A New Feel For Steel
“There’s a different feel to the economy in 2011,” said one mill executive, reflecting the generally positive tone at Steel Business Briefing’s Steel Markets North America Conference last month in Chicago.
By Dan Markham, Senior Editor
Steel Producers Positive on Service Center Partnership
Since the recession and its dramatic effect on demand and pricing, service centers have been understandably gun-shy about buying steel. Even with the recovery gaining steam, there has been no big stockpiling by distributors. How has this more conservative approach to business been viewed by the service centers’ supply base? Mill executives admire their newfound discipline.
At last month’s Steel Business Briefing Conference in Chicago, moderator Tom Balcerek, North American editor for SBB, asked a panel of North American steelmakers if the “hand-to-mouth buying [by service centers] plays havoc on [mill] production schedules?” In fact, the producers said, buying that more closely reflects actual demand is a welcome change.
“We’re all looking for a consistent model, rather than a volatile one,” said Madhu Vuppuluri, president and CEO of India-based Essar Americas. “I like a more consistent buying pattern; it helps us from a scheduling perspective,” added Keith Busse, CEO of Steel Dynamics Inc., Fort Wayne, Ind., who noted that the risk of unexpected price swings is far too great today for service centers to speculate.
Since the entire supply chain suffered during the recession, mills and their customers have a greater appreciation for the benefits they can share from a stronger partnership. “Our relationships with our service centers are better than they ever have been. It serves the industry well,” said Tim Timken, chairman of The Timken Co., Canton, Ohio.
“Service centers are our salespeople. We need them. We’re having much better dialogue with them. We understand them much more,” added Vicente Wright, president and CEO of California Steel Industries, Fontana, Calif.
The steelmakers explained their own efforts to manage their companies through the downturn. “You need to differentiate yourself with your customer base,” said panelist Mike Rehwinkel, president and CEO of Evraz North America, which is relocating its headquarters from Portland, Ore., to Chicago. “We increased our spending in marketing, increased spending on the commercial side, increased our sales team. In a downturn, the last thing you want to do is take away your focus from the customer. You probably need to spend more in a downturn.”
Busse said SDI’s electric-arc-furnace technology allowed the company to more quickly adjust to the decline in demand. “It’s fairly easy to ramp up and ramp down. It’s one of the benefits of [minimill] technology. We continue to focus our efforts to be the low-cost producer.”
California Steel has worked to become a more market-oriented organization, Wright said. “The world has changed. We implemented a new marketing department to collect better intelligence and to have more direct contact with the customer. We want to be closer to our customer base, to understand how we can work together. We decided to schedule the mill in a certain way and to stick to a certain level of production.”
As for the year ahead, the panelists generally offered a bullish outlook. “There’s a different feel to the economy in early 2011 than there was in 2010,” Busse said. “Many of us misread the marketplace last year. It was more about restocking and less about an increase in real demand. This year, the demand seems real.”
Commenting on specific markets, Timken pointed to opportunities in mining and extraction equipment. “The base industrial businesses have gotten a lot of the inventory restocking done. Now we’re seeing good quality structural flow through the supply chain. That’s all very positive,” he said.
One of the hottest markets is the rail industry, Rehwinkel said, which is good news. “We’re running quite full in our rail production. When you move freight across this country, it means something’s happening. It’s one of the biggest positive indicators for our economy right now.”
Streamlining the Supply Chain Takes on Greater Urgency
In an economic and pricing environment that makes distributors tentative about investing in inventory, streamlining the supply chain takes on greater urgency, explained three leading service center executives on a second SBB conference panel.
Wayne Bassett, president and CEO of Samuel, Son & Co. Ltd., Mississauga, Ont., believes there are areas where all the players in the supply chain can improve. Most importantly, end-use customers need to work with mills and service centers to take costs out of the chain by making stronger volume commitments, sharing information on production schedules, placing more consistent orders and minimizing the sizes and grades of metal required. “A lot of customers don’t want to work with us to see how we can cut costs in packaging, run sizes, logistics and scrap. There are all kinds of things we can do to minimize the cost of doing business,” Bassett said.
Don McNeeley, president and chief operating officer of Chicago Tube & Iron Company, Romeoville, Ill., expanded on Bassett’s complaints about OEMs’ forecasting habits. “One of the problems inherent in our channel of distribution is allowing the OEMs to play us. They inflate their projection, it comes in at 60 percent, and there’s no downside risk. Eventually you draw a line in the sand and they just move on down the road to the next distributor to run the game again,” McNeeley said.
From the mill side of the chain, Bassett argued for improved delivery performance. Shipping partial orders leads to higher handling and logistics costs. Bassett would also like to see mills offer reasonably priced yearly contracts and maintain slab banks or hot-band for customers. In absence of the more long-term contracts, Samuel “is taking a position in scrap,” he added.
Bassett didn’t exclude his own industry from critique. He believes distributors should invest in better computer systems for real-time information sharing, perform processing closer to the producers and source the right products from the right suppliers.
“You get much better delivery service and improve the chain dramatically if you do a lot of volume of similar items with one mill. We’ve split our purchasing where we source some items with mill A, some with mill B and others with mill C. They’re all getting the same number of tons, but they’re getting the same tons in fewer items. We find that works better in the chain,” Bassett said.
Chairman and CEO Jim Bouchard of Chicago-based Esmark advised distributors to make sure they serve a diversified market, in terms of products and customer segments. “Any service center that has one customer who represents over 20 percent [of sales], if that customer goes down, it can capsize the company.”
Likewise, no single end market should represent more than 20 percent of the business, he added.
Bouchard believes the current high prices for steel are not a temporary spike, but a near-permanent condition. Distributors with liquidity issues are in peril, he said.
“Any service center purchasing hand-to-mouth right now, not servicing their core business or giving their salespeople an opportunity to grow, should get out of the business. The price volatility is here to stay, so you’d better have a strong balance sheet. It’s only going to get worse.”
McNeeley, who doubles as an economics professor, said the entire manufacturing base is faced with a new challenge as the result of the most recent recession—the Paradox of Productivity. Similar to the Paradox of Thrift, which explains the downside to the economy of too much saving, this new phenomenon grew out of a protracted recession that saw companies shed much of their workforce. Businesses first cut labor costs through attrition, then layoffs of the least productive workers, and finally painful cuts of valued employees as the recession dragged on. Eventually, these leaner employers learned they could do more with less.
That leads to the question: “Can the nation become too productive to employ the masses?” McNeeley asked.
Analysts Debate Direction of Carbon Flat-Rolled Price
Spurred by rapid increases in raw material costs, prices for carbon hot-rolled steel were approaching $900 per ton in early March, “one of the most remarkable periods in pricing I have ever seen,” said Paul Shellman, a consultant for Wainscott Commodities Inc., New York. “Prices are no longer set regionally. Demand in the Midwest and Chicago are not setting prices. Prices are set globally by raw materials.”
Though panelists Shellman, John Anton, Sandy Simon, Josh Spoores and John Short all expect the steel price to moderate, they disagreed on when it would take place and how high would it get before then. Most expect the price to peak at a bit over $900 before starting to tumble later this quarter.
“There’s going to be a point when inventory buying slows down, and that’s pretty much what I’m looking for,” said Spoores, the founder of Steel Reality, Spencer, Ohio, which analyzes the flat-rolled steel market. “I’m looking for a short and swift decline in prices before things go back up.
Anton, director of steel services for IHS Global Insight, Lexington, Mass., was the outlier, saying prices were at or near their peak. “These are the second-highest steel prices ever, with demand that’s not back to normal. While I don’t think there’s going to be a freefall, I think they’re higher than we can support.”
But even if the price dips before the second quarter ends, many anticipate a second run-up later in the year.
“What you are getting is a compression of the length of time for a cycle. I think we’ll see at least two more cycles this year, but they’re not going to be swings of $500 up and $300 down. They’ll be smaller,” said Short, director of metals for Newedge, a global futures commission merchant based in United Arab Emirates. “You just have to deal with it, because if you get your volume wrong in those cycles, you’re snookered.”
Anton agreed that the economic cycles are speeding up, noting that price hikes and price minimums for steel had alternated every year since 1996 until this year. “It’s a faster cycle.”
Despite other factors that contribute to the price volatility, including the costs of iron ore and scrap, demand will ultimately dictate steel’s price, the panelists agreed.
China is the wildcard in global steel pricing, Short noted. “If China decides to export, all bets are off on what prices might do in North America. If China keeps its exports in check, you’ll have a little more of control. But China will decide it for you.”
All the panelists supported the concept of steel futures trading to provide protection from big price swings. Even service centers could benefit from a futures market, said Simon, vice president of business development for Atlanta-based Pacesetter Steel Service. “In the steel business, some of the OEMs want to make money on both sides. All the hedge is designed to do is protect your margins.”
Hopeful Outlook for Energy, Construction, Manufacturing
Sending conference attendees on their way with a feeling of hope was the final panel, which delivered mostly encouraging forecasts for steel’s major consuming markets. Perhaps the most surprisingly upbeat outlook was offered by John Cross, who’s far more confident about construction than most observers.
Cross, vice president of the American Institute of Steel Construction, Chicago, said his organization believes overall construction, which encompasses residential, nonresidential, industrial and infrastructure in almost equal parts, will increase by about 11 percent in 2011, with further growth projected in the coming years. While industrial and infrastructure experienced only modest declines in activity through the recession, both the housing and nonresidential sectors have fallen to historically low levels.
The depth of the problem was exemplified by the height of the building projects, Cross said. In 2007, 142 projects of more than 20 stories were started in the United States. In 2010, just 22. Every segment of the nonresidential and residential markets except one, college dormitories, was down significantly from the peaks of 2006-07.
So why the optimism? Cross said the two most prominent theories on nonresidential construction suggest a recovery either follows residential construction by two years or starts three quarters after the general economy begins to improve. But he does not stand behind those predictors in this case. Instead, his organization looks at three factors: the GDP growth rate returning to pre-recession levels, positive employment growth, and improvement in the American Institute for Architects billing index. All three of these conditions are on the upswing, he noted.
AISC predicts improvement in both residential and nonresidential construction activity through 2015 before it begins to taper off again, though it won’t reach the heights of 2006-07. “It will be about 20 percent below the peaks. But that’s good news compared to where we are right now,” Cross said.
In contrast to the construction market, the energy market remains strong, particularly where natural gas is concerned, said Kent Moore, professor and director of the Energy Policy Research Group at Duquesne University in Pittsburgh. “Gas in general, and unconventional gas in particular, is the game changer, especially in North America,” he said. The price of gas, which he expects to hit $4.20 to $4.65 per million BTUs, coupled with North America’s enormous surplus, is going to change the dynamics of the market, the need for storage and which deposits will be mined, he added.
The Marcellus Plate, in Moore’s Pennsylvania backyard, figures to be the big winner in the future, with more than 827 trillion cubic feet of known recoverable reserves, plus an even greater amount believed to be below that. The average new Marcellus well will come in profitable at a NYMEX contract of $3.52, which is 40 cents below the current level in what’s considered a depressed market, he said.
That contrasts to the Barnett Shale in Texas where “there’s plenty of space left but the sweet spots are gone,” and a contract costs in excess of $6.50 to drill. “You’re seeing companies dropping lease options in Barnett and picking up lease options in the Marcellus. Cheaper gas is moving more expensive gas out of an already super-abundant market,” Moore said.
The expansion of drilling projects in Pennsylvania will also require the construction of additional pipelines and storage facilities. “In many regions, we now use over 85 percent of pipeline capacity for storage,” Moore said. Currently, 28,000 miles of pipeline are planned or under construction in the United States. That figure is expected to grow to 61,000 miles by 2030, he added.
In addition to its abundant supply, other factors bode well for natural gas, including new clean-air restrictions that will drive power generation away from coal-based projects. “Natural gas is going to be the fuel of choice,” Moore said.
Roy Platz, marketing director for ArcelorMittal USA, Chicago, was similarly enthusiastic about the prospects for automotive and general manufacturing. Platz noted that the manufacturing sector has positioned itself nicely in the past decade with restructuring, consolidation, reduction of legacy costs and high productivity making the U.S. sector globally competitive.
In December, U.S. exports of capital goods exceeded the peak in 2007 and were just marginally below the all-time peak of early 2008, he added. “We’ve got great export strength. We have a competitive U.S. manufacturing base, which no longer has the headwinds of an excessively strong dollar. I’m pretty bullish on manufacturing as a whole.” n