At last month’s Steel Success Strategies 2019 Conference in New York, the final panel on Day 1 steered away from the tariffs and trade topics that had been top of mind for most presenters. Instead, they addressed another topic of great interest to the industry – digitalization.
The three panelists at the 34th AMM/World Steel Dynamics event agreed on one key thought – the industry is woefully behind other business segments when it comes to adopting and utilizing data and the other advantages borne of the technological revolution.
“There are pockets of excellence, but in general we’re way, way behind,” said Barry Zekelman, CEO of pipe and tube producer Zekelman Industries, Chicago. “It’s almost embarrassing how far behind the steel industry is.
“If we’re not thinking about it today, we’re not going to be where we need to be tomorrow. I would argue the steel industry is not where it needs to be compared with other industries,” said Todd Leebow, president and CEO of Majestic Steel, Cleveland.
That could be changing, however slowly.
“There aren’t common technologies. There aren’t common platforms. There are a host of different things when dealing with customers because they each have their own platforms and own needs,” he said.
“What we’re seeing the last one or two years at conferences like this is interest concerning digitalization has significantly increased. We are close to an inflection point in our industry,” said Gisbert Rühl, the CEO of Germany’s Klockner & Co., the parent company of the North American service center leader, Kloeckner Metals.
The companies represented are clearly the exception. Zekelman has spent the last few years developing its Automated Inventory Management system, an in-house web portal designed to smooth out the purchasing process. Likewise, Rühl’s company has been approaching the purchasing issue from an industry-wide perspective, launching its digital XOM Marketplace in Europe in 2018 and following it up with a North American launch this spring.
And perhaps no company in the industry has been as active at using technology to advance its business as Majestic Steel. Leebow outlined a raft of developments his company’s team of designers have launched over the past decade. Some, such as its Sales and Analytics hubs, are internal tools to bring information in real time to the people in the company who need it. Others, such as the weekly Core Report or its most recent innovation, the Unravel coil calculator, are designed for the benefit of the industry as a whole.
‘We always say educated buyers make better decisions,” Leebow said. “They make decisions based on facts and fundamental, rather than just on feel.”
And like Kloeckner, Leebow has been involved in the creation of an industry-wide digital platform. Felux is a platform spun off from Majestic by former company employees who grew up in the entrepreneurial culture fostered there, he said.
It was the future of these digital platforms that created the most interesting back-and-forth commentary throughout the conference.
Rühl and Leebow believe the emergence of digital platforms in the vein of Amazon or Alibaba were inevitable. An increasing number of today’s steel buyers have grown up in a digital consumer world, and expect to have that same kind of experience in the B to B space. If the steel industry players didn’t develop such a system for buying and selling metal, an outside agency would have filled the void. “The question is who will lead this: Will we have companies from outside, or companies inside the industry?” Rühl asked.
But Zekelman wasn’t sold, at least as far as his company is concerned. He believes his company’s portal will serve the needs of his customers best.
He noted how the AIM system allows for complete visibility into the purchasing process, from steelmaking all the way through to delivery. The system lets customers know exactly what they’re getting, where it is on the shop floor, and exactly when it will be delivered to the customer. And with a system that takes human touches out of the equation, the company will be able to drive out costs and inefficiencies from the process, he said. These attributes won’t be available on a universal platform.
“It allows for better inventory management, better forecasting. We all know the whipsaw effect in pricing. You reduce a ton of risk when you’re able to turn your inventory quickly. We have some structural customers turning their A and B material 15 to 20 times. It clears up floor space and capital, while still maintaining the service metrics to the customers,” Zekelman said.
He challenged the idea that his product will need to be available on a broad platform. “We’re in business to make money. I’m not going to get bid down.”
Rühl countered that the answer isn’t ultimately up to Zekelman or Kloeckner or Majestic. “The customer will decide,” he said.
“It’s not a commodity business. It’s a highly value-added proposition if you deliver it the right way,” Zekelman said.
But Leebow said some in the industry certainly see it that way. “How much more commoditized can it get? Companies send an email in a blind copy and put a price in the email,” he said, though noting that his company believes it’s adding value to the transactions it conducts.
Rühl said the western world has fallen behind when it comes to the use of platforms. “We only have to look to China to see how advanced this industry is in digitalization already.”
“You have to do it and make money. The Chinese steel industry doesn’t make money,” Zekelman countered. “It’s all great, with these web companies like Uber where you can get a car at any time, but Uber loses a billion dollars a quarter. Tesla is a cool technology company, but they’re burning through $900 million a quarter. There’s a balance.”
Interestingly, all three men agreed that successfully delivering the steel industry into the digital age will be crucial to complementing that with a more traditional form of productivity – top-notch employees.
“If steel isn’t willing to innovate, if it doesn’t attract the best talent, we’re going to struggle to perform,” said Leebow. Developing an organization that embraces the technological revolution, and thereby brings in the best young hires, has to be “part of the culture and part of your mission. It has to be communicated throughout the organization.”
“The world is becoming much faster. That’s the way it’s going to be,” Zekelman said. “Unless we can adapt to that, we’re going to have trouble attracting to people into the industry.”
The Lender’s Perspective
The North American steel sector remains an attractive market for commercial banks, at least those predisposed to serve the industry.
Andrew Pappas, managing director of BMO Harris Bank, said lenders like his remain bullish on the market. “From the commercial bank market perspective, the metal sector is still a strong sector. There are number of banks very active in the space. We are very active in the space,” he said during a panel discussion on steel industry financials.
“If you’re managing your working capital well and managing your business properly, there’s plenty of capital available . It’s still a good time to be a borrower.”
A good time, and possibly getting better. Market watchers were expecting a decrease in interest rates from the Federal Reserve, followed by another later in the quarter.
Digging into the steel markets, Pappas said the flat demand that has characterized the first half of 2019 has its roots in supply chain pullback. Conversations with service centers have indicated warehouse shelves are largely empty.
“One conclusion we’ve drawn, the bottom is near, the supply chain is bare. Many people have taken their inventories down to two months or even below, and they’re barely purchasing any more material,” he said.
For the mills, the spate of new investments announced in 2018 will have several effects when those projects begin to reach fruition. Mill profitability will likely take a hit, some import offerings will be replaced by domestic products and some current production will likely be taken offline.
Pappas said BMO Harris does not see doom and gloom in the market, with no expectations for a recession in the near future. On the other hand, the company remains worried about the trade environment and what kind of an effect it will have on the industrial economy should issues with China and other trade partners remain unresolved.