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Steel, Past and Present: A Tough Business, Then and Now
By David N. Deinzer
President & CEO, Denman & Davis
This article appeared in American Metal Market's, January 2000 Service Center Supplement
In 1880, the United States was the world's largest producer of steel, and demand for the coveted alloy was driven largely by the railroads' appetite for steel rail, the same rail used to lay the foundation of the transcontinental railroad system.
Through the late 1940s, the U.S. remained the top contender. After World War II, Japanese and European steel makers began to stir the competitive pot. Later, more competition would follow from developing countries, such as Brazil and Korea. To illustrate the progression and the effect of this competition, consider this. In 1945, following World War II, the U.S. produced about half of the world's steel. By 1991, the U.S. was the world's third largest producer, behind the former Soviet Union and Japan. Today, the industry faces even greater competition from global competitors as was the case in 1999, when unfairly traded cheap foreign steel was dumped on the U.S. market, unreasonably skewing margins and exerting downward pricing pressures.
As 2000 gets underway, it can be said that the industry is embarking on a new era. While steel as a commodity is still being used in many traditional ways, the industry itself and the way business is being conducted is changing rapidly.
Independents under Attack
Independent steel service centers are under attack from all angles and in many forms - rapid consolidation, a global economy stacked with downstream foreign competition and new technology (the Internet). There is no doubt that the age of e-commerce is poised to forever change the way business-to-business transactions are conducted. Few would doubt that 1999 was a tough year for the industry as a whole. It's struggled through an inventory hangover from 1998, which was fueled by the dumping of steel as a result of the collapsed economies in Southeast Asia.
Looking ahead at 2000, the threat of unfair trade is receding as foreign economies make a comeback and domestic steel producers continue to lobby against unfair trade practices. Economically, the 2000 outlook for service centers remains strong. This is evidenced by recent announcements of price increases among steel producers expected to take effect early in the year. While the strong economy bodes well for the industry as whole, one thing is certain: Things won't be getting any easier for the independent service center.
If independents are to survive in the new business climate 2000, they must be leaner than their bigger consolidated brothers, continue to supply value-added products and services and work even harder to maintain a strong commitment to niche markets and customer service. In short, they have to continue to hang tough and work smart.
Tough Industry; Tough Times Ahead
The steel industry has been tough for years, and it won't be getting any easier in 2000. However, the New Year does bring with it a host of new and different challenges that will test the mettle of independent service centers.
The main challenge that continues to loom large is consolidation. Predicted in the early 1980s, the mergers and acquisitions of steel service centers will continue and this trend is not expected to stop.
A variety of factors are fueling this. For one, many service centers (small or family-owned) are looking for an exit strategy and are ready to depart from the industry as competition gets fiercer. Some of these service centers foresee that they will no longer be competitive in the future because they lack the financial resources to invest in inventory and capital equipment. Those centers probably cannot afford to invest or take the financial risk in new MIS systems and in high technology hardware (shears, burning machines, slitting lines, etc.) - equipment that they need to be more productive, competitive and to provide value-added services or create a niche.
In this era of consolidation, the center that will survive must be flexible and adaptable to ever-changing regions and markets. Using Denman & Davis as an example, the company is one of a handful of family-owned service centers in its fourth generation that is still doing business - and only flexibility and adaptability made this happen.
Thirty years ago there were 50-plus service centers located in the New York Metropolitan area that belonged to the local New York Chapter of the Steel Service Center Institute. Today, there are only a handful.
Much of this is because the Metropolitan New York area, like most of the Northeast has lost most of its metals manufacturing base — factories have closed or relocated elsewhere. All this has created an environment in which Denman & Davis is probably the largest independent, general line service center left in the Northeast, because most of our competition has either sold out or merged.
Therefore, for independents, the challenge remains how to survive when everything around is folding. This issue will continue in 2000 and will force independents to look inward and outward for innovative ways to maintain as level a playing field as possible. Fortunately, the strong economy should help.
It's the Economy
The 2000 economic outlook for service centers is being influenced by a stronger capital goods market, the recovery of the Southeast Asian financial markets, rebounding economies in Europe and Latin America and a decline in the dumping of cheap, unfairly traded foreign steel onto U.S. shores. In a nutshell, the world economy will continue to strengthen and will be buoyed by the 2000 presidential election.
The first key economic factor affecting service center profitability in the year 2000, will be the effectiveness of service centers in passing along the recently announced price increases. These announcements followed a noticeable decline in the dumping of cheap foreign steel into the U.S. The action is certain to have a ripple effect on the service center industry and its price margins. Those centers dealing in stainless steel have the same challenge in passing along surcharges. No matter how difficult, for centers to maintain cash flow for inventory replenishment, they should be pricing their goods and services based on replacement costs. NIFO (next-in-first-out) costing for profitability is critical!
Service center business will be up in 2000, with volume increases estimated to be as much as 12 percent in some products and markets. Also, there will be price recovery in most steel commodities in the marketplace. Depending on the specific commodity, total price increases could conservatively range from 10 percent to 15 percent by year end.
This strong economic outlook is being buoyed by the pickup of the Far Eastern economy, where the American dollar remains strong, and as a result, commodity-type goods can be purchased at competitive values. Moreover, demand for American goods (capital equipment produced in the U.S.) is in demand. The financing is back in many foreign countries and export levels of American manufactured equipment will be returning to their pre-Asian crisis levels. All this signals the comeback of a stronger domestic U.S. capital goods market. The market had been in a lull over the past 12-18 months; however, in September it began to show a turnaround and the market outlook is now solid. Volume levels from capital goods manufacturers remained strong in December 1999, a month that traditionally slows down.
Specific markets where the steel service center industry expects sustained upturns include power generation, which should remain strong for the next three to five years, plastics equipment, machinery, petro-chemicals, and construction for office buildings and infrastructure. Industries that are expected to remain slow are aerospace, farm equipment and pulp and paper equipment.
Keeping a Lean Machine
While the overall economic outlook appears good, independents must stay on their toes and continue to look inward to reduce redundant costs.
The continued downward pressure on pricing and margins means that it is especially critical for service centers to maintain an efficient operation by keeping operating costs under control and inventory levels as lean as possible.
In this area, it is not going to get any easier in 2000. In fact, it will get increasingly difficult. The demands from the competitive global economy means continued pressure to provide the best in value-added services, world-class quality and timely deliveries. If a business is not globally competitive with both products and value-added services, then that business will be unable to sustain profitability for the long haul.
E-commerce, still in its embryonic stage, will continue to grow in importance in the business-to-business sector during 2000 and beyond, and that should be positive for the economy and for business.
E-commerce will drive out redundant operating costs (such as data entry for order taking) and should ultimately make the goods and services that service centers provide even more price competitive against alternative and competing materials in the marketplace. This will lower the cost of doing business and ultimately be reflected in lower prices. It will also be one of the ways that independents can remain competitive with larger consolidated centers, as e-commerce helps level the costs associated with management information systems (MIS) and the business transaction playing field.
Another way to differentiate one's business is to find a niche. As competition gets tougher year after year, independents will need to be more opportunistic in gaining a competitive edge. They will need to become adept at looking for little seams and cracks in the channel indicating a particular market is not being given the attention it should be. For example, focus on providing superior customer service than the competition to a given market segment.
An additional way independents can work to level the playing field is by joining a cooperative. Since its formation in 1996, the North American Steel Alliance (NASA) continues to gain strength. NASA has provided a toehold in gaining greater recognition and respect. The goal for NASA and its members is to be the preferred customer of the steel mills and have mills want to do business with NASA members. The other objective is for NASA members to be perceived as the preferred suppliers of metal to the metals consuming marketplace. Today, there are 81 members in NASA, accounting for $4.1 billion in revenues.
Where Do We Go from Here?
What 2001 - the true start of the new millennium — will bring remains to be seen. The year 2000, though, looks like it will shape up to be an interesting ride for service centers — independents and consolidated alike.
For independents, it will be a year of finding the right mix, a year of maintaining competitiveness, of maintaining value-added and niche services and a year of dealing effectively with the onslaught of competitive pressures.
In this world of Goliath service centers and a world far removed from the industry's early stages of 1880, one thing is certain: The business is not boring. Independents looking to put their business acumen to the test, most certainly, will not lack for challenges in the year ahead.
David N. Deinzer is president and chief executive officer of Denman & Davis, a steel service center headquartered in Clifton, N.J., with other locations in Slatersville, R.I. and Albany, N.Y.
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