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Article Excerpt
FOR SMALL TO MIDSIZE PLAYERS, the service center business today is about consistently hitting singles and doubles rather than the long ball, agree members of the Association of Steel Distributors. Despite the steel industry's many changes and challenges, they remain confident they can go the distance using a combination of smarts and hustle. Metal Center News Editor Tim Triplett moderated a panel discussion Feb. 16 with six ASD members in Detroit. They shared observations on current market conditions, supply and demand issues, industry consolidation, mill-service center relations, pricing trends, imports, logistics, the plight of American manufacturing, sales compensation and capital spending. Following is an edited transcript:
Panelists:
* James Barnett, president of Grand Steel Products, Farmington Hills, Mich.
* Doug Everhart, vice president of materials for Wyoming Steel Supply Inc., Camden, Ohio
* William Feniger, president of Universal Metals LLC, Toledo, Ohio
* Andrew Rasulo, materials manager for Action Steel, Astoria, N.Y.
* Brian Robbins, chief executive officer of Mid-West Materials Inc., Perry, Ohio
* William Vitucci, vice president and chief financial officer for Vitco Steel Supply Corp., Dixmoor, Ill.
MCN: Your companies are primarily carbon flat-roll distributors. Please give me your assessment of current market conditions and what you expect for the rest of the year?
VITUCCI: We are seeing fewer orders being placed, mostly due to competitive pricing in the market right now. Inquiries are slightly higher. A lot more OEMs are calling us looking for pricing, as opposed to us having to chase them down. The activity level is good to steady for this quarter.
Steel prices have leveled out somewhat. In recent weeks, we are not finding spot market availability. Being a secondary house as well, our supply side is tightening up. We are being forced to use more prime or excess product and less secondary product. Secondary used to be our profitability advantage-to be able to upgrade secondary product and reallocate it to a different use. Being that secondary product is not as readily available, it has made our margins quite a bit tighter.
BARNETT: Our order booking level is up 10 to 15 percent. Some of that is because we added sales staff, and some of it is due to increased pricing, which has gradually gone up over the past two quarters. Our sales are steady and trending up. We forecast a continued increase in sales at about the 5 to 10 percent level through the third quarter. At that point, my crystal ball gets real fuzzy.
MCN: So you're 10 percent above a very good year last year.
BARNETT: Yes. It should certainly not go unmentioned that a lot of that is due to the supply side pressure we're feeling from our mill producers. They are continuing to ask for, and getting, higher prices, forcing distributors to raise their prices and, therefore, realizing a built-in sales increase. Overall volume, on a tonnage basis, is up as well, however, in the 5 to 7 percent range.
MCN: Is that a common experience?
EVERHART: I would echo that. We are up probably 10 percent over last year. I also agree with Bill [Vitucci] that material is getting harder to find. There are price pressures...and a higher inquiry level. As prices move up, customers are shopping harder for the steel they're buying. The first ones to raise prices are the mills. It takes service centers a little longer to recover that increase. So, we are seeing a bit of margin erosion compared to last year, but we will eventually catch up, with the normal historical lag of a couple months.
FENIGER: Surprisingly, we are substantially ahead of last year. We are noticing a definite pickup in our order book, though the order book from the past has changed substantially. There is more daily, sporadic buying. [Spot buying has replaced longer-term purchase agreements.] We are not even looking to quote out any long-term [contracts] at this point because it's just impossible to calculate where your costs are going to be. Only with customers we've had for a long time will we try to work with them on the pricing question for a contract.
MCN: So spot sales make up a bigger percentage of your total business?
FENIGER: Most definitely. It was trending that way beginning in 2004 and spilled into 2005. Most of us have come to the realization that the short-term business is where we're at. Purchasing big inventories at big prices for the long-term is too risky. The size of our business, the volume of our business, is directly related to the amount of steel we can buy, which is determined by the availability we have with the mills. There are five to seven major producing mills, compared to 30 five or six years ago. That has changed the whole perspective of our business. In my opinion, it has made us become more professional. Fewer suppliers means more continuity in what you can get, more continuity in what you can sell, more continuity of prices. It allows us to run our business a little bit more professionally in terms of budgeting, planning and projecting.
MCN: At the same time, business must be a lot less predictable with fewer contract sales and more spot business, right?
BARNETT: The steel mills have pretty much determined what distributors of our relative sizes can do in the marketplace, as far as contract sales. Our abilities are limited. I think the pendulum has swung the other way. At one point, flat-roll steel distributors were taking in excess of 55 to 60 percent of the production, and the mills saw that as slicing into their pie profit-wise. With the consolidation of the industry, they have reduced the amount of contract tons available to steel distributors.
EVERHART: As far as inventory management, those same customers that demanded [but no longer get] long-term contract prices still forecast their demand. We know how much they're using, so we can extrapolate that into...
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