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NASA Roundtable Buying Co-op is United by ‘Advantage of Independents’ MCN Editors Tim Triplett and Dan Markham moderated a wide-ranging roundtable with members and staff of the North American Steel Alliance—the service center industry’s top buying co-op—Jan. 22 in Scottsdale, Ariz. Following is an edited transcript: Panelists: • Doug Anderson, Anco Steel Co., Naperville, Ill. • David Bernstein, State Steel, Sioux City, Iowa • Paul Blaisdell, McNeilus Steel, Dodge Center, Minn. • Rick Costantini, Scion Steel, Warren, Mich. • Steve Gottlieb, Ratner Steel Supply Co., Roseville, Minn. • Tom Kennon, Boyd Metals, Fort Smith, Ark. • Ed Leppien, Pacific Steel & Recycling, Great Falls, Mont. • Rich Merlo, JDM Steel Service, Chicago Heights, Ill. • Fred Prine, Westfield Steel Inc., Westfield, Ind. • Keith Sabel, Sabel Steel Service, Montgomery, Ala. • Don Sazama, Pioneer Steel Corp., Byron Center, Mich. • Tom Sennett, Samuel, Son & Co., Ltd., Troy, Mich. • Roger Simmons, Simco Steel, Ltd., Mississauga, Ont. * NASA staffers also participating: Lonnie Terry, Miles Donovan, Randy Haas, Vicki Snemis Q: What are your general impressions of current market conditions? • Sabel: We finished the year a little weaker, as usual, due to typical seasonality. January is somewhat spotty. We have good days and not so good days. No trend is really established. We anticipate 2013 to be about the same as 2012. [Group nods general concurrence.] Q: How did 2012 compare to 2011? Are you back to pre-recession levels? • Sabel: No, that is still a work in progress. Every year has been better since 2009, in units in particular. Margins have been compressed due to competition and a vastly changing market scene. Scrap has been influencing steel prices, up $50, down $50, which throws the market into disarray. • Kennon: I would echo what he said. 2012 was about the same as 2011. I am a bit different because of the energy sector in Oklahoma, which has been a little stronger. We saw a little rise in business in 2012 over 2011, in terms of both units and profits. As far as the fourth quarter leading into January, the market seems good, but we’re not sure yet. Q: Is that because of the political uncertainty in Washington? • Kennon: Absolutely. Everybody is afraid to invest in anything right now because of the political environment. Q: So customers are still waiting to see what happens with the debt ceiling and budget cutting debate? • Kennon: Yes, I think customers are waiting more than we are. • Gottlieb: 2012 was a pretty good year. Being in the Midwest, we are agriculture and energy dominated, and both sectors performed pretty well. We were up in 2012 vs. 2011. The last few weeks of December were a throwaway because of where the holidays fell. Several customers said they weren’t going to buy a thing until the fiscal cliff was decided. Recently, we have seen a significant uptick in quoting for customers, which is good. One of the positives that came out of the political wrangling is that bonus depreciation was extended. We have a lot of customers sitting on the fence about whether to buy equipment in 2013. Many are going to go ahead with plans because of that bonus depreciation. Some good things have happened that should help us out in 2013. Q: When you say business was up in 2012, are you talking single or double digits? • Gottlieb: Double digits, not dollars but tonnage. Q: Is that a typical experience for others? • Costantini: We are in Michigan, and we had a very strong 2012 because automotive has been very hot. We saw double-digit gains, and we expect 2013 to be about the same. • Bernstein: The drought is a big issue for the agricultural equipment makers. People are waiting to buy ag equipment. Last year the drought heavily impacted farmers. A second year of drought would make it much worse. We need a lot of rain in a lot of the upper Midwest. That will be the biggest driver for us in 2013, depending on how much rain we get and how much equipment people buy. Q: Farmers insure their crops, correct? So isn’t it likely some will buy equipment? • Bernstein: I think farmers did reasonably well last year on a cash basis once they got their [crop insurance] checks at the end of the year. The bonus depreciation helps, but buying equipment today and keeping yourself state-of-the-art is one consideration, while making sure you have cash coming in after possibly two years of drought is another concern. A lot of farmers are sitting and waiting. If it starts raining or snowing next week, it could be a good boost for us. • Merlo: Uncertainty always seems to be the theme at the beginning of the year. We are all waiting to see. We hear rumors that things could really explode this year from different markets. The energy market was crazy at the beginning of last year, then it calmed down. Railroad cars, they are saying, will be down this year, but tank cars are at an all-time high. So there is a lot of speculation on which way the market will swing based on the demand side. There is still a lot of uncertainty, but there is also a lot of optimism about what could happen this year. • Prine: Business has gotten steadily better since 2009, but there is a lot more competition in the Midwest. There are just more [competitors] in our area than there were in 2008. Q: I would have expected some shakeout during the recession and that survivors like you would be picking up market share by now. • Prine: That did not happen. Q: Did it happen in other parts of the country? • Costantini: We lost a lot of competitors. We lost a lot of everything in Detroit. The rebound has been pretty good for the people who have made it through. • Simmons: I can speak for southern Ontario, and nobody went away. As a matter of fact, there has been some increase in competition. The area is heavy in automotive, but there has been some increase in structurals and long products, too, in terms of the number of competitors. Q: Have you seen some startups in your market? • Simmons: Yes, and larger companies putting new facilities in the area. • Anderson: We all tend to venture further and further away from our normal market. We all want to grow, so we all spread out, even though it costs us more. • Sabel: That’s the overriding problem in the Southeast. When 2009 hit and consumption dropped 30-40 percent, the competition wanted to keep their piece of the pie the same. The only way to do that is to branch out, even if you lower your margin per transaction. In the Southeast, we did not lose any [service centers] of substantial means. We may have lost a few small people, but nobody of big measure. Q: Any other comments on 2012? • Blaisdell: We service Minnesota, Iowa, Wisconsin and the Dakotas, and 2012 was a strong year for us, up double digits. Mainly we rode the backs of ag manufacturers and the energy market. We are concerned about ag going into 2013. But we feel pretty strongly that both residential and nonresidential construction are beginning to recover, and some of those projects will pick up the slack. We’re cautiously optimistic about another up year in 2013. Q: Anyone else seeing any change in the construction sector? • Prine: No. A few schools or hospitals, but no commercial building. • Leppien: In the West, our customers are telling us they are keeping a lot of projects on hold until they know the tax consequences of what Congress is doing, and the financial stability of the country. • Sabel: I truly believe that if our government would get its act together, we would see a pretty big boom. There is a lot of pent-up demand. • Merlo: We operate in Houston, and it is amazing what has happened with the energy sector there in the past year. Whether it is oil and gas movement or water transmission, that business was great for nine months and then it just dropped off the face of the earth. Government regulation and what will happen with drilling is a big factor for companies that make frack tanks and pipe for all this oil and water movement. It could really explode this year. But Houston has seen three months with not a lot going on. Q: So as distributors, with all the uncertainty, what do you do with your inventory? Describe your inventory strategy. • Prine: We are taking a real conservative approach, given all the volatility [in steel prices]. Nothing is good when prices go down. Your inventory is worth less. We are watching it as closely as you can watch it. We are working now at six turns, keeping our purchasing people on their toes. • Gottlieb: It depends on who you buy from. If you buy from some of the big integrated mills, they need a little more lead time. But for the most part, lead times at the mills are very short right now. With so much uncertainty, you really don’t need to hold a lot of steel. You can get what you need fairly quickly. • Sabel: We keep our inventories anywhere from two to four months depending on the price at the time, and depending on our projections for the next few months. I would not say we are opportunists, but being in the scrap business gives us a little bit of a view forward. We may pad our inventory because we think the market is stable or trending upward. If it looks the other way, we cut back and buy only what we need to keep our stocks at a two-month average. My managers point out that we used to always have X pounds in inventory, but I point out that was when the steel price was in the teens. Now it is 30 to 45 cents [per hundredweight], so to have the same amount of pounds takes considerably more capital. We want to have enough to sell, but not to gamble. • Gottlieb: We have come to the conclusion that mill lead times trump everything right now. Even though other factors point to rising prices, when lead times get short, mills are willing to throw all that out the window to buy market share. Until mill lead times extend, it is hard for us to imagine how prices can start to go up. Q: Was anyone affected by RG Steel’s bankruptcy? It sounds like supply is in excess of demand at this point, even though a large mill closed. • Kennon: RG going out was a non-event. They were producing so little, and what they were producing was so questionable, I don’t think it had much impact on the market. Q: Any other changes on the mill level? • Gottlieb: We are waiting to see what ThyssenKrupp does down in Alabama. That will be a big factor in the marketplace. Q: Surely someone will buy that beautiful, new mill. [ThyssenKrupp is seeking a buyer for its plant in Calvert, Ala., which began production less than three years ago.] • Gottlieb: If the buyer is a U.S. mill, they could take down domestic capacity somewhere else. If it’s a foreign buyer, they may run it at capacity. There could be a big difference in the marketplace, depending on who acquires it. Q: I want to make sure I understand the inventory situation. Are your inventory levels historically high, low or about the same? • Sennett: Our inventories are just about the same. In the last couple of months we have really been trying to work down the inventories, feeling like we will see some buying opportunities near the end of the first quarter. • Prine: Our inventories are low, conservative. [Others nod agreement.] Q: Let me pin you down on your forecasts for 2013. You say you expect a 2013 about the same as 2012. Does that mean you are expecting a flat year? Can you put a number on it? How optimistic or pessimistic are you? • Sazama: We're actually running a little bit behind 2012 right now. I don’t see any prospect for drastic improvements in the next six months. There is a still lot of uncertainty out there. We are certainly holding off on any equipment purchases, and keeping our inventory as low as we possibly can. I have a good memory and I remember three years ago. No one wants to get caught up in that again. Our customers feel the same way. We sell to a lot of small tool and die shops. Many of them are still hanging on by their fingernails. You have to be really careful who you extend credit. A lot of them have not really recovered yet. Q: Are others concerned about getting paid? Have accounts receivable stabilized? • Sabel: My company started insuring its receivables a couple years ago. [Credit insurer] Euler Hermes is one of the co-op’s operational suppliers. It has brought us a much greater comfort level. The most important thing is getting paid for what you’ve done. Q: Show of hands, how many insure your receivables? About half. Is that typical? • Gottlieb: I think it is more prevalent in NASA than in other parts of the steel industry. The big players all have huge credit departments and are on top of customers, getting financials and letters of credit. In our group, smaller, more entrepreneurial-type companies need credit insurance more. • Anderson: I wasn’t familiar with credit insurance until I joined six years ago, and it was a savior for me early on. It was a great benefit that NASA provided. Q: In terms of capital spending, is anyone planning any big investments this year? • Kennon: We bought high-definition plasmas for three of our locations last year. • Gottlieb: We are opening up a new building in Indiana with a new cut-to-length line from Red Bud. • Blaisdell: We made a pretty significant investment in equipment. We currently are adding a Red Bud leveling line in our Wisconsin location, two 3D lasers, one flat laser and a couple of brake presses. • Anderson: We are a little different. We are opening up a location for rebar fabrication. • Costantini: We made an investment in ERP software from Enmark. We’re in our training sessions right now. Q: Other thoughts or comments? What keeps you awake at night when you think about 2013? • Sennett: On the automotive side, there has been a rollup of consolidation among customers. We used to have that credit spread across three or four different accounts. Now you have one customer who owns all three. It concentrates the risk. That's concerning. Banks have been willing to lend money to them, but there is also a lot of debt in those companies now. It will be a challenge for everyone to stay on top of that. • Gottlieb: For us, it is the competition. The "big box" players continue to get bigger and more creative. There has been no consolidation at the service center level to speak of, so there are a lot of people chasing every order. We are seeing margins compress more and more, so you have to get that extra volume just to make the same money. We don’t know where that’s all going to shake out. Q: What else is keeping you awake? • Leppien: The lack of consistency with the economy. It seems like energy goes up, then it backs off. Automotive goes well, then it stabilizes. There is still not a lot of construction out there. A lot of money remains on the sidelines. So there is a lack of consistency you can count on. • Sabel: I agree competition is an issue, but overriding that for me is the lack of a clear vision from our government. We are not promoting confidence in our economy. An American people with confidence will do things. Without it, they hang on to their money. • Prine: We are always on the lookout for another company to buy, but today you can’t afford to make a mistake. You have to make sure that whatever you do is the right decision. • Simmons: We know a lot of imports will be hitting the Great Lakes in the springtime, and it will have a detrimental effect on our domestic mills, no question. Q: Do your companies buy much imported material? • Sabel: Some. On the Gulf Coast, there are times when you really have no choice. You either compete with the lower price or you’re not part of the game. We go to our domestic suppliers and say, “Here is the offer we have [from a foreign source]; can you help?” More often than not they say no thanks. We are primarily domestic, but we do take advantage of buys when we feel the offer will be taken up by our competition and we must lower our cost. Q: Is that more of an issue based on where you are located? • Merlo: Yes, in Houston we buy a lot of foreign steel, and in the Midwest we don’t. In Houston, there is no producing mill close by, so it is difficult for the domestics to get the product there and meet the price of the foreign that is coming in. It is a big factor down there. Q: How has your membership in NASA benefited your company? • Sabel: The co-op is successful because we have a motivated staff, an interested board, growing membership and willing suppliers. NASA has made my company more profitable. We joined to get us closer to the “big boxes,” and it has helped. We are far better off today. 'NASA Members are Part of Something Bigger' The North American Steel Alliance, based in Laguna Hills, Calif., is the service center industry's largest buying co-op. Its 115 members operate about 370 locations in the U.S. and Canada, with aggregate annual revenues or more than $7.5 billion. Lonnie Terry, NASA's president and CEO, describes the group as a “member-driven organization.” It is not NASA’s goal to recruit many members, but rather to recruit the right members. “We go after the best independent service centers out there. Because they are independent, they make quick decisions; they have deep experience in their products and industries; and have very close relationships with their customers. Putting all that together, we have an ‘advantage of independents’ and that plays out in many ways,” Terry says. NASA has relationships with about 20 metals suppliers, who offer a full range of steel and aluminum products, and 30 operations-type suppliers, who offer everything from credit insurance to office and janitorial supplies. NASA members receive rebates each year based on the degree to which they participate in group buys from these preferred suppliers. The suppliers, in turn, benefit from the group’s volume. By purchasing through NASA, small distributors get buying power comparable to larger competitors. At the same time, they retain their independence and decision-making authority, notes NASA Vice President Miles Donovan. "The term 'independent advantage’ is what NASA is all about. If you look at the market, you have the 'big boxes,' you have NASA, and then the rest of the industry. Relative to other folks in the market, that puts our members in a really strong position. NASA helps our members define themselves as part of something bigger."