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March 1, 2010

HOW, NOW?

Metals industry executives, like just about anyone in business, aren't happy about the economic ideas coming from Washington.

How to jump-start the North American economy appears to be a mystery. Last year’s stimulus packages enacted by the U.S. and Canadian governments have not been entirely successful. Forecasters expect unemployment to remain stubbornly high and consumer spending anxiously low. In the long run, government debt levels in both nations threaten to hobble growth.

Proposed solutions come and go, driven by their momentary political appeal more than their sustainable economic value. If January’s upset election for the U.S. Senate in Massachusetts is any indication, the appeal isn’t working for President Barack Obama. Congressional Republicans are even less popular. At the start of 2010, Canada Prime Minister Stephen Harper suspended meetings of parliament and reshuffled his cabinet as he looked toward a new phase of his economic recovery plan.

Sir Arthur Conan Doyle’s super sleuth, Sherlock Holmes, preached, “When you have eliminated the impossible, whatever remains, however improbable, must be the truth.” Could it be that North American manufacturers, beset by overcapacity and global competition, and out of favor in political power circles in Washington and Ottawa, have some useful answers?

Forward sought short-term and long-term answers from the North American metals industry. Industry leaders expressed the same doubt, bias and skepticism that are apparent everywhere, to be sure. Don’t expect total agreement among these entrepreneurs. But this informal open mic generated tips and strategies that comprise a timely contribution to public discourse, especially now that other ideas have failed to complete the job at hand.

Two broad questions were asked regarding economic revitalization.

Number 1: What are the two or three most important steps government policymakers need to take now?

Number 2: What are the two or three most important steps the metals industry needs to take now? The replies are presented as unvarnished as possible. In sum, the to-do lists boil down to these:

For the economy as a whole, the metals mavens would like to see a little enthusiasm out there for manufacturing. Direct the remaining government stimulus dollars to substantial infrastructure projects. Upgrade public education with an eye toward globally competitive jobs. Enforce existing laws rather than enact new ones, especially those that encourage the industrial economy. Reduce regulations and paperwork burdens on small business. Don’t tamper with the balance between management and labor. After you’re done spending for infrastructure, reduce long-term government debt.

For the metals industry, the focus is on modernization, efficiency, better use of technology and better buying. Modernize and coalesce the North American manufacturing supply chain to shrink costs and increase flexibility. Create industry-wide, state-of-the-art ordering standards and e-commerce capabilities. Reduce industrial capacity while growing even closer to customers. Help establish export markets for North American manufacturers. Swear off risky balance sheet reactions to short-term price swings in raw materials and focus instead on real supply and demand.

WHAT SHOULD GOVERNMENT DO NOW?

DAVID H. HANNAH, chairman and chief executive officer, Reliance Steel & Aluminum Co., Los Angeles, California: “We are at very low levels from an economic activity standpoint. We really need some improvement in real demand. We need to get people back to work and start measuring success with jobs in a positive way rather than losing fewer jobs. We really need, on a national basis, to get our manufacturing economy back on its feet. Until that happens, I don’t think we’re going to see much by way of employment gains. There was a lot of money approved for stimulus, but we haven’t seen anything of note of any infrastructure spending that’s stimulus related. Why not solve two problems? Get people back to work and solve the aging infrastructure problem at the same time.

RICHARD J. GREAVES, president and chief operating officer, ThyssenKrupp Materials NA Inc., Southfield, Michigan: There are still a lot of people who aren’t going to work every day. A clear focus on rebuilding and encouraging manufacturing has to be addressed in a more serious way. It not only creates jobs, but it taps creativity and innovation. Manufacturing is what propelled this country forward for the last 100 years. We have to have legislation that encourages investment in people, plant and equipment.

WAYNE BASSETT, chief executive officer, Samuel, Son & Co., Ltd., Mississauga, Ontario, Canada: My concern is getting people back to work. I don’t care if they are selling hamburgers at McDonald’s. What really matters is that people are working and that they’ve got funds to go out and buy a toaster, a refrigerator, a new home or a car. Our whole industry in North America is heavily related to consumer products. We benefit any time those stimulus packages put people back to work. Even if they were building a concrete bridge, I would consider that to be a positive.

What we would like to see is to make it easier for small businesses to do business. Government has to take that into account. There’s so much paperwork it makes it difficult for them to operate effectively. Canada is no friendlier. It’s just that in the U.S. you have a higher percentage of small businesses than Canada does.

We need to enforce our trade laws. In Canada, we have a history of the government taking a very weak approach to enforcing the trade laws.

The deficits that are being run in both Canada and the U.S. are one of the very significant concerns going forward. We are going to run up deficits that are going to bring our overall debt to levels that aren’t sustainable. We’re going to have a hell of a time just paying the cost of funding them. We could see the economy in America coming down a fair bit, because we are going to have to tax individuals or corporations. What the governments have to do is create as little additional debt as they can. That’s a Canadian problem as much as it is a U.S. problem.

MICHAEL D. SIEGAL, chairman and chief executive officer, Olympic Steel Inc., Bedford Heights, Ohio: The beginning of fiscal responsibility would be nice to see. While we need a short-term stimulus, there is no discipline in terms of spending money. Fiscal discipline in Washington is critical to our long-term future.

We need to take a whole look at public education and revamp public education completely. We need to go to national matriculation at a much earlier age and teach people to have jobs.

From a steel perspective, let’s enforce the laws that are there. The real issue in Washington is there is no enforcement. Certainly, it would be nice, theoretically, to be more libertarian and say get out of our way, but that’s not the case. The reality is they have laws on the books they don’t enforce, and then they pass more laws that they don’t enforce, and just create more costs and more complication and add to lawyers’ and accountants’ long-term annuities. In all aspects of the laws, if you’re not going to enforce the laws were have, don’t pass new ones.

[For example], the [U.S.] Office of the Comptroller of the Currency has a certain responsibility to protect the depositor, not the loan. To the extent that you have good fiscal discipline in your business, you can get money. If you have not managed your balance sheet well and you are losing money, it is difficult for a bank in terms of its responsibilities to its depositors and its oversight bodies to lend money. Simple enough. There’s lots of money in banks. The bank’s responsibility is to protect the depositors. In all the discussions I’ve read, nobody seems to want to talk about what the real responsibility is.

Under the regulatory bodies that manage banks, operations that have not run well cannot get money, nor should they. When you don’t enforce the oversight that’s there to protect the person it’s designed to protect, then bad things happen. Just to say, “let’s go give money to a small business that doesn’t make money and doesn’t know how to manage” means he’s stealing money from the depositor, and that’s what you’re supposed to have oversight about.

ROY BERLIN, president, Berlin Metals LLC, Hammond, Indiana: The government needs to become a consumer, to buy things that need to be made and put people back to work to make things that the government needs. If you’re going to spend money, spend money as a country on things that will make us more efficient and more competitive—electrical transmission, high speed rail, education—whatever it takes to improve our competitive position.

TOROS ASSADOURIAN, president, Gatsteel Industries Inc., Etobicoke, Ontario, Canada: Put money in the hands of industry to go out and buy equipment. Government should consider developing a program for small companies to obtain loan guarantees in order to modernize and/or automate processes. If North American manufacturing is going to survive, it’s going to have to be modern, and it’s going to have to be able to produce more parts per whatever. How do you get efficiencies? You can’t keep cutting wages back. Baby boomers will retire. There will be a smaller work force.

Providing tax policies such as accelerated capital cost allowances, tax credits based on capital expenditures for new manufacturing equipment and tax credits for inventory levels, are some ways of government “spending” that would inject money into the hands of employers and employees but ultimately benefit government through increased tax revenues in the future.

C. LOURENÇO GONÇALVES, chairman, president and chief executive officer, Metals USA Holdings Corp., Fort Lauderdale, Florida: The most important step the government can take right now is to refocus on the economy. The U.S. government clearly accomplished what they planned to accomplish to avoid mega-bankruptcies within the financial system and, ultimately, to save capitalism. Mission accomplished? No. They moved from saving capitalism to promoting the Democrats’ agenda. It will be their Iraq, the same thing that [President George W.] Bush did with Bin Laden.

Saving big banks did not promote what was necessary to make the U.S. economy go back on track. Not forcing banks to restore credit as a mandatory step two was a big mistake by the U.S. government. We see smaller companies having a very difficult time getting access to money. There should be more of a quid pro quo [between the government and banks]. That’s what they should have done. Is it too late? Not really.

BILL JONES, vice chairman, O’Neal Industries, Birmingham, Alabama: The original intent of energy policy, I believe, was to make the United States less dependent on Middle Eastern oil. I do not think that is what has come out. What is proposed is an environmental policy that says we think coal, oil and natural gas are problems and we are going to replace them.

There are certainly opportunities in new markets like wind and solar. There are also some older markets that should be included, such as nuclear. But keep in mind that the bird-in-the-hand, the industries that are already very good for the metals industry, are oil, gas and coal. Those are the industries that are being hammered based on proposed legislation and the Washington rhetoric that’s out there that demonizes those industries.

WHAT SHOULD THE METALS INDUSTRY DO NOW?

KLAUS KLEINFELD, president and chief executive officer, Alcoa Inc., Pittsburgh, Pennsylvania (from Alcoa’s fourth-quarter results conference call, Jan. 11): Key end markets will improve over 2009, [but not to] historic norms. We’ve been singularly focused on cash as a measure of performance. We had to pull back on capacity at many locations to meet the decreased demand and the way we were going to manage our cash is to take all of the variable costs out as quickly as possible. Cash flow up; debt to capital down. Our actions all significantly improved our cash generation as well as our balance sheet and we have all intentions to remain on that path in 2010.

RICHARD A. ROBINSON, president, Norfolk Iron and Metal Co., Norfolk, Nebraska: Right now, there has to be some [metals service center industry] consolidation. But in doing that we have to listen to what our customer needs. The [business] model that some customers have used has probably changed, so we need to be aware of changing customer needs and be responsive to them. Instead of building their inventories of finished goods, they are building a lot more goods to order because everybody is a bit worried about inventory. They want to shrink the time they have to produce things, which is going to cause our industry to be extremely responsive.

NORMAN E. GOTTSCHALK, JR., president, Marmon/Keystone LLC, Butler, Pennsylvania: The service centers are further behind the consolidation process than the mills. There is still too much capacity. We have a good business model. We have a good customer base. We just need to take some additional capacity out. Secondly, service centers need to do less speculation. Whenever prices are going up, everybody is buying inventory to protect themselves and their customers. And then prices decline and they get hurt. If you had some consolidation, and everybody finally said let’s just buy what we need and let’s not speculate, those are two things we can do.

C. LOURENÇO GONÇALVES: The metals industry in general and the leaders of the biggest mills in particular need to understand the new relative size of things. In 1996, China produced about 100 million [metric] tons of steel; now it’s nearly 600 million. The U.S. was about 100 million [metric tons]; now we’re down to nearly 60 million. We are going down and they are going up. More important, they are going up at such a pace that if you don’t understand what’s going on there you are going to be saying stuff that has no relevance. We’ve got to be careful, because we are taking a risk of becoming ridiculous if we continue to talk as if we were the biggest in the world. We are not, and we need to understand that. With China not only producing but also consuming seven or eight times more than the U.S., the old assumptions no longer apply.

The main consequence is on pricing. Steel prices now are a lot more a function of what happens in China than anything else, especially now that everybody knows everything in real time.

WAYNE BASSETT: We believe the [price] volatility is going to stay. With the fact that Asia is far more important in the steel business than North America is, we believe there are going to be fairly significant trade and currency issues. China, the No. 1 driver, moves up and down fairly quickly in consumption, and they will drive raw material costs. We believe that dealing with that volatility is going to be one of the key factors going forward.

TOROS ASSADOURIAN: You have these huge swings in your purchase prices as a distributor. You’ve got price fluctuations that translate automatically into inventory write-downs at the end of the year. In Canada, we cannot use LIFO [last-in-first- out inventory accounting]. We have to use FIFO [first-in-first-out]. Stability in prices is what we need now. Is it artificial demand? It’s an almost impossible question to answer, because it’s a free market and people can do anything they want. The mills react very quickly. As soon as they see a demand increase, they will put a price increase in. It’s kind of a vicious circle.

DAVID H. HANNAH: If [our customers] can’t get [credit] from a bank, they are going to try to turn us into a bank. They are going to want higher credit lines with their suppliers. We all have to be very careful of that. We’re going to be very alert for customers trying to string us along at levels higher than we are comfortable with. You may have to sell customers smaller amounts more often so they can live within the limits you have for them.

ROY BERLIN: For a metal service center, I’ve always likened our job to being a surfboard rider. We’re riding the face of the [price] waves, not too high and not too low. We don’t make the ocean. We don’t make the waves. I’ve never been surfing, but I’ve watched it on TV. You have to be on top of the wave. That’s our job.

DAVID H. HANNAH: This has been a long-time edict at our company: We don’t speculate; we don’t hedge; we don’t buy a lot of import material that requires you to go out months at a time in terms of when you’re going to receive the material. We buy what we need when we need it. We resist the temptation to try to outsmart the market or get greedy. Most everyone in our industry who has a financial problem has been the result of a bad inventory decision. There aren’t a lot of things that we can control as service centers, but we can control our inventories and our expenses.

BILL JONES: It would help if the industry could develop communications standards, whether part numbers or traceability of materials [such as] bar coding. That would make the industry more efficient. Some companies have developed their own standards, and they don’t want to change. The industry has never felt like that was the highest priority. But in the long run, I think our industry would benefit greatly from more standardization of common items and common procedures.

WAYNE BASSETT: Let’s face it, every one of us is trying to move into higher value-added products and everyone is trying to differentiate themselves from the others. That’s one of the government things we need—more research and development tax credits. But ultimately the bulk of the business doesn’t fall into those value-added categories. We’ve got to drive productivity up and drive production costs down on the more commodity type products, so we can successfully continue to supply those products. We have to simplify the supply chain for manufacturers. We are pushing a big e-commerce project—one standard for the industry. For the first time since I’ve been in the business there seems to be a general feeling that we should be doing it.

DAVID H. HANNAH: [Service centers] don’t need to chase all that volume. Let’s concentrate on profitability. If profitability means selling less tons, then OK. If more profitability means buying state-of-the-art equipment that’s more efficient and training our employees, let’s talk about that. If we need to have more efficient facilities, let’s talk about that. If we need to close a facility that just isn’t going to be able to sustain itself at the levels that we would expect, then let’s talk about that. None of us really knows what the size of the new market is going to be. The auto industry going forward is going to be smaller than it was at its peak. I think the market overall will be less than it has been.

WAYNE BASSETT: I think there is a real opportunity to export more [manufactured] products out of North America, now that the American dollar has come down and North American products are well priced vs. the world. To do that, we need to make it easier for manufacturers to supply a good quality product competitively, whether it is to Asia or Europe or wherever. Our job may be then to add more value. Take six of those manufacturers that are doing something that we can do for all six more cost-effectively than they can each do it individually. There is only so much business in North America, and we need to become more of an exporting country, like Germany.

We have to make sure that we join together to have a larger voice with the federal governments. What you need to do is get as many interested parties as possible in a coalition that’s looking at the metals industry and, whether it’s going to Washington or Ottawa, go with a united front to attempt to get some of these issues resolved. The more we can unite; the bigger we can make these groups, the better chance there is that we can have some impact on legislation. You have to get the mills and the service centers on the same side first. We’ve tried this several times in the past, there appears to be the will to make it happen this time.

SUMMING UP

DANIEL R. DIMICCO, president, chairman, chief executive officer, Nucor Corp., Charlotte, North Carolina: My answer to [question] number two [is] vigorously support and accomplish number one. Replace foreign sources of energy with domestically produced energy. Balance our trade deficit. Rebuild outdated and unsafe infrastructure. These policy changes by our government—in conjunction with leadership and financing from the private sector—will drive the creation of the more than 20 million jobs we need to rebuild our economy, our country and our middle class.