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March 1, 2005

Still Tough as Steel

To call 80-year-old David Roderick a legend in the steel industry only begins to capture the extent of his stature in the business. Starting as a cost analyst in 1953 at a railroad U.S. Steel then owned in his hometown of Pittsburgh, Pennsylvania, Roderick rose to CEO of the steel behemoth by 1975. He went on to serve as chairman from 1979 to 1989 as U.S. Steel transformed into USX.

During his time at the top in those two posts, he guided the company through some of the most wrenching changes in its history and fended off a takeover attempt by corporate raider Carl Icahn as well. A 1987 Time cover story called the former Marine sergeant “A CEO as Tough as Steel.” At the time, Roderick had closed down 27% of USX capacity as he tried to right-size the then-troubled steelmaker.

Given all his battles at USX, Roderick would have been forgiven for retiring quietly when he left the steel giant. But sitting serenely on a beach somewhere is not Roderick's style.

In 1990, buyout specialist Kelso & Company acquired California-based EMJ, merging it with pipe and tube distributor Kilsby-Roberts to form Earle M. Jorgenson Co. in 1991. The merger didn't go as Kelso had hoped, and Kelso's chairman asked Roderick to join the board of the merged service center to help turn it around.

Roderick's famously direct management style soon came into play. Reviewing the company's then top managers, he recalls that “I was not happy with their performance. I felt they were living in the past rather than the future, and the board agreed with me.”

Roderick searched for a new CEO, hiring Maurice S. “Sandy” Nelson, Jr. from Inland Steel in 1997.

Nelson, with Roderick's input and advice, has since engineered a major turnaround at EMJ. Nelson improved both productivity and customer relations, according to Roderick. The company saw its fiscal 2004 sales top $1.04 billion, a 13.1% jump from the prior year, with net income of $15.3 million, nearly a six-fold increase, and is poised to launch an initial public stock offering, a sign of its financial recovery.

Roderick says management lessons he learned in steel mills apply to service centers as well. “The key in both industries is getting qualified people, giving them goals and then measuring them. Don't tell them how to do things, tell them what you want done and get out of their way. If they accomplish it, reward them; if they can't, find other people.”

Roderick jokes that his management style has changed somewhat over the years. “I think I'm a lot sweeter now. I have mellowed like wine kept under the right conditions.” But some things haven't changed. “If I get into a business situation, I don't believe in nonsense, I believe in performance,” he says. Roderick doesn't plan to stop working or to slow down physically. He walks three miles every day and regularly plays golf. “You have to be mentally challenged, you have to stay physically active, and you have to continue to be mentally active,” he says.

In addition to his work at EMJ, Roderick in 2003 found time to help his native Pittsburgh deal with its fiscal problems. He helped direct a group of 30 executives on a specially formed financial oversight committee that made recommendations to the city and the state in early 2004 for a combination of tax increases and city cost reductions. Today, the city's credit rating has been restored and its budget is back in balance, “so I think our endeavor was successful,” Roderick says.

Forward asked David Roderick to share his thoughts on the metals business and issues affecting both mills and distributors.

Q: LAST YEAR WAS A VOLATILE ONE FOR THE METALS INDUSTRY WITH PRICES RISING AND A PERCEIVED WORLDWIDE GLUT TURNING INTO A SHORTAGE. WHAT DO YOU EXPECT IN 2005?
A: I think its going to be a more stable year. Outside of the price announcements that have been made, my guess is this year you're going to have a little more stability price-wise. The industry, is going to be fighting cost increases in the raw materials they have to purchase. I think you're going to see iron ore prices and coke prices try to catch up. As a result, cost containment is going to be more of an issue.

I think the markets are still tight but they're not anywhere near as shaky from a supply point of view as they were in the spring and summer of last year. People have put prices in that they're more or less satisfied with. I think it's going to be a very good year for the industry throughout 2005.

Q: WHAT ARE THE LESSONS FROM THE PAST THAT SERVICE CENTERS, AND PRODUCERS, SHOULD BE CONSIDERING IN THE CURRENT BUSINESS ENVIRONMENT?
A: What history tells us is we are in a commodity driven business. When you get periods of shortage or supply/demand imbalance and you're operating everything pretty much at capacity, there's very little flexibility. History tells you at this point you want to go with the market, you want to stay short—you don't want to make a lot of long-term commitments.

The industry took very few outages last year for maintenance and some of that will catch up with them in 2005 and 2006—which again will keep supply pretty much in balance. A lot of facilities, their lives have been extended, but you only can do that for a limited period and then you have to face the music. As a result, this year is going to be another period where supply and demand are going to stay in relative balance.

I think customers are in better shape, from an inventory point of view, than they were at the start of 2004. Many companies were accustomed to very short lead times and let their inventories get low. I think there's much better balance in the users' hands than there was in early 2004 and that will relieve a little panic and pressure.

Q: PRICE INCREASES LAST YEAR CAUSED ILL WILL BETWEEN MILLS AND DISTRIBUTORS. WILL THAT ILL WILL CONTINUE THIS YEAR? 
A: I haven't seen it change in 40 years. Distributors always want a lower price and the mills always want a higher price, it's an ongoing thing.

The thing that's happened now is that the mills and distributors and major customers of the mills have built a closer relationship. They recognize that continuity of supply is as important if not more important than price. If you get price increases, even if you don't like them, you have to find ways to pass them through. But if you don't have supply you shut down.

Between those two alternatives, price increases are much more acceptable if you can move them through to your customers. I think most distributors learned to do that either through surcharges or renegotiations with their customers last year.

Q: HOW CAN SERVICE CENTERS BETTER PROTECT THEMSELVES AGAINST PRICE CYCLICALITY? LONG-TERM CONTRACTS HURT THEM AS PRICES ROSE. IS THERE A BETTER WAY TO PROTECT AGAINST PRICE SWINGS?
A: I don't think there's any trend for the steel mills to go to longer term contracts. Long-term contracts very seldom work out for both parties. Long term, as prices drop, the users beg for relief. When supply is short they become more interested in availability than they do in ending up in court and therefore those things tend to be reworked so both parties can continue in the relationship—and that's as it should be.

The guy in the middle can't be in the position of absorbing increases and getting fat—2004 made producers and consumers understand the necessity of that. When you get volatility, we have to work together so that neither party gets materially disadvantaged, one party shouldn't end up with his pockets full of coins while the other guy goes broke.

In the foundry business last year, company after company went bankrupt because scrap prices went up and customers were not willing to accept increases. The consumer has to pay the price at that time but in the interim, you've driven the company into Chapter 11. Who benefits from that? No one does.

The producer and the consumer have to recognize they are not the market, they're a segment of the market, and each has to do well in order for them to survive long term.

Q: CONSOLIDATION HAS BEEN A HALLMARK IN THE STEEL INDUSTRY AND NOW IN THE SERVICE CENTER SECTOR AS WELL. DO YOU EXPECT THAT TO CONTINUE? 
A: The steel industry needed to have consolidation. There were too many producers out there. Weak producers weren't worried about profitability, they were worried about survival. In the last five years, the consolidation has been tremendous in the steel sector. I don't think it's finished.

The service centers are probably five years behind the steel industry. I think more consolidation needs to take place. I think more consolidation will take place. I think the customers want it. If you have multiple locations, you don't want to be dealing with 40 different locations for your supply chain. Customers want the service, they want the reliability, they want the quality and they want on-time delivery.

The mills want service center consolidation because they would rather be dealing with a larger distributor. It makes sense.

There's always going to be a lot of mom and pops around in smaller markets.

I hope the steel service centers continue to consolidate. They're putting some meat on their bones financially. I think they're going to be in a much better position in '05 and '06 to make acquisitions and mergers that will be beneficial to both the seller and buyer.

Q: HOW DO YOU SEE THE ROLE OF CHINA IN WORLD SUPPLY AND DEMAND FOR STEEL THIS YEAR AND IN THE NEAR FUTURE? WHAT ARE THE IMPLICATIONS FOR SERVICE CENTERS? 
A: I don't think that China this year is really going to be a major factor. It undoubtedly will bring a little more capacity in. Conversely, its consumption is going to rise rapidly and, long-term, China does not want to be a major importer of steel, so they're going to continue to build capacity for their long-term needs—a lot of it in the long products as opposed to flat-roll.

That added capacity is going to continue to keep pressure on raw material costs and those things that you need to produce steel products.

I think in 2005, China is not going to be a destabilizing factor of any magnitude. Beyond that, I think we have to wait and watch.

The only thing that affects a service center as far as China is concerned is price. If longer term China over-expands, that could be reflected in world steel prices and there would be that linkage back to the American steel service sector.

Q: HOW DO YOU SEE THE IMPORT TARIFF QUESTION PLAYING OUT IN WASHINGTON?
A: The political realities in getting tariffs, I think, are going to be very difficult. Those that are seeking steel tariffs now will find there's going to be major, major opposition to it and therefore the process gets out of the economic need and it gets more political than economic.

I just think it's going to be a tough road for those who think they are going to get protection through the application of steel tariffs.

Q: DOES THE AUTO INDUSTRY'S CONSTANT PUSH TO REDUCE THE USE OF METAL WORRY YOU? WILL LIGHTER WEIGHT AUTOS MEAN LESS DEMAND FOR METALS?
A: The fuel efficiency trend in the industry has gone on now for 30 years; lightening the vehicle has gone on for 30 years. But that said, over the years the amount of metals going to the auto industry has not really declined. The SUVs and vans have more steel in them than old autos used to. I think product substitution is a natural part of the market, it will continue. It will be an evolution over time. It's been going on for a long time and we're still producing 16 million vehicles in the United States and the auto companies are still the major customers for the flat roll producers. I don't see that changing.