is a good one. We pay 100 percent of employee insurance. We don’t lay people off. We have benefit programs. We offer a lot to our employees. 

Q:  Are you using social media as part of that?
Val Simone:
  LinkedIn has been a big part of it. That’s the younger crew. They know that LinkedIn and Instagram. I leave it up to them. 

Q:  How do you onboard new employees? 
Val Simone: 
When we bring somebody new on, we make them spend time on every piece of equipment, receiving department, shipping department, etc. We want them to make sure they’re going in the direction they want. 

Q:  What do you think of the effect of technology in the industry? 
Val Simone: 
The new processing equipment that’s coming online, two laser blankers. I never would have thought of using laser blankers. We slit steel, we cut steel, we shear steel. To do dual phase and higher yield steel. We’ve taken an active role in upgrading machinery to handle those.
Q:  Describe the challenges of working with the auto industry. 
Val Simone
:  It’s made us a better company. The forecasting, all of the issues we have with automotive people as far as inventory control. It’s demanding. We have to stay on top of it constantly. We’re bringing in new technology, a new lab. We’ve taken steps to handle more from Tiers 1s and OEMS. It’s exciting the direction we’ve been going now. 

Q:  You’ve been busy with acquisitions in the last few years. What are the challengers of that?
Val Simone: 
Buying three companies in two years was a scary situation. But it’s brought a lot of opportunity to us. It’s strengthened our relationship with mills. We’re working with them on processing material. 

Q:  Can the Fed get us to the soft landing?
Val Simone: 
The Fed raising the rates as rapidly as they have has put a real burden on credit lines. It’s going to reduce the amount of inventory you want to handle. It’s going to soften the purchase of new vehicles. We have a lot of work in front of us. 
I’d like to see them ease off on interest rates, it’s not doing any good for our economy. Making a major purchase of large quantities of steel, the interest rates we’re paying from our bank lines. Are we going to be able to recoup our money? We know some of the automotive people don’t pay in 30 days. 

Q:  What do you expect to see from the automotive industry?  
Val Simone:
  The EV market is not going to go away. The ICE market is not going to go away. There will be some consolidation in the EV market.  

Q:  Do you have any thoughts on alternative materials?
Val Simone: 
When I first got into steel, I would hear, “Why are you getting into steel; plastics are going to take over.” Steel has only gotten stronger. We’re not going anywhere anytime soon.