News Articles
Steel prices reverse profitability picture for users
By Mark Bilger
Published in Lake Erie West Manufacturing & Construction News, September 2004
In 2003, the federal government levied steel import tariffs designed to help resolve difficulties in the domestic steel manufacturing industry. The tariffs were to assist remaining US steel manufacturers such as US Steel, Weirton Steel, etc. Domestic manufacturers have had a hard time over the last twenty years, many have closed their doors, others consolidated via merger, and some have been on the verge of bankruptcy with high overhead and low foreign prices to compete against. Domestic steel companies are burdened with an older workforce, many retired, and pension funds weigh heavily on net profits.
Steel manufacturer corporate officers and workers alike blamed the government for allowing “dumped” foreign cheap steel into the US . They further added that domestic steel users theoretically were profiting at the expense of domestic mills by using the cheap steel. Critics said domestic steel mills weren't efficient enough to be competitive in a global marketplace. Steel users were happy about low material costs but this was changed by the import tariffs that raised steel costs drastically. Steel users said they were losing 200,000 jobs and many companies would be driven out of business because of the tariffs. Steel mills said that without the tariffs they'd lose 200,000 jobs and the remainder of domestic steel makers would soon be bankrupt.
Domestic steel producers were losing the battle and steel users were doing fine until the import tariffs took effect. The import tariffs were to stem the flow of “cheap” steel from other countries (with the exception of NAFTA member countries), retain domestic mill jobs, boost domestic steel sales and resulting profits, and appease steel workers.
The results of the tariffs adversely affected steel users though because initially all steel, even specialized formulas that were not available from US manufacturers, jumped in price. The tariff wording was adjusted to resolve the specialized problems. Tariffs boosted profits for domestic mills but angered overseas manufacturers. According to various industry critics, domestic manufacturers didn't use their increased sales and profits to become more efficient nor to improve their facilities. They instead took the increased profits out to pay higher investor dividends, higher salaries for management, and otherwise used profits unwisely, according to industry critics. Meanwhile the clock was ticking and the end of tariffs neared.
Industry critics speculated that as soon as the tariffs expired, domestic mills would be back in the same boat as before – overhead would be just as high, manufacturing would be just as inefficient, and foreign competition would be just as aggressive. Steel users in the US looked forward to the tariff rollback so prices would settle back down to near pre-tariff levels. But that has not been the result.
China has recently become the world's largest user of steel as its economy and industrial production has increased drastically. China is now importing rolled steel, specialty steel, aluminum, and scrap steel from every country, including the United States . Chinese buyers are snapping up all the scrap steel they can find in the US and shipping it overseas to create cold rolled steel, which is made of approximately 80 percent recycled steel, to feed their industrial base.
This steel hunger further enforces the 180-degree shift of fortunes for our domestic steel mills and steel users. In virtually every case metal base prices have increased 50 to 150 percent in the last year and there's no end in sight. In classic supply and demand fashion, domestic mills are feeding domestic and foreign markets at full capacity, which means it is not a time for them to worry about competition but profit as long as the market will stand by raising prices regularly. It also means that metals ordered by domestic users sometimes aren't available.
We talked recently with Eric Fankhauser, vice president, and Darlene Dieball, purchasing manager, of Toledo Metal Spinning Co. (TMS) in Toledo . TMS uses mostly stainless and carbon steel, and aluminum, to create lines of hoppers, cups, lids, domes, cylinders, cylinder ends, and other similar products. These products are purchased and used by the plastics, pharmaceutical, lighting, and aerospace industries among others.
Fankhauser and Dieball are frustrated by the rapidly rising costs of materials that are the lifeblood of their company. Dieball told us: “Since the beginning of the year we've seen stainless steel base prices increase 3 percent each month for January, February, March, and April. Two of the three mills our stainless comes from added another 6 percent increase in May. We expect these increases to continue.”
Fankhauser added: “Predictions are that cold rolled steel prices will be 100 percent higher a year from now than they are today, and they're already 100 percent higher than a year ago. Besides the base price increases, the largest nickel producer in Canada is having a labor strike, nickel production is low because of it, and steel manufacturers are adding a nickel surcharge per pound when it's a compound with nickel in it. This month that's adding another 52 cents per pound [$1040 per ton] to our base cost.”
Price fluctuations, supply fluctuations, and China 's high and increasing demand are making steel harder to acquire as well. Dieball said: “A user can't place a long-term blanket order anymore. Our suppliers aren't sure they can even fulfill a one-time order. We now must shop at various suppliers far and wide to find adequate materials for production runs. Today there's a 16-week lead-time on aluminum. Suppliers don't know from day to day what costs will be, so we have a hard time quoting product prices to our customers. We used to get 30-day price guarantees on materials. Now a price won't be guaranteed more than 24 hours.”
Further exacerbating the situation is the fact that many mills closed their doors forever during the recession so there are now fewer mills to fulfill high demand. Fankhauser told us: “There was an 8 cent drop in the nickel surcharge for July so demand increased dramatically as companies stocked up. That caused the supply to dry up again because the remaining domestic mills are running full tilt and can't keep up. It seems we're going to be enduring skyrocketing prices for a long while.”
Toledo Metal Spinning has been able to pass the materials cost increase on to their customer base. Fankhauser said: “Our customers know what's going on in the industry and they've been understanding about our predicament so we can recoup our materials cost increases. Because we're a ‘job' shop with small production runs, our customers don't want to search for new suppliers because the problem would be the same anywhere they turn. Fortunately we aren't involved in the automotive industry where the industry has locked-in contract pricing with parts suppliers and there's no room for passing materials price increases on. I expect quite a few of those users to go out of business and more automotive parts will be manufactured overseas with lower labor costs to compensate. We've returned to doing some steel processing in-house that we were previously outsourcing, such as shearing from sheet steel to smaller squares. That improves our materials availability and saves us a little on processing to offset material costs.”
Toledo Metal Spinning has also come up with some new marketing strategies involving the Internet, which help smooth out the instability of material prices and availability. Fankhauser told us: “Years ago we developed a strategy of stocking stainless steel conical hoppers and lids to serve those customers who desired to buy small lots and ship immediately. We serve customers who want to buy a few or even just one piece at a time. We recently set up our systems to accept major credit cards over the phone and ship low quantities immediately.
“To build on this strategy we've also created other new product lines such as Cleanline brushed stainless steel waste receptacles, which are attractive for arenas, convention centers, shopping malls, airports, and restaurants, as well as Brewdome Fermenters for the home brewer. The stainless steel is strong and corrosion resistant. Commercial users can buy any quantity desired direct from us.
“When industry-wide factors beyond your control are working against you, it's necessary to be aggressive to keep employees working,” Fankhauser continued. “It's always been our philosophy to protect our employees against layoff and keep them employed. Even after our big fire in 1998, when our facility was almost completely destroyed, our employees didn't miss a single day of work. We started rebuilding and shipping existing stock immediately and got production and sales back up quickly. We've received numerous prestigious awards because of that and we did it to recognize our dedicated employees. I'm not going to let materials price increases take us out either. We'll find ways to overcome this adversity and will continue growing as we always have.”
Now there are rumors that domestic steel mill unions are considering striking because they see their employers making high profit margins during this high demand time, and they want a share of the pie. The mills have lost so many millions of dollars over more than a decade that they feel they and their investors deserve to recoup what has been lost and stabilize the industry for the future lean times. A strike or series of strikes could bring domestic steel production to its knees once again, create an even worse supply and demand situation, bankrupt more steel mills, and cause user costs to go much higher.