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May 1, 2009

LINKS IN THE LONG CHAIN

The metals industry has experienced—and brought about—dramatic developments. Here are 100 significant events, from 1909 to today.

The nation was wrestling with the aftermath of a devastating financial panic and a much anticipated change in the White House as the first decade of a new century neared its end. Skepticism abounded among business leaders about the ability of politicians to create prosperity, but their demands on government for protection were equally widespread.

It was 1909.

The more things change, the more they stay the same? Perhaps, but as surprising and telling as déjà vu may be, the history of business enterprise then and now tells an equally important story of change for business in general and the metals industry in particular.

In North America, metals production and fabrication have faded as symbols of economic might in favor of technology, finance and other so-called knowledge industries. Yet, nowhere has the brainpower of business enterprise been more important or more evident. By transforming the production, distribution and use of metals toward greater efficiency and profitability, an industry at risk from global competition has become an industry that leads the way forward in global competitiveness.

Early Days

The prominence of the metals industry 100 years ago was as plain as daily front-page headlines. Steel rails and structural beams for skyscrapers recast North American transportation and architecture, and countless manufacturers invented new uses for steel, aluminum, copper, brass, and nickel.

The first decade of the 20th century saw the incorporation of United States Steel Corp. in 1901, Jones & Laughlin Steel Co. in 1902 and Bethlehem Steel Corp. in 1904. The financial crisis in 1907, its effects felt for years afterward, was not sparked by New York bankers speculating in home mortgages but by New York bankers speculating on shares of a copper mining company.

In the same year, Pittsburgh Reduction Co. changed its name to Aluminum Co. of America, as the lightweight and plentiful metal, known mostly as a material for kitchen utensils, moved toward large-scale commercialization.

The ebb and flow of metal prices were as closely watched a daily economic indicator as the Dow Jones Industrial Average. Six of the 12 stocks in the index in November 1907 were issued by metals producers, compared to just one, Alcoa Inc.—as the Aluminum Co. of America is now known—of the 30 Dow Industrials stocks today.

Meanwhile, U.S. and Canadian entrepreneurs were organizing Canada’s first significant steel mills to broaden the reach of industrial metals and compete with U.S. and British mills: Algoma Steel Corp. (now Essar Steel Algoma) in Sault Ste. Marie, Ontario; Steel Co. of Canada (Stelco) in Hamilton, Ontario; and Dominion Foundries and Steel Co. (Dofasco Inc.) in Hamilton. Aluminum Co. of America established Northern Aluminum Co. Ltd., predecessor of Aluminum Co. of Canada Ltd. (later Rio Tinto Alcan Inc.).

“A people’s standard of civilization is its consumption of iron and steel,” and “it should be a source of pride to all of us to be factors in an industry that contributes so much to the welfare and prosperity of the individual and the progress of the nation,” Fred Krebs, general sales manager of Cambria Steel Co. of Johnstown, Pennsylvania, a major steel mill at the time, told a new trade association of metals merchants.

In the United States, the size of the steel industry made it a target for antitrust enforcers. The text of Krebs’s speech to the fledgling American Iron, Steel and Heavy Hardware Association and the report of the rest of the association’s third-annual convention were marked “confidential,” reflecting the jitters business executives felt in the wake of the trust-busting era of President Thoedore Roosevelt. Even President William Howard Taft, who succeeded Roosevelt in 1909, was less pro-business than many inustrialists had hoped.

Nonetheless, great size, represented by the billions of dollars in capital investment by a dozen major steeel companies, spawned a desire for stability and cooperation in the steel supply chain. One hundred years ago, Krebs and the executives of all North American steel mills opreated with a simple strategy: produce the maximum tonnage per dollar invested in capital and labor. Sales and distribution were to be organized solely to enable this result.

Steel was born of iron and carbon mixed in hot, dangerous cauldrons, often in grueling 12-hour shifts. Few people witnessed this birth. But they did see, with a fascination now lost on seasoned contemporary consumers, ribbons of rails, high-rise skeletons, steel bridge expansions, fearsome warships and shiny automobile bumpers.

In between mills and homes were thousands of vacant back lots, large basements, idle sheds and abandoned chicken coops—foster homes for stacks and stacks of iron, steel and other metals. Metals merchants, a largely unrecognized cog in the system, acquired bundles of metal from mills or other merchants, unbundled the sheets, plates, bars, tubes and scrap and sold smaller quantities to fabricators who could be reached within the range of a horse cart. It was, and in most cases remains, a small business. Middlemen delivered their orders to customers in the morning and played golf with them in the afternoon. Today, the average order size for members of the Metals Service Center Institute is just $1,700 to $1,800. But the scale and scope of steel distribution was widening dramatically a century ago. Production opportunities, from low cost hydroelectric power, available on Lake Superior for Algoma Steel’s plant, to the rich mineral sources and cheap labor available around Birmingham, Alabama, for Tennessee Coal, Iron and Railroad Co., made steel-making competitive, even in regions far from industrial hubs such as Pittsburgh, Pennsylvania; Chicago, Illinois; and Toronto, Ontario.

In the late 1800s, just one product—rails—and one industry—railroads—dominated steel demand. When demand for steel rails declined early in the new century, a vast and complex array of construction and manufacturing companies, large and small, became eager customers. These buyers sought out metal distributors, entrepreneurs such as themselves. A metal fabricator in a remote Canadian town or even just a few blocks from a giant steel mill in Pittsburgh could receive metal faster, more reliably and in more convenient bundles from a distributor.

A New York newspaper, The Sun, reported in March 1909 “the biggest pile of steel” ever stacked in one spot: 60 million pounds of steel shipped to a distributor in Bayonne, New Jersey, from a mill in Phoenixville, Pennsylvania, for use in the Manhattan Bridge connecting lower Manhattan and Brooklyn, New York. At this time, an arms race pitted Germany, Britain and the United States in developing the most efficient, effective metal plates for a new generation of warships. In the consumer market in the mid-1920s, one components manual for an automobile was 500 pages long, “from exhaust valves to steel wheels,” wrote business historian Thomas Misa.

Thousands of small metal fabricators designed products, from basketball hoops to electric clothes washers, which they hoped would appear in the catalogues of Sears, Roebuck and Co. and Montgomery Ward & Co. Inventive metal fabrications, such as aluminum crown bottle caps and brass zippers, delighted every household.

Also in the early 1900s, the Wright brothers, among the nation’s most celebrated small businessmen, were staging the first public demonstrations of their airplanes, powered by a lightweight aluminum engine. The brothers “asked their bicycle shop mechanic, Charlie Taylor, to build” an engine for their flying machine, an Alcoa company history recounts. “Taylor was self-taught and brilliant; he put the engine together in just six weeks, at the Wright shop in Dayton, Ohio. To save weight, a local foundry cast the block and crankcase in an exotic material—aluminum. The metal came from Alcoa. The little engine weighed only about as much as Orville Wright, but it put out 13 horsepower.”

Champion of Friendly Competition

In the first half of the last century, steel and aluminum followed different trajectories between mill and consumer.

Aluminum Co. of America, which held a virtual monopoly on aluminum production until mid-century, was led by Charles M. Hall, who in 1886 had invented a process for extracting aluminum from bauxite. Hall’s technical expertise and the need to develop markets for the novel metal prompted his company to expand vertically, even after Hall’s death in 1914. Alcoa, as the company is now named, fabricated products and sold strictly through its own sales force.

In 1928, the company decided it was losing control of its non-U.S. operations. Those units were aggregated into its Canadian subsidiary, which then was spun off as an independent company, Aluminum Ltd. Independent metals distributors did not become an important factor in the sale of Alcoa’s output until after World War II.

Steel mills, on the other hand, were more mature companies, typically operated by financial engineers, not metallurgists or inventors. Technological developments in steel making were few and far between. Demand for the metal seemed self-sustaining. The critical task, in the eyes of Big Steel’s chieftains, was moving the product.

In establishing United States Steel Corp., banker J.P. Morgan hoped to create a new era of price stability and put an end to cutthroat competition that had plagued the steel industry under his rival, Andrew Carnegie. Judge Elbert H. Gary, first chairman of U.S. Steel, knew little about steel making. But he championed stable prices and “friendly competition” among steel producers, sending a powerful signal to the entire chain of metals commerce. To that end, he created the American Iron and Steel Institute in 1910 and ran it until his death in 1927.

From the mills’ perspective, independent distributors, with their inventories and customer lists, could be part of the solution to smoothing price and production cycles.

“The distribution of goods is part of the cost of manufacturing,” Krebs noted in his speech to the new metal merchants trade association. “The merchant or jobber is, therefore, an important link in the chain of operations that converts the raw materials into the manufactured article and places it in the hands of the ultimate consumer.” He later said, “For more than 30 years, the jobber or merchant has been an important and satisfactory factor in the distribution of a large part of the output of the company I have the honor to be connected with.”

Many were self-made individualists. Edward D. Kimball, born in Hennepin, Illinois, in 1849, was lured to bustling Chicago at age 16 and eventually established his own hardware store. By the turn of the century, Kimball was one of Chicago’s leading “jobbers of iron and heavy hardware materials,” according to his personal history preserved in the 1918 edition of Chicago: Its History and Its Builders. Shortly before his death in 1912, Kimball helped organize and served as the first president of the American Iron, Steel and Heavy Hardware Association and president of the National Association of Hardware Manufacturers.

Others were Jewish immigrants, whose merchant tradition prompted them to establish businesses as scrap metal dealers and later become wholesale warehouse operators. In 1890, Robert Hyman Siskin “left Lithuania to escape religious persecution. He arrived alone from his native country on a cattle boat with no idea of where to go once he arrived. During the trip, a friend told him about Chattanooga [Tennessee] and invited him to travel there with him,” recalls the company history of Siskin Steel and Supply Co.

“In order to make a living, he became a pack peddler, buying utensils and clothing, carrying them into the rural communities on his back. When all were sold, he would return for more. He did this for several years. When he finally could afford it, he sent for his family. In 1900, Robert and a friend opened a scrap metal business with $6.00 and a rented lot …. The company had no equipment or machinery until 1924.” After World War II, Siskin Steel became one of the South’s leading metals service centers and is now a unit of Los Angeles-based Reliance Steel & Aluminum Co.

Others were Ivy League bluebloods. Andrew Wheeler attended the William Penn Charter School, founded in 1689 by William Penn in Philadelphia; the St. Paul School, an exclusive Episcopal prep school in Concord, New Hampshire; the University of Pennsylvania; and the university’s Wharton School of Finance and Economy. In 1892, he became a junior partner of his family’s business, Morris, Wheeler & Co. Iron and Steel, prominent Philadelphia iron and steel merchants, and, in 1903, was named treasurer of the American Iron and Steel Association, another industry group.

In Canada, early metals warehousemen often began business as importers, capitalizing on Canada’s membership in the British Commonwealth. “Mark and Lewis Samuel first sold lamps, then hardware and then they concentrated on steel,” says Peter Baines, corporate vice president of communications and corporate affairs for Samuel, Son & Co. Ltd, which bought his grandfather’s company, Bainesteel in Markham, Ontario, in 1992. The hardware merchants established offices in Toronto and London. Their company, which today is one of Canada’s oldest and most successful businesses, began its focus on metals distribution in the late 1880s.

At the same time, brothers George and Thomas Drummond along with James McCall recognized a growing demand for metals at factories along Quebec’s Lachine Canal. The company, Drummond, McCall & Co. of Montreal, was an import agent for British and Scottish iron and steel mills, but also imported coffee, cutlery and tools.

The pedigree of Russel Metals Inc., based in Mississauga, Ontario, dates to 1785, when John Russel arrived in Canada from Scotland and set up a merchant business. In 1916, his great nephew Hugh established a steel warehouse operation.

But despite their varied backgrounds, pioneers of today’s metals service center industry and supply chain had a common goal: gaining the respect, as well as the business, of suppliers and customers.

As an early president of the American Iron, Steel and Heavy Hardware Association put it, “We were organized … to create and preserve more friendly relations with each other, more true brotherly love toward each other, in a business and social sense; for the interchange of trade ideas and business methods; and to make the condition of business on a high plane which our standing in the business world would warrant us demanding; to arrange for better business customs and a more satisfactory way of distributing the products of our manufacturing friends.” The American Iron, Steel and Heavy Hardware Association’s standing committees included the Horse Shoe Committee and the Horse Nail, Pad and Calk Committee. But the industry’s expansion into new markets and more sophisticated products was well under way. Small, family-owned companies, despite their conservative leanings, pursued daring opportunities.

Just a year after suffering a fire that destroyed the Chicago building where they kept their steel inventory, Alfred M. Castle and his partner, William B. Simpson, opened a branch office of A.M. Castle & Co. in San Francisco. A year later, the 1906 San Francisco earthquake and fire leveled most of the city. But, thanks to the city’s revival and new commerce through the Panama Canal, demand for steel in the City by the Bay soon was nearly as great as in Chicago, a company history noted. Such pluck was an essential element in the distribution chain between mills, mostly situated east of the Mississippi River, and the westward industrial growth of North America at the turn of the last century. A well-functioning metals supply pipeline was a vital outlet for mills.

In addition to geographic reach, risk-taking metal pioneers responded to changes in their markets. In 1907, the year of its founding, Keystone Pipe & Supply Co. in Butler, Pennsylvania, advertised on its tiny headquarters “New & Second Hand Pipe Oil Well Supplies & Machinery.” The world’s oil industry had been born in 1859 in Titusville, Pennsylvania, with Butler just south of the historic oil field. But by 1907, the shift of exploration and drilling to Texas was under way. The company opened branches in Texas and Oklahoma but eventually severed its dependency on the oil patch.

“Keystone has grown with the times,” company president William Horwitz said in 1950. “Mechanical tubing in a thousand sizes and specifications lies ready for shipment. Canada, Mexico, South America, Africa, the Philippines and most of the states of the union have welcomed shipments from Keystone …. Pumps and water systems, structural steel, rails, bars, plates and sheets, tanks large and small, roofing, plumbing and heating equipment for home and factory—all these are now to be found awaiting the customers’ needs.

“We reinvented ourselves quite a few times,” recalls Norman E. Gottschalk Jr., president of the company, now Marmon/Keystone Corp.

Amid the willingness of metal distributors to adapt, overtures of friendship by major steel producers toward the hundreds of small merchants, some of whom literally ran their businesses from notes held in their vest pockets, elevated their “standing in the world.”

Gary’s efforts to ensure price stability through industrial cooperation produced another benefit for independent distributors—the cross-pollination of ideas about doing the job better. Sharing knowledge and experiences, as well as camaraderie, was a vital element in encouraging risk-taking by independent iron and steel merchants. A case could be made that aluminum’s contribution to industrial expansion and living standards might have grown faster and more broadly had Alcoa’s early executives relaxed their proprietary concerns and invited independent distributors into the sales process.

Honeycombs of Precision

Metals service centers today bear little resemblance to the “pile of steel” that intrigued a newspaper reporter in 1909. Then-and-now snapshots would tell a story of innovation in material handling. Today, instead of piles, honeycombs of precise stacking racks reach two stories or more high in closely aligned aisles. Numbers or bar codes identify the contents of each bin in the racks. Inventory data has moved from the vest pocket to the computer.

Sideloader lift trucks, rarely seen outside industrial warehouses, have often replaced more recognizable forklift trucks in navigating narrow aisles of racks, stacking and picking metal bars, tubes, rods, sheets and plates. In some centers, sideloaders have been sidelined in favor of automated storage and retrieval systems, where the operator stands at a computer terminal.

Elsewhere on the service center floor, operators at precision saws, metal shears, cutting torches, laser cutters and other costly equipment slit and trim mill products, while other machines uncoil, flatten or shape metal to customer specifications—often measured in thousandths of an inch. These value-added services, which shift investments in equipment and skill from the manufacturer to the service center, date to 1905, when the friction saw first appeared in a few metal warehouses.

The final movement in this symphony of material handling, processing and logistics is played by flatbed trucks, often in the wee hours of the morning. They line up at one door of the center and move through, like cars queuing up at a fast-food drive-up window. In both cases, the goal is to prepare, package and deliver exact customer orders with as much speed as safety will allow.

Giant overhead cranes, operated by a solitary worker with a handheld device on the warehouse floor, lift and set the selected products to be shipped. The massive electrical cranes move tons of metal onto trucks effortlessly, like children playing with twigs. Service center truckers may log hundreds of miles in a day, sometimes operating pony-express style, meeting a second driver who completes the trip, in accordance with detailed travel schedules. Whatever is left behind in the center in the form of scrap is deposited in other trucks, summoned from recyclers.

Service centers typically are described by their admirers as department or grocery stores. “What Macy’s, Wanamaker’s, I. Magnin’s, Kaufmann’s, Nieman-Marcus, the May Company and other famous department stores mean to millions of consumers, the nation’s steel warehouses are to many, many thousands of steel users,” Arthur Collins, vice president of the Philadelphia chapter of the American Steel Warehouse Association, wrote in 1949 in The Journal of Marketing.

Such metaphors are inaccurate and unhelpful in at least three respects. First, few ordinary people ever see the inside of a metals service center. Second, if they do take a tour, they mostly observe items for which they have no direct use.

Third and more importantly, they probably would fail to appreciate the enormous economic value represented by the goods in inventory, which at major service centers such as Reliance Steel & Aluminum Co., Castle and Russel equal about 60% of current assets, compared with 44% at U.S. Steel and 28% at department store Nordstrom Inc.

To keep their inventory moving, service centers invest heavily in plant, machinery and equipment. In many cases, the smaller the company, the greater the proportion of such investments. The balance sheet of industry leader Reliance, with 2008 sales of $8.72 billion, reports 19% of assets (net of depreciation) in plant, machinery and equipment; Castle, with $1.5 billion in 2008 sales, holds 13% of its net assets in plant, machinery and equipment; Olympic Steel, Inc., in Bedford Heights, Ohio, reports $113.5 million in plant, machinery and equipment, or 24%, against $574 million in total assets. Olympic’s 2008 sales totaled $1.23 billion.

The evolution of sophistication in machinery and equipment reflects the high proportion of the business held in inventories and the increasing demands of customers for greater service. In service centers, the grit and brawn of the metals industry have been tempered by knowledge work, devoted to the intricacy of racking systems, the precision of metal cutting and flattening operations, the care of recycling efforts and the diligence of trucking logistics.

A grammarian might express the industry’s mission this way: raw materials rolling out of mills and finished products on display in Macy’s, etc., are nouns. What a service center delivers are adjectives, especially “convenient,” “better,” “faster,” “smarter” and “cheaper.” In a global economy based on commodity goods and ubiquitous Internet retailing, the adjectives, not the nouns, rule.

Speedy and His Principles of Scientific Management

The intellectual seeds of modernity in metals were planted a century ago during the Elbert Gary era by another controversial industrial pioneer. Frederick Winslow Taylor, a frail prep school dropout, was called “Speedy” when as a young man he worked in a machine shop in Pennsylvania.

In 1906, as president of the American Society of Mechanical Engineers, Taylor delivered a speech with what seemed like a curious title—“On the Art of Cutting Metals.” But his message, later published as part of a 248-page tome with two dozen foldout charts, was much broader. It established what became known as scientific management, the use of precise measurements to identify and prevent the waste of time and materials and to squeeze costs out of almost any industrial or organizational process. Taylor’s paper was an instant worldwide sensation.

In a later book, The Principles of Scientific Management, Taylor elaborated on his theory: “Maximum prosperity [for workers as well as owners of the business] can exist only as the result of maximum productivity …. The most important object of both the workman and the management should be the training and development of each individual in the establishment, so that he can do [at his fastest pace and with maximum efficiency] the highest class of work for which his natural abilities fit him.”

The device most closely associated with Taylor, and the legions of bloodless efficiency experts who followed in his wake, was the stopwatch. Long after Taylor died in 1915, novelist John Dos Passos authored a biting profile in his 1933 book, The Big Money: “Production went to his head and thrilled his sleepless nerves like liquor or women on a Saturday night. He never loafed and he’d be damned if anybody else would. Production was an itch under his skin.” At the end, Dos Passos wrote, “He was dead with his watch in his hand.”

This harsh portrait glossed over the wholesome and timely inspiration that Taylor’s ideas provided to thousands of young men, especially soldiers and sailors returning from World War I who aspired to engage their brains in the booming metals industry but didn’t have the backing of a J.P. Morgan to erect or buy their own mill or manufacturing plant.

In his memoir, Kirkman O’Neal, founder of service center O’Neal Steel Inc., in Birmingham, Alabama, remembered his stopwatch fondly. His father and grandfather had been governors of Alabama. His family was well off and prominent. He was a graduate of the U.S. Naval Academy who had served with distinction on two ships in the war. His career choices seemed vast.

When he left the navy in 1919, he went to work for U.S. Steel in a shipbuilding plant in Chickasaw, Alabama, where he was assigned to schedule work in the fabricating shop: “I spent a great deal of time studying the situation and trying to devise a better means of scheduling the work and seeing that the proper material arrived at the shipways when it was needed for erection.”

When his boss ignored his analysis, O’Neal quit and joined a steel fabricator in Birmingham, Ingalls Iron Works Co. The owner asked him to determine whether a request by the plant superintendent for an additional friction saw, plate shear and crane was necessary.

“I made a survey with a stopwatch and found out the saw was running less than half-time as was the plate shear. They were idle, waiting material. The stock yard was in foul shape, no plate racks, plates of one size piled on top of plates of another size, and the beams and channels likewise,” O’Neal wrote. Production efficiency, not new equipment, was needed.

His boss then turned O’Neal and his stopwatch loose in a hunt for greater operational cost savings. “I was, of course, looked upon with suspicion by all the executives, as they did not know what my duties were and each [was] afraid I might undermine him.” Soon, O’Neal struck out on his own as a competitor to Ingalls. Today, O’Neal Steel bills itself as the largest family-owned steel service center in the country.

Essential Uses

When America joined the Great War in Europe, demand for metals for armaments became acute and led to competition for supplies between makers of war material and industries less directly linked to the war effort.

“The big problem, first and last, was how to produce enough steel to meet the new demands of the war and at the same time take care of the ordinary demands that were increased by the influence of war demands,” recalled a history of the period by Joseph T. Ryerson & Son Inc., the nation’s leading steel warehouse operator. “And to make the matter more complicated, the situation was but meagerly understood even by the best minds in the industry or the government.”

The steel division of the government’s War Industries Board required that distributors, as well as mills, disclose who was buying their products, so that government officials could steer metal to the “essential” uses in war effort.

But “it was obvious that the warehouse concerns could not tell, when they placed their order with the mills, just who would buy the steel from them, or to what use it would be put,” Ryerson noted. Instead, warehouses seeking to replenish their stocks were told to disclose the destinations of their previous month’s shipments. Orders by warehouses from mills would be fulfilled only to the extent that the previous month’s sales were deemed war priorities.

Ryerson complied, but customers complained bitterly: “Should we be unable to obtain material soon it means we are going out of business after 25 years establishing a business and bringing it to its present state of efficiency, and also cause us to discharge at least 130 workmen,” wrote a manufacturer of tanks, boilers, stand-pipes and smoke stacks in Omaha, Nebraska.

Nonetheless, the metals warehousing industry congratulated itself that, in meeting the demands of government, it had served its country and itself, even if it meant snubbing longtime customers.

“The War Industries Board found the jobber the right kind of fellow after all,” B.F. Butts, president of the American Iron, Steel and Heavy Hardware Association, boasted to his group’s annual convention in 1919.

“Do you realize that government agents called on the jobber to deliver entire stocks of certain merchandise; called upon the jobber to completely disorganize his system of store supplies; called upon him to sacrifice old and tried, dyed-in-thewool line customers; called upon him to do everything the jobbers’ natural inclination rebelled at? And did the jobbers fall down? Did they shrink from duty? Not one,” Butts said.

Joseph T. Ryerson told a particularly poignant story about wartime government relations:

“One day while lunching at our restaurant with the employees, I was called up to my office only to find waiting for me there two United States government Secret Service men. They advised me that they had come to take away our machinery specialist and place him under arrest and, no doubt, have him interned for the duration of the war.”

The man was of German heritage and, Ryerson said, “looked like a German, talked like one and on this account had to take great care in all he said and did.” On a business trip to New York, he apparently had been overheard making “certain statements” during an argument in the Astor Hotel. Ryerson vouched for the man and averted the arrest but warned him to “keep out of Washington, as his accent and his name might alone cause some trouble there. This he promised to do.”

Not long after the warning, the employee contacted Ryerson from Washington, D.C., reporting that he had secured new government contracts for machinery needed in France.

“I immediately called him in and asked why he went to Washington against my instructions.” It seems that he had met in New York City with government buyers who immediately escorted him to an emergency meeting in Washington, because “they had secured more help and information of value in this emergency from our man than from any other source.”

Aluminum on the Rise

After the Armistice in 1918, government contracts dried up and the economy suffered a deep recession. But with the dawn of a new decade, prosperity resumed. The Roaring ’20s generated enormous sales of industrial metals.

Steel construction beams were the most obvious expression of the industry for city dwellers. Buildings arose at a frantic pace. A 1927 cartoon (see below) in the upscale magazine The Chicagoan, shown in A.M. Castle & Co.’s 100-year history, depicted a truck loaded with furniture that has pulled up to a towering steel frame of a new skyscraper. The caption read, “Come back in half an hour, Joe.” Annual production at American steel mills climbed to 63.2 million tons in 1929, the year of the stock market crash, from 38.8 million tons in 1919.

The decade saw a vast expansion in the use of aluminum, which had earned its stripes in the war as a source of airplane materials. Aluminum competed with steel components of home appliances and automobiles.

In this period, Aluminum Co. of America began to designate a few independent distributors to supplement its internal sales force. The first to stock Alcoa’s products, in 1917, was Strahs Aluminum Co. in New York, records of the former National Association of Aluminum Distributors show. Alcoa’s appointment of three authorized and exclusive distributors in 1929 was a sharp break from the company’s history of vertical integration.

The move reflected not only Alcoa’s desire to expand its sales but also the increasing internal sophistication of warehousemen, who had proved their value in the war. One of the three new Alcoa-designated distributors was Williams and Co. Inc., in Pittsburgh. George E. Lees and Harold E. “Harry” Williams founded the company in 1907 as a distributor of steel tubing.

As with many small metals merchants in the 1920s, Williams and Co. had grown in management depth and sophistication as well as in dollars of sales. For the first time, executive positions in sales, finance and operations were filled by individuals hired from outside the company. Williams began referring to its “family,” using quotation marks—a typographical indicator of hiring and management changes occurring throughout the industry. “During the 1920s, [Williams] sought men of vision, wisdom and solid judgment who would ultimately be guiding the destiny of the company,” a company history states.

Family-dominated, paternalistic structures in the metals distribution business reflected its regional markets and affinity with small manufacturers. But in many cases a close-knit ownership and management structure yielded an important dividend as the economy sank in the 1930s, when output of American steel mills plunged 76%.

William K. Howenstein’s father and uncle founded Copper & Brass Sales Inc. in Detroit in 1931. “I’ve read the first stockholder meeting minutes, which suggested that they maybe ought to throw in the cards because at that time in our country things were not so good. But they hung in there,” he says.

Nepotism and paternalism, practices shunned by many corporations today, can have economic value, argues Donald R. McNeeley, president of Chicago Tube & Iron Co., founded in 1914 and based in Romeoville, Illinois. McNeeley is an adjunct professor in engineering management at Northwestern University in Evanston, Illinois.

“If we have a good employee, we want their sister, son, cousin and brother,” he said. Family ties often strengthen a culture of teamwork, especially in hard times, when anything less than the best efforts by one employee could cost a relative his or her job, he reasons.

In Birmingham, O’Neal provided rent-free housing for black workers. What income the company made in the labor portion of work orders simply was divided among the men in the shop, sometimes as little as 10 cents an hour. Feelings of intimacy and obligation nurtured in family businesses can boost loyalty and perseverance but also magnify personal tragedies inside a company.

The human toll of the Depression hit Joseph T. Ryerson and Son directly. Ryerson chairman Donald M. Ryerson committed suicide in May 1932. “Distressed over the economic situation of the country, with bank failures and an apparent bottomless stock market, he needlessly believed that his financial affairs were in a desperate state,” his brother Edward recalled in a memoir. In 1935, Chicago-based Inland Steel Co. acquired Ryerson in a stock-for-stock transaction.

“We had reached a time when I was the only member of the family still active in the management of the company,” Edward wrote. “It would therefore become a serious question of family policy as to the soundness and propriety of only one member of the family assuming full responsibility for the success of the investment of so many second- and third-generation heirs.”

As with most of American business leaders, natural optimism and a strong dose of denial influenced public remarks in the initial months after the stock market crash of 1929. But by 1935, when the American Steel Warehouse Association Inc. held its first annual meeting as the successor to the American Iron, Steel and Heavy Hardware Association, widespread anxiety was evident.

“I don’t think any of us here tonight can look at the future with anything but grave doubts,” Richmond Lewis of Charles C. Lewis Co. of Springfield, Massachusetts, told the association’s annual banquet. “We don’t know what is going to happen and we have got to live more or less from day to day until we see some definite trends.”

The first Depression-era calamity for the metals warehouse industry arose when hundreds of the nation’s banks failed. Some companies raised cash for payroll and other routine expenses by selling inventory as the outlook first turned dark.

Harry Williams had paid his bills, including charges for which he had not yet received invoices. But shortly thereafter the Bank of Pittsburgh closed its doors, freezing the Williams and Co. account. He found another bank that would lend him $35,000 for just 60 days, “the shortest 60 days in history,” he said later, a company history reports. Yet in the decade of the 1930s, Williams broadened its product line and established an office and warehouse facility in another city, Columbus, Ohio.

War of Steel, and Aluminum

President Franklin D. Roosevelt’s efforts to ramp up U.S. military procurement as Europe slid into war helped revive the nation’s economy. After the Pearl Harbor attack of Dec. 7, 1941, Navy Undersecretary James Forrestal declared: “This is a war of steel. No words and no speeches will win this war.”

Forrestal might have added “aluminum” to his definition of the war. Government subsidies for aluminum production and fabrication in the United States and Canada promoted a rapid expansion of plants and an intense search in the western hemisphere for bauxite.

In the period of pre-war build up and during the war itself, 304,000 military airplanes were made in the United States, using 1,750,000 tons of aluminum, Richard S. Reynolds Jr., a son of the Reynolds Metals Inc. founder, recalled in a 1961 speech. By 1943, North American primary (annual) production had increased to 1,415,000, compared to 247,000 tons in 1939, Reynolds said.

Despite the obvious role of metals in the war effort, independent metals distributors remained suspect in the corridors of America’s wartime bureaucracy, as was the case during World War I.

“For many years the industrial distributors occupied a much-disputed position in our system of business,” Wayne Rising, a vice president at Ducommun Metals & Supply Co. of Los Angeles, told fellow aluminum distributors shortly after the war. Ducommun, successor to a family business founded in 1849, was one of the largest businesses on the West Coast. For decades, the company had supplied metal to the movie industry, mining operations and the nascent aircraft industry, including pioneers Donald Douglas and brothers Allan and Malcolm Loughead (who changed their name to Lockheed in 1934). Despite such business credentials, Rising said, distributors have “been called a parasite, a profiteer, among other things.”

Ignorance, as well as prejudice, afflicted the industry. Meetings with government agencies early in the war were frustrating, Rising recalled. “At one of these we were explaining the steel warehouse industry, when one of the bureau men asked where we sold steel warehouses.”

As they had in World War I, service centers, especially those near shipbuilding yards, sprang to the defense of the nation after the Pearl Harbor attack. “Warehouses emptied their racks and bays virtually overnight, providing many thousand tons of steel to the government for rebuilding and re-equipping the Pacific citadel,” wrote Arthur L. Collins, an official of the American Steel Warehouse Association, the new name of the American Iron, Steel and Heavy Hardware Association.

But once again, the urgency of war prompted many metals distributors to delay the development of their industry’s warehousing and service roles. Instead, warehouse space was converted to manufacturing. Existing metals fabrication operations within the plants of metal merchants shifted to filling war contracts.

As a Naval Academy graduate, Kirkman O’Neal tapped his sources to make his company a leading supplier of bombs for use by the Navy against the Japanese. In just 36 days, the company erected a new plant for war production. Among its output were the superstructure and gun platforms for a “landing ship medium” amphibious landing craft used by General Douglas MacArthur in his famous return to the Philippines.

In Pittsburgh, Williams and Co. converted a newly acquired business that made stainless steel kitchen sinks to one that produced armor-piercing shells and stainless steel containers for Army artillery powder bags.

Providing armaments and other materiel to the war effort distinguished many metals merchants and kept business humming. Despite the persistent image of the industry as mere “middlemen” and “jobbers” and nagging government constraints on mill shipments to warehouses, the industry received a higher proportion of total steel production, 17.3%, in 1948, versus 14.6% in 1940.

After the war, in a role reversal, metal distributors found a new source of supply in military salvage. Keystone Pipe and Supply bought gun barrels and propulsion shafts from surplus warships. Still, making parts for armaments represents a steady, profitable niche for many service centers today.

The Core Dilemma

During the war, the industry began to find a new identity and a new voice. “This business of ours is a critically essential factor in winning the war, but who knows it—except us?” Harry L. Edgcomb of Edgcomb Metals wrote in a plaintive letter to fellow members of the American Steel Warehouse Association in April 1942.

“No one except us and the industry which we serve knows the actual benefits to be derived through our system of distribution. Certainly the mills don’t know. Certainly Washington doesn’t know …. We should not be considered an industry who buys steel and for that reason be given a priority rating to buy it. No, we should be considered as a part of a system which furnishes steel to the War Program… and then be permitted to keep these essential stocks, on a basis of complete necessity.”

With this complaint, Edgcomb expressed what would later become the core dilemma of the metals service center industry. Friendly relations with metals suppliers were vital, but the greatest opportunities for growth and profit lay in becoming even more essential to customers.

Harvard Business Review, in a rare academic analysis of the metals distribution business, dissected the issue in a 1947 article. Author Charles A. Livesey, a professor of business management at Harvard University, noted “warehouse distributors are a little known factor in the distribution of industrial steel products.” Yet, he reported warehouses provided metal to an estimated 250,000 metals buyers, 10 times the number of manufacturers who bought directly from mills.

Warehouse operators, hoping to retain and add customers in competition with direct sales by the mills, needed to think beyond the tasks of holding inventories and making timely deliveries, Livesey wrote.

In particular, he argued, warehouse operators must become more expert than their customers in understanding the innovations in metallurgy and use of alloys that emerged during the war. During the war, technical advisers to the American Iron and Steel Institute, drawn from mills in the United States and Canada, devised methods of achieving the same steel hardening effects while using lesser amounts of alloys, such as nickel, chromium and molybdenum, which suddenly were in scarce supply.

The new products initially were dubbed the “national emergency steels.” After the war, the viability of these metals was proved, but their composition and utility needed to be explained to the full range of metals buyers. Livesey urged distributors to play a role in this education process. By 1955, the American Iron and Steel Institute boasted, “many of these steels so completely superseded the standard steels in 1941 and 1942 that they are in turn standard steels, and the term national emergency” has long been forgotten. Nearly all manufacturing company purchasing executives Livesey surveyed described such “service” as a significant factor in selecting a warehouse relationship, but he noted “service [is] a very ambiguous word.” The “personality” of the warehouse salesman also ranked high, he found, but “the more successful warehouses are those that have tried to become ‘steel counselors’ to the purchasers.”

The article validated ideas about a customer service focus that had been circulating in the industry for decades. But advancement of the service center concept needed to be two-pronged. The biggest headaches for metals distributors after the war came from the mills, not the customers.

An expected postwar economic downturn did not occur. Instead, an acceleration of automobile production led a boom in steel demand. Metals distributors as well as manufacturers faced steel shortages and higher prices. Labor unrest and tensions between Big Steel and the Truman administration sparked a wave of negative public sentiment toward steel producers in the 1950s.

Metals distributors were seen as co-conspirators, not victims in a decade of postwar steel price inflation. Congressional investigators, who had publicized alleged profiteering by steel mills, turned their attention to distributors.

In 1951, the subcommittee on mobilization and procurement of the Senate Select Committee on Small Business staged a series of public hearings in Pittsburgh, Chicago, Detroit, Michigan, and Cleveland, Ohio, about an alleged gray market in steel and its threat to small manufacturers. Investigators presented charts purporting to depict a “daisy chain” of sales of steel through as many as seven intermediaries between the mill and the end user, each imposing a higher price along the chain.

“Some are attempting to discount this gray market in steel by pointing out only a small percentage of total steel supply is involved, but if it represented only one-half of one percent of steel supply, that would be about 500,000 tons of steel, which would be enough to keep a lot of small businesses going if they could pay the price,” U.S. Sen. Blair Moody, a Michigan Democrat, told the Oct. 25, 1951, hearing.

Evidence of price conspiracies was thin, and the bad publicity quickly subsided. Meanwhile, metals distributors, like their customers, recoiled loudly against price hikes by mills, prompting Walter S. Doxsey, president of the American Steel Warehouse Association, to admonish his members: “Unjustified attacks and criticism of the steel industry arising in Congress and other branches of government should be resented by you just as they are by mill executives.”

Doxsey acknowledged that his members’ relations with mills were strained. But he warned them against feeding political support for extending federal controls of the steel industry, which were still in effect well after World War II. “Don’t do it. Don’t be a sucker,” he told the association’s 1951 annual convention. “One of the worst things you can do, when you haven’t the steel to fill your customer’s order, is to suggest that they complain to Washington about scarcity of steel in warehouse stocks.”

New Products

The aluminum industry faced a different post-war problem. The government-sponsored expansion of aluminum products increased capacity by six times, “far in excess of the established civilian market,” Richard Reynolds Jr. explained in his 1961 speech. Over-capacity was obvious in Canada as well, he said, adding that thousands of tons of airplane scrap were a drag on the market. Unlike steel, the aluminum industry lacked the product breadth to absorb its output.

In response to anti-trust pressures on Alcoa, rivals Reynolds Metals and Kaiser Aluminum and Chemical Co. acquired government-subsidized plants and began marketing new products, everything from aluminum siding for farms and homes to lawn furniture and pleasure boats, not to mention aluminum foil—the product that had enticed cigarette producer R. J. Reynolds into the metals business in the 1920s. In the mid-1950s, the aluminum beverage can immediately became a consumer staple. In the late 1950s, the aluminum Christmas tree sprouted in living rooms.

Aluminum distributors, their ranks swelled by the new competition among Alcoa, Kaiser and Reynolds, organized their own trade association in 1951. Most of the members of the National Association of Aluminum Distributors made the bulk of their revenues selling steel, but the distinct attributes and market opportunities for aluminum were becoming more pronounced.

In his seminal 1960 Harvard Business Review article, “Marketing Myopia,” Harvard business professor Theodore Levitt wrote: “Aluminum has … continued to be a growth industry, thanks to the efforts of two wartime created companies that deliberately set about inventing new customer-satisfying uses. Without [Kaiser and Reynolds], the total demand for aluminum today would be vastly less.”

The aluminum market doubled in the 1950s, with a growth rate three times the growth rate of the U.S. economy. Distributors captured 25% of the business, up from 11% at the start of the decade.

Likewise, stainless steel, in which nickel or chromium provides rust resistance and luster, proved an essential commodity for wartime use and quickly came into vogue after the war, especially as an architectural material.

The need to reach post-war industrial metals buyers was obvious, but the initial target of the distributors’ communications effort was mills, not customers, recalls Howenstein of Copper & Brass Sales. “Our big problem was convincing the mills what our function was,” he says. “We had to sell our function to our suppliers, which is kind of ridiculous. We had less trouble selling our function to the users.”

At this time, major mills, including U.S. Steel, Inland Steel, Reynolds Metals and Alcoa, operated their own distribution subsidiaries. “We would be in competition with them, often in some fairly large chunks of business. So we had to demonstrate what our value to them was,” Howenstein says. Of course, mill relations were vital. But by 1969, with 141 million tons produced, steel production in North America was peaking just as the nation entered a nearly two-year recession. Output resumed in an economic expansion of the early 1970s, but in 1973 the industry reached its maximum annual output, 151 million tons. The decline occurred because Big Steel was ignoring its customers, historian Thomas Misa argued.

“What was wrong with U.S. steel was not its size or even its market power, but its policy of isolating itself from the new demands of users that might have spurred technological change,” he wrote in A Nation of Steel. “The resulting technological torpidity that doomed the industry was not primarily a matter of industrial concentration, outrageous behavior on the part of white- and blue-collar employees, or even the dysfunctional relationship among management, labor, and government. What went wrong were the industry’s relations with its customers.”

From the potentially ruinous labor relations to the failure to embrace improved steelmaking technologies and their overt disinterest in entrepreneurial ideas for steel fabrication, Big Steel executives and the leaders of their unions created their own troubles and, in the 1960s, opened the door to importers from Asia and Europe, Misa wrote. In particular, automakers, the North American steel industry’s biggest customer, found in imported metal a more reliable, costeffective and higher quality product, Misa said.

By tying its destiny too closely to mills, the service center industry ran the risk of guilt by association. Industrial distribution consultant Michael E. Workman of College Station, Texas, says the industry needed to recast itself as an essential component of a demand chain, not a supply chain.

“A lot of folks in a lot of distribution industries got it wrong when they believed they were part of a supply chain process,” he says. “I think they are part of a demand chain process. The customer decides what business you are going to be in and what you are going to provide.”

As Chicago Tube & Iron’s McNeeley puts it, “The idea that supply precedes demand is diabolical. Demand always precedes supply.”

“We do business in most parts of the world, and like North America, the business in most parts of the globe developed essentially based on the requirements of the customers,” says Michael Hoffman, Newport Beach, California-based chief executive of Macsteel Service Centers USA, a unit of South African-based Macsteel holdings.

What did metals customers want? The answer was simple: improved quality, faster deliveries and lower costs.

“Elastic Band in History”

In the mid-1950s, Big Steel, under antitrust pressure from the U.S. Supreme Court, ended its practice of setting steel prices through a system called “price equalization,” which adjusted prices based on the distance of the buyer from the mill. Greater competition in steel prices enabled metals service centers to make their case as inventory managers for their customers. The concept of “cost of possession” became the industry’s rallying cry.

“Articles and brochures appeared throughout the decade explaining that warehouse steel might cost as much as 25% more, but many customers paid the premium willingly to eliminate inventory and other costs,” says a history of A.M. Castle & Co.

Gathering statistics to make their case, metals service centers were able to portray themselves as economic shock absorbers for metal price and supply volatility as well as a source of metal processing for customers. Service centers “became the elastic band in industry,” as Howenstein puts it, because of their investments in inventory, processing equipment and delivery capabilities.

The well-known concept of just-in-time delivery was a further extension of the cost-of-possession message, says John H. Roberts, a veteran of the service center industry and retired president and chief executive officer of the former C.A. Roberts Co., a metal service center in Franklin Park, Illinois, and J.H. Roberts Industries Inc., a mill in Des Plaines, Illinois.

“Mills felt service centers were infringing on their business as they promoted the cost-of-possession concept, and service centers felt mills were infringing on their business when they put finished goods into their inventories,” Roberts recalls. “However, in many cases service centers and mills did work together on joint marketing efforts. On the aluminum side of the business, the exclusive franchises mills used to give to selected service centers back in the 1950s have been replaced by service centers being able to buy from several mill sources and mills being able to sell to a broader number of service centers.”

A Happy Era

A robust economic expansion, beginning in 1961 and stretching to the end of 1969, provided a tail wind for metals distributors. The number and scale of companies blossomed. Pre-war entrepreneurs enlarged their operations; second- and third-generation family members moved into action; World War II veterans and other young people chased opportunities in metals in the years before Mr. McGuire uttered the famous “one word” to young Ben Braddock in the 1967 movie The Graduate: plastics.

In a typical story, George C. Tinsley had been a super salesman before the war for Cold Metal Products Inc., a steel mill in Youngstown, Ohio. In 1940, the company helped set Tinsley up in a warehousing business in Chicago, Precision Steel Warehouse, “because they saw a need for smaller quantities of materials being used by end users and metal stampers and fabricators,” says Terry Piper, Precision Steel’s current chairman, president and CEO.

In 1961, Piper joined the company as part of a high school work/study program. “I went to school in the morning and worked in the afternoon,” with stints in almost every department of the company, Piper says. At the time, the company was engaged in a major growth spurt, culminating in opening a branch operation in Charlotte, North Carolina, in 1976. Today, his company is a unit of Berkshire Hathaway Inc. “I report to Warren Buffett,” Piper says.

“The service center industry doubled from 1960 to 1970, and we would have doubled again in the [1970s] if it hadn’t been for OPEC [and its oil embargo] and the recession of 1975-1976,” said Robert G. Welch, who in 1962 became president of the Steel Service Center Institute, as the American Steel Warehouse Association was now called. Interviewed in 1980 by Purchasing magazine, Welch said, “Because of material handling improvements and better computer information systems, we have been able to make tremendous gains in sales without increasing inventories.”

In this generally happy era, the historically reserved industry produced a few extroverts. Chief among them was Earle M. Jorgensen, son of a Danish sea captain. As with many metal entrepreneurs, Jorgensen started in the scrap business, collecting steel and aluminum from shipyards and selling to the budding oil industry in southern California in the early 1920s. With a $20,000 loan and a slogan he had clipped from a magazine at age 16, “Hustle—that’s all,” Jorgensen built one of the nation’s largest metal service center networks.

His commitment to the Republican Party, especially the political career of Ronald Reagan, was as outsized and energetic as his philanthropic work. As a family friend and member of Reagan’s kitchen cabinet of businessmen advisers, Jorgensen helped launch Reagan’s campaign for governor of California in 1966. Nancy Reagan recalled the metals distributor’s enthusiasm for life: “He’d stand on his head, just for fun, just to show us that he could,” she said in a Los Angeles Times story. He died in 1999, at age 101, after telling Forbes magazine a year earlier, “I’ve always worked. I’m too busy to die.”

In the mid-century period, service centers throughout the nation established public profiles as community institutions. In Chattanooga, Tennessee, the Siskin Memorial Foundation headquarters housed a variety of welfare agencies, a clinic, a school and a museum. In Chicago, the Ryerson family’s longstanding community involvement in education and welfare took a new turn, building the city’s public television station, WTTW. In the current economic downturn, sweat equity is substituting for cash donations at expense-conscious companies, says Mathew L. Smith, president of Yarde Metals Inc. in Southington, Connecticut, an active community benefactor and contributor to customer charities.

“What I’ve advised people in the company to do is that, opposed to just writing checks, we need to look at it with a little different philosophy—getting involved. There are ways you can give and be involved without writing checks and running up expenses. That’s going to be our approach in 2009. Last year we gave the Junior Juvenile Diabetes Foundation a $1,000 check. This year we gave $500 but will be putting a group together to walk in their walkathon. That’s one small thing.”

Debt and Pressures

In those good times of the 1960s, many service center companies assumed excessive debt to finance growth. This balance sheet excess, little known in the past in the conservative industry, sparked a wave of industry consolidation that continues today. Like many trends, consolidation of the service center industry was apparent early on the West Coast.

William T. Gimbel, whose uncle had started Reliance Steel Products Co. in 1939, took control of the Los Angeles-based company in 1957. Gimbel was one of the first entrepreneurs in the industry to pursue a strategy of aggressive growth through acquisitions. Under Gimbel’s leadership, the former supplier of reinforcing bars for southern California extended its product line and its reach.

Size mattered a great deal on the West Coast, in part because service centers from Vancouver to San Diego were buying off of boats. “There was not much difference between the Canadian and U.S. business,” Duncan Thomas, former chief executive officer of service center A.J. Forsyth & Co. in British Columbia, says. “We would buy steel from all over the world. When you got ocean freight, you’d have to order larger quantities.”

At the same time, domestic steel distributors faced pressures from foreign mills, which set up distributorships in North America, especially at West Coast ports, to move their products. In 1977, Purchasing World magazine estimated as much as 15% of the U.S. steel service center industry was controlled by non-U.S. mills, prompting one observer to tell the magazine, “Substantial foreignowned service centers on the East and Gulf Coasts are causing havoc in the marketplace.” Moreover, independent steel brokers sold metal off the docks, without the overhead expense of warehouses.

The end of the 1970s, marred by high inflation and anemic economic growth, ushered in a challenging decade for metals service centers. Domestic steel mills swooned under the pressure of low-cost imported steel and ill-advised capital investments that bore little relatio