Steel buyers say they want more from suppliers

Buyers and mills see cost-management as a major business challenge but have divergent views on the subject.

By Tom Stundza -- Purchasing, 2/16/2006

As the products from steel mini-mills have expanded, so also have buyers' expectations about products and service from the electric-arc furnace (EAF) steelmakers. The nation's largest half-dozen steelmakers now include such EAF-based conglomerates as Nucor, Gerdau Ameristeel and Steel Dynamics. Once touted as the "suppliers of the future" when they were the new independent mills on the supply scene, the mini-mill firms now have to fight perceptions among buyers that they are no more customer-focused than the big-tonnage integrated mills.

The fact is that cost concerns are a key marketplace focus for 2006. The mills are trying to deflect the inflation of electricity, natural gas and ferrous scrap as they continue to grapple with product oversupply and margin erosion. Buyers, who see many mini-mills as being just as fixated on the bottom line as their blast furnace-based brethren, are seeking a true accounting of the impact of energy and raw materials on mill products that continue to sell at historically high transaction prices.

When the steel industry's version of discount airlines made basic commodity-grade bar and rod products, limited tonnages were available and suppliers were judged mostly on price and availability. Today, the mini-mill sector also produces certain grades of sheet, plate, special quality bars, structural beams, rails and tubing—and the mills are rated by buyers on product quality, delivery service and after-sales support metrics—plus competitive pricing.

"Some mini-mill bar suppliers recognize that price is different from cost, but what most do not understand is that long products have a market price," says buyer Gene Finley at the Metcut steel processing firm in Aurora, Ill. "If these mills are not offering higher-value products, then they still have to be market competitive" with other mills, domestic and foreign.

The advent of slab-casting systems suitable for these smaller-tonnage EAF shops resulted in a new wave of mini-mill construction during the 1990s that allowed them to capture markets once dominated by the integrated (blast furnace-based) steel producers. Upshot: More than half (53%) of the steel made in the U.S. these days comes from electric-furnace steelmakers, according to the U.S. Geological Survey's Minerals Information Center in Reston, Va.

But, with the expanded smelting and mill-product manufacture have come new problems. Dan DiMicco, chairman of Charlotte, N.C.-based Nucor, the largest mini-mill company, points out that "many mini-mills make similar products so it's a very fragmented industry. Additionally, in flat-rolled, the competition is with integrated producers and other mini-mills. Competition is not only domestic but foreign; so, there are a lot of competitors out there." Thus, the Washington-based Steel Manufacturers Association had included in a game plan for 2005 the rekindling of customer relationships that stressed strong customer service and proactive response to changing customer needs. However, buyers have continued to have trouble getting mini-mill steel products delivered when promised.

"There's no commitment from any mill to actually deliver orders on time," says a buyer surveyed by Purchasing. "Promised delivery dates mean nothing. I've been forced to look offshore for competitive pricing and timely delivery on certain flat-rolled products offered by the mini-mills."

And, despite higher prices over the past two years, the mills have seen their financial performance under pressure from erratic pricing caused by corporate consolidations, excess world capacity for steel production, rising levels of imports, a gradual slowdown in U.S. economic growth, and the rising costs and reduced availability of energy and raw materials in a tight supply environment.

Many people lump all steel producers together but the mini-mills hold themselves apart from the larger mills. "American mini-mills will continue to be among the most competitive, cost-efficient steelmakers in the world," says Thomas A. Danjczek, president of the Steel Manufacturers Association. "But they have their sets of problems that impact how they deal with the marketplace."

Danjczek points out that "market demand for steel products isn't a constant, it's constantly changing, and that creates competitive pressures on sales and pricing, including pressure from imports and substitute materials." Other issues, he says, include volatility in steel prices and changes in the supply and cost of raw materials, particularly scrap steel. "And then there's the availability and cost of electricity and natural gas."

For example, electricity used by the mini-mills costs, on average, 11% more than it did in 2004. And every 1¢ per kilowatt hour increase in the cost of electricity can boost an EAF furnace's operating cost by $7 per net ton. Natural gas costs increased 33% in 2005 from the year earlier. And scrap pricing has just exploded. No. 1 busheling is a popular grade used by the mini-mills to gauge surcharges over the past two years. The market price average dropped 30% in 2005 from the peak year of 2004, but the Chicago-area price average last year was 64% higher than it had been at its bottom in 2003.

That's why "cost-control and cash-management have become the major business challenge for the mini-mills," says Danjczek. "The inputs of energy and raw materials are very volatile, and probably will remain so this year." Atop that, he points out that cash-generation also is needed to pay for capital spending by the mini-mills.

"The minis are making more than just channels, angles and other low-end bar products," says Danjczek. "And they have to generate cash to cover costs and earn enough profits to pay for new equipment."

And therein lies the rub with many buyers, who say that mini-mill product prices have risen higher and faster than the true growth rates of raw materials inflation—and wonder if these mills are starting to oversupply their product lines. While 78% of the steel buyers who source through EAF mills have developed and maintained strategic alliances or partnerships with these suppliers, only 47% are happy with these relationships these days—largely because mini-mill conglomerates were in the forefront of the 2004 run-up in steel product pricing that has created a new and higher plateau for sheet, plate, bar, beam, rod and tubing prices.

Among buyers, attitudes are widely divergent nowadays. "In my experience, all mills have difficulty seeing past their own interests," says a buyer. "The burden is on the consumer to sort out 'price vs. cost' issues. Quality issues have been elevated recently but it seems that in the minds of steel producers, their performance standard remains separate from other products."

Yet, the mini-mills have their proponents: "I think they have a firm grasp on price vs. cost," says a buyer answering Purchasing's latest online survey. "The mini-mills are very market sensitive and put out a high quality product. I think the mini-mills attitude, in general, is better. The staffers are more personable, responsive and hard working at all levels than those at the integrated mills." And, the mini-mills also have their detractors: "Many of these mills appear to care less if they get the order or not," says another buyer answering the survey. "Most of the mills I deal with treat me with a 'you will get your material when you get it' attitude. It is amazing."

There is the veteran buyer who sees "no clear differentiation between integrated mills and the mini-mills." That may be why 58% of the buyers polled believe they are just another customer in the mini-mill sellers' order books. And several buyers polled still are angry about the scrap and energy surcharges that have boosted transaction prices since late 2003. "All these mills have been adding surcharges that are not always in line with actual costs," says a buyer. "Surcharges are a way to add profits to a product that are not related to cost of doing business."

Another senior steel buyer rebuts that: "The attitude of the mini-mills on the support side is far superior to the integrateds at this time." Another buyer says that "recent steel industry mergers concern me because as companies get larger they lose interest in medium-sized customers, and bigger does not mean better." (Nucor, the biggest mini-mill company, this decade has taken over Birmingham Steel, Tuscaloosa Steel, Auburn Steel, Marion Steel, Fort Howard Steel and Seattle Steel.)

A number of buyers prefer dealing with smaller mills, but they are in the minority. A full 60% of those polled feel that since consolidations have become so prevalent, they need to coach their mini-mill suppliers to improve their strategic partnering capabilities, deliveries and post-sale technical service. "Mini-mills today are out for the dollar only," says one of these buyers. "Mini-mills need to realize that there is a real world out there waiting on good product at a fair cost."

"I have worked with the mini-mills for years, and never thought they were customer-oriented," says purchasing manager Walter Condley at Valley Industries in Lodi, Calif., which produces professional-quality trailer hitches and towing accessories. "Because of this, my offshore purchases from China and India have expanded 300% in just two years." Danjczek of the Steel Manufacturers Association agrees that imports from Brazil, Russia, India, China and elsewhere could become a major threat to mini-mill profitability in coming months. "That's why there has to be significant changes in U.S. and foreign trade policy affecting steel imports or exports," he says.