What will the supply chain and industrial economy look like when we’re fully recovered from the coronavirus pandemic? Four experts weigh in.
One of the more pressing questions that has loomed over the industrial economy since the start of the pandemic is how the business environment will look once COVID-19 has run its course.
Over the course of the past few months, Metal Center News has been speaking to leading voices inside and outside the industry, listening to webinars and other ways to discover just what we can expect from the metals supply chain post-coronavirus.
Here are four takes, from an analyst, two economists and an aluminum executive, on just what to anticipate from business life after the pandemic.
Few steel analysts spend as much time poring over the bigger picture than the veteran John Lichtenstein, now the managing partner of Swiss-based Research and Consulting Group AG. Lichtenstein always tries to see how and where steel fits within the trends dominating the economy and culture. His assessment of the post-pandemic world is a harsh one, in many ways.
“The first thing is, there is going to be a permanent reduction in the size of the steel market,” Lichtenstein says. “I’ve gone back and looked at all of the recessions in the U.S. over the past 50 years, and in each case, looking at steel consumption, it was lower than the recovery from the previous recession.”
He says recessions of all types exacerbate long-term declines in steel intensity. Part of that is the natural inclination in a recession to look for better, more efficient ways to accomplish the same task. A more recent part is the ongoing trend to higher-grade steel.
Automotive, for example, continues to use more advanced high-strength steel. While that’s good for the steel industry in its battle for material primacy, the oft-unsaid fact is there is still less steel being consumed in the process.
As for the supply chain, Lichtenstein says there are counterbalancing effects at work. On the one hand, the experiences of the pandemic may push toward tighter, more local supply chains, as companies try to take a little country risk out of play. That is supported, at least in theory, by greater protectionist policies. “It could mean things are closer, geographically,” he acknowledges, which is good for the steel service center.
However, that’s offset by any push to offshoring of steel-containing goods that will come back to the U.S. market as finished goods. “There’s good evidence that the 232 tariffs have accelerated the trend toward offshoring of steel-intensive manufacturing,” he says, noting the price differentials for steel products that existed when the duties went into effect made that more appealing. “I’m not saying 232 was a bad idea, but putting them in without some type of protection downstream was shortsighted,” he says.
There are a few risks to the service center, particularly those who try to live by buying and selling smart and living on the spread. Mills may start looking to move downstream, using technologies to get better visibility into their order books and working more directly to the customers.
To thrive in the coming years, service centers must make themselves indispensable parts of a mill’s supply chain, worrying less about whom to buy from and more about serving a particular producer well, he contends. Relatedly, survival can hinge on getting closer and more useful to the customer, continuing to expand its value-added services.
“Service centers either have to move closer to your steel supplier and become a part of their supply chain and make it less attractive to disintermediate you, or you need to further integrate yourself into the customers’ supply chain, taking on not just processing but first-step manufacturing,” Lichtenstein says.
But these aren’t done with the flip of the switch.
“All of this requires capital, particularly on the customer side. You’re going to have to have access to capital, which is further bad news to the small mom and pop,” he says. John Anton
At the early-March FMA Annual Meeting in San Antonio, John Anton was the prophet. While numerous other steel analysts and executives were downplaying the novel coronavirus, Anton was promising attendees it was going to hit the U.S. hard, with devastating effects to the U.S. economy. Within a few weeks, it was obvious Anton, IHS Markit’s principal economist for the steel industry, was spot-on with his predictions of doom.
A few months later, while speaking to John Packard in SMU’s weekly webinar series as many states were beginning to lift restrictions, Anton was applying the brakes to overexuberance.
“Things are improving and will continue to improve. That improvement is not going to be huge and it’s not going to be fast,” Anton said.
Anton’s view of the major end markets follows that basic premise. He says nonresidential construction will fall off more than 20 percent in 2020, with only a 5 percent increase next year.
Automotive will recover a little quicker than construction, but will still take a few years to get back to 2019 levels. “The growth rates will be great, but the level is what’s important to steel demand, and that’s not there.”
For fabricated metals, a major customer of service centers, the decline in 2020 will be roughly 25 percent. He doesn’t anticipate the market to recover fully by the end of 2022.
Finally, there’s oil and gas, and the story there might be the most depressing of all. The price of crude oil will rise slowly, keeping activity at lower levels. “We do not see a spike in oil prices. If it did, it would only last for hours,” he said.
In late May, the industry was still facing a major oversupply of oil that had already been pulled from the ground. “There aren’t enough places to put the inventory,” he said.
One of the questions hovering over the supply chain is how the mills will react to demand increases. Many observers praised the industry for how quickly it reacted to the pandemic by idling capacity. But if demand increases or prices come back, the incentive could be there to bring more capacity back online.
“Could the integrateds go out of business or be absorbed by someone else? Yes,” he asked and answered. “I don’t know what mills will close, but I do expect to see some furnaces close.”Chris Kuehl
The coronavirus, and the response to it, presented the ultimate conundrum, said Chris Kuehl, managing director of Armada Corporate Intelligence. “No matter what you do with the economy, or to deal with COVID-19, it’s going to make the other problem worse. Anything you do to further contain the virus is going to further damage the economy. Anything you do to open the economy is going to make the containment process that much harder.”
Kuehl, who was Packard’s guest the following week, is more optimistic about the recovery.
“The overwhelming opinion at this point is we’re looking at a fast recovery,” he said.
Kuehl’s positivity was driven by the unique nature of the current crisis. Unlike previous recessions, driven by economic forces, this was more of an intentional economic slowdown. “We went into this because of a deliberate government action; we were not headed for a serious recession prior to this.
“It was a sudden, imposed recession. Which means it can be a sudden, imposed recovery, depending on how the government responds, depending on how businesses respond and depending how consumers respond,” he said.
It is the last group that is most responsible for Kuehl’s confidence. The government attacked the coronavirus-driven recession the way it typically does, by putting money in the average American’s hands and counting on them to spend the economy out of the doldrums. The problem, this time, was the consumer had nowhere to spend the money.
During normal times, Americans save at about a 4-5 percent rate, with the rate occasionally climbing to 6 percent. During the coronavirus, Americans were saving at close to 25 percent.
“When it opens up, then you get this surge of money coming into the economy, coupled with a desire from consumers to get back to ‘normal,’” he reasoned. On an individual market level, he said the longer-range exit from the recession will deliver some decided winners and losers, depending what niche a sector occupies. Construction, for example, will have a shift toward the medical sector, a recognition of the importance healthcare has played in response to this pandemic, and the potential needs if there’s a next one.
Another nonresidential construction segment, warehouses, could see a spike in growth as companies put more value on inventory, given some of the supply chain struggles during the shutdowns.
One interesting segment, with drivers both pulling it up and pushing it down, is automotive. In some ways, auto demand may spike as virus-surviving consumers are more hesitant about public transportation for local needs or flying when traveling by auto is an option.
On the other hand, as many companies were forced to allow employees to work remotely during the height of the crisis, there could be a greater shift to making that option permanent, which would have potential impacts on auto miles, among numerous other business segments.Lee McCarter
Disruptive events such as the COVID-19 pandemic deliver major challenges to companies in every industry, and the metals manufacturing segment is no different. At the same time, for the fast-thinking and nimble company, times like these present ample chances to reinvent themselves for the future that follows.
That’s the way JW Aluminum is approaching the crisis. “Clearly, this situation has brought up a risk, because we hear it every day on the news,” JW Aluminum CEO Lee McCarter told MCN. “But it’s also brought up an opportunity. There are opportunities for manufacturing, opportunities for our country.”
McCarter saw a supply chain that was challenged by the pandemic, with distributors and manufacturers less capable of relying on distant suppliers who could be stuck in a lockdown or out of reach due to global transportation network slowdowns.
McCarter hopes the pandemic’s challenges will result in reshoring of some critical manufacturing, with medical and pharmaceutical most likely to lead the way. “Of course, that has a trickle-down effect on many industries, including the aluminum space. When you see those companies come back, you’ll see the trickle-down effect on companies that support those industries with supplies.”
Meeting those needs will require investment. The aluminum supply chain his company takes part in has an annual domestic demand of three billion pounds of flat-rolled continuous cast products, but only 2 billion pounds of capacity. “You have a billion pounds of product that people have to go elsewhere for.”
JW Aluminum is in the closing phases of a 220,000-square-foot expansion in Goose Creek, S.C. Upon completion, the project will add 175 million pounds of new capacity, fed by 100 percent scrap material. The first phase is expected to be completed this month, largely avoiding any disruptions from the pandemic.
The investment was prompted by several factors, including the knowledge that to continue to produce for the next few decades, the company needed to upgrade to the most advanced technology. “Further prompting it was domestically it’s been an under-invested capacity in this country, and our customers were almost begging for domestic sources.
“It’s going to take some time for capacity to reshore itself here in North America, but I think over time service centers are going to look how they can better diversify their supply chains,” he said. ?