Traders' Almanac

Traders' Almanac - Startegies for trade shows and conferences

Tue, 20 May 2008 20:17:14 +0300

Strategies for trade shows and conferences

The content deadline for our next Prime magazine was quickly approaching, and I had to think about the topic of my next Traders’ Almanac article. Then I realized that I cannot think of anything but our upcoming trade conference that we are organizing in San Diego in July. So, to fit the flavor of the day, I want to talk about the various conferences that traders or commercial steel professionals can attend and how they can get the most out of them.

Conferences are dime a dozen nowadays. All the major publications, trade groups and various associations, even ports, are organizing events ranging from large expos to small gatherings of people who share the same interests. You certainly can't go to all of them, as it would be very costly and, more importantly, time-consuming. After all, you have to stay in the office and actually work sometimes.

So you have to pick and choose. First, you have to look at the demographics of the conference. You have to ask yourself: Who are the attendees? What type of companies are attending? Are my customers and competition going to be there? Is there an opportunity to represent my company and raise the awareness in the industry? Another important question to ask yourself is: What can I learn from the conference, not only from the speakers but by networking with the other attendees?

Let me share with you the events on my must-attend list: First are the American Wire Producers Associations (AWPA) meetings. AWPA is a small trade group which lets me see and catch up with the same faces every time, allowing me to develop almost family-like ties with attendees. National Association of Steel Pipe Distributors (NASPD) meetings have a similar concept, and they certainly choose very nice places to host their events. I also attend the World of Concrete expo because it’s the only show where I can connect with a great number of people in rebar and wire rod, (although it is huge, and steel is only a tiny portion of the expo). I also like to go to some American Institute for International Steel (AIIS) events and Tampa Steel Conference events since I always see a lot of friendly faces at these conferences, from international traders to large import buyers as well as people from service industry businesses such as logistics, shipping and finance. Lastly, I blend in a few more conferences as my schedule permits and business dictates.

If you are a sales person, nothing beats a face-to-face meeting at your customer's office or location. But if you have a lot of customers, and they are peppered around a large geography, attending some of the conferences your clients are attending is the way to go. However, you have to look at going to a conference as an investment. Travel costs, hotel stays and attendance fees can add up, and more importantly, your time is even more valuable. So here are some tips for efficiently attending a conference:

First, you can’t go to meetings hoping that you will run into your clients. Make sure you approach to the attendee you want to network with ahead of time and arrange a short meeting. Lunches and dinners are preferred as they help you to socialize with your client closely, and hopefully you can back the personal rapport you develop with a solid backing of your business proposals. Make a plan. Know ahead of time what you can propose to the client and what you need in exchange.

Also, I find the social events like the opening cocktail reception to be very a useful venue to introduce yourself to potential suppliers and customers. Better yet, let an acquaintance of yours do it for you. It is always good to show that you are known in their circles at least by one person. Another tip is to watch your time, as small talk can grow into a deep conversation, preventing you from walking around the room and making more contacts. As you learn how to make an introduction and make interesting conversations, you also need to learn how to make a graceful exit from a conversation.

So, should you come to our conference in San Diego? After all, this is our first one, and the attendee demographics are not yet clear. Allow me to be a bit biased and tell you, “Yes, you should attend our conference.” We believe in gathering and connecting commercial people with one another, people who buy and sell steel products every day. At our conferences we also provide plenty of opportunities to learn, network and enjoy the company of other steel professionals in a social, business-friendly environment. We have managed to create such an environment at our conferences in Europe, and we hope to carry the tradition into the Americas as well.

See you in San Diego!

Why steelmakers hate steel futures

Mon, 24 Nov 2008 21:39:21 +0200

"Originally Posted July 30, 08"
----------------------------------

“Steel people are against it. We don’t need this in the steel industry!” exclaimed one of the attendees of our workshop.

“Come on, you are trying to make a s__t load of money off us. Go on and tell us the truth!” said another, who wasn’t quite as polite. I was completely surprised at the verbal exchange that developed during the steel futures segment of our steel trading workshop in San Diego. The presenter, Paul Shellman of Nymex, an intelligent, straightforward guy, was open to establish a floor discussion, but no one, including myself, anticipated such a rough exchange, except, perhaps, Paul himself.

So what is it about steel futures that turns usually polite and tame steel people into an angry mob? What is it about steel futures that makes their blood boil?

There are a couple of simple answers. First, the concept is new, and most steel people (including myself) don’t understand it completely. When we don’t understand something, it is easier to dismiss the whole idea. Yes, there are many questions to sort out. Steel has many shapes and qualities, and steel also has other problems such as the potential for claims and trade legislation issues. Many steel professionals don’t understand how steel futures will be able to overcome these hurdles.

We also wonder whether our steel jobs will be on the line if futures take a foothold. Would sales and purchasing people still be needed to determine the price of steel if price transparency became the reality? Would you still need to have an educated purchasing manager if you could hedge your price up to three years in advance?

There has also long been distrust between the steel industry and the financial world. This distrust has never been felt more acutely than it is now, as other commodities like oil are in the spotlight, and speculators are being blamed for the high prices.

I believe, however, that the biggest reason for steel futures’ negative reputation is the steelmakers themselves. Mittal and DiMicco, deity-like figures in the steel industry, are very openly and sometimes aggressively against them. DiMicco went as far as to say in a recent steel conference that the company is against steel futures because they “promote and breed unethical, if not illegal, activity.”

After many decades of struggling to survive, steelmakers around the world have found their mojo again. Consolidation coupled with improved world demand has clearly put them in the driver's seat, and now they are enjoying healthy profits, price discipline and, most importantly, the respect of the entire steel industry, both upstream and downstream. So naturally, it makes a huge impact when role models like Mittal and DiMicco speak ill of steel futures.

Make no mistake, though: steelmakers are against steel futures not because they are bad for the entire steel industry, but because they believe they are not good for the steelmakers. Steelmakers have recently gained the upper hand in pricing and would like to continue to dictate the price to their customers. With an established futures price, though, producers would immediately lose their newfound pricing power, and, instead, the combination of buyers and sellers in the exchange will determine the price, perhaps against the steelmakers’ expectations. Steelmakers use futures themselves, however, when it is convenient for them – steel producers utilize futures to hedge their purchases and energy needs on a regular basis.

I have my own doubts as to how well the market would establish the steel price once so many non-steel investors start pouring money into the system. Would imperfections in the information flow be magnified, ultimately distorting the price? As I was trying to sort out my doubts on this subject, perhaps the best counterargument came from a rebar fabricator at our workshop. He asked, “How can you quote on a job for a skyscraper in Chicago if you have no idea about what your steel cost is going to be in six months? Even if we cannot use it, we are excited about [steel futures].”

The steel consuming industry clearly needs price predictability well beyond the traditional three months in order to manage their financial risk. Therefore, there will be plenty of steel companies that could use futures contracts and benefit from them. So why deny them the chance to try?

The future of Trading

Sat, 03 Jul 2010 02:20:29 +0300

The future of trading

Most of you who read this column know by now that I was once a steel trader. I made my transition to SteelOrbis in 2007, after happily working for Corus Trading for five years and two other major trading companies before that.

Recently I was invited to give a presentation regarding the role of a trading company at the Institute of Supply Management’s Steel Buyers Forum. After my presentation, an audience member asked me if steel trading will survive the current crisis. After all, imports are shrinking and trading companies are constantly merging. Before I tell you how I answered that question, I would like to reflect on my own personal experience.

My first job started in 1994 with Mannesmann, a major German conglomerate established in 1890 and inventor of the seamless pipe making process. The president of Mannesmann Pipe and Steel in Houston, Mr. Rudi Georg, was a fatherly boss in his sixties, and he had not worked for any other company in his life. The company was successful and growing and it seemed that it could be still there by the time I retired. But I was wrong. Within six years of my start, Mannesmann was bought out by the cell phone company Vodafone which didn’t care about Mannesmann’s steel businesses and ultimately pawned us off. So our long products division became part of another German trading giant, Ferrostaal. Ferrostaal was a good company to work for and I spent two good years there. But when the opportunity came for me to do what I do from my beloved San Diego, I made my first career move, and I joined Corus Trading.

Some people raised eyebrows when I announced my decision. Ferrostaal was rock solid, and Corus was losing billions—its future looked pretty grim at that point. But several years later, Corus turned the corner and to my great surprise Ferrostaal was put on the sales block. Later on, Ferrostaal merged with Coutinho Caro and Tata Steel took over Corus. The moral of the story is that we live in a very dynamic corporate world. Companies that look solid can reverse direction, be sold—or worse—go belly up any time. There are no guarantees in the corporate world for secure, long-term employment. But there is one guarantee: as the Turkish saying goes, if you are a work horse, there is always someone to ride you. Your reputation as a hard worker will always earn you a job somewhere.

So, why did I make the switch from trading to SteelOrbis? Some people thought I was very smart and foresaw the horrible years coming for steel companies. To be honest, I’m not really that smart, but I probably just got lucky. Believe me, I’m glad that I missed all the horrible years of bankruptcies, phony claims, cancellations and litigations. But the real reason for my switch was that I always believed in electronic commerce and believed one day someone would figure out a way to engage steel buyers and sellers on an electronic platform. I still hope that someone will be SteelOrbis. SteelOrbis provided me the ability to pursue this dream, and I was happy to follow our corporate strategy and help to the best of my abilities for the last three years.

Now to answer the steel buyer’s question: Do I believe that steel trading will survive? You bet! Steel traders are the most adaptive and flexible folks that I ever known. Sure, US imports have gotten smaller but smart trading companies have already moved on to doing different business like exporting American steel to Latin America and Asia. Others have explored customers further downstream and started to build relationships with OEMs and manufacturers. There will always be supply and demand imbalances in the world and steel traders will be the first ones to notice and correct them. Throughout my career, steel trading companies certainly changed, but steel trade is still alive and well, and despite immensely unfavorable business conditions, good traders are still in high demand.

Will technology or e-commerce eliminate the job of a steel trader? In my mind, e-commerce will enable more efficient communications, just like telephones, fax machines and e-mails did throughout the past. These tools have not eliminated the trader from the transaction; I believe e-commerce won’t either.

Clearly, I believe in steel trading and the permanent role of a trader in the supply chain. That’s one of the reasons why I accepted my new role at my former company, Corus Trading in Chicago (now Tata Steel International), starting after our annual Steel Trade Conference in San Diego. The other reason is that I heard Chicago is a nice city and its weather is a tad better than San Diego’s.

I wish my colleagues at SteelOrbis the best of luck and hope they stay the course to serve as the backbone of electronic trading in the global steel market. And finally, I would like to thank the few poor souls that read my scattered thoughts in this Traders’ Almanac column over the years. I hope you enjoyed the journalistic experiment of a steel peddler.

Short selling – Is it to blame for steel market woes?

Thu, 06 Nov 2008 00:47:24 +0200

As we've dipped deeper into financial crisis, European and US exchanges have temporarily banned short selling of financial company stocks. Short sellers borrow stock with the aim of selling it and then buying it back at a lower price and making a profit with the difference. These short sales are widely blamed for the recent stock market declines. What about the steel markets? How does short selling work in the physical world? How widely is it taking place? Has it contributed to the rapid decline of steel prices?

Short selling occurs in steel trading when traders expect prices to decline and thus make sales agreements with customers prior to actually buying the products. Often times, the trader provides his customers with prices that are extremely competitive, well ahead of the curve and below the prevailing spot prices. If the buyer agrees to buy at this price, the trader then turns around and shops for suppliers for this order.

I remember the big market decline in 1998 during the Southeast Asian financial crisis. It seemed like every day we were hearing lower numbers from customers. Some of these lower numbers were, no doubt, coming from traders just fishing for orders without having legitimate offers from suppliers in their hands. This may have added to the speed of the decline. I don’t think that just one trader can upset the entire supply and demand equilibrium of the steel business, but they can certainly add to the panic and negative market outlook that buyers and sellers have. In the end, though, after the hype subsides and the dust settles, the market dynamics dictate where the prices end up.

Despite its bad reputation, short selling could also be beneficial for the market. Buyers often freeze during times of price decline. Some buying activity, even at low numbers, is better than no buying activity. With short selling, the market still functions even during weak times, and commercial transactions still transpire.

I have always thought that short selling is less risky for the trader and often used the method early in my career. I made good money with this method and increased the volume of our sales. The good thing about short selling for a trader is that you don’t have to guess the breakdown of the order, and when you shop around, you can get the order produced exactly to the specs you need. When you buy on speculation, you can get stuck with unwanted and slow-moving sizes and grades.

Later in my career, however, I found out the hard way that short selling is almost as risky as taking long positions.

Remember when steel shifted from a buyer's market in the late 90s and early 2000s to a seller's market in the landmark year, 2004? Sure, there have been down cycles since '04, but they seemed to be shallower, and the turnarounds were faster. On one of those short down cycles, we did take an order with a low price. The customer was asking for a quick confirmation. We were barely making money with the current purchase prices but thought that the market had some more room to drop, so we took the order and started to shop around. But no mills were willing to conclude the deal at the bid price we needed. What was worse, contrary to our expectations, the market started to pick up. We hesitated to buy, and each week passed by with greater price increases. As time passed, our customer's order started to look more and more like a big money-losing proposition. As a good trader, though, you have to do the right thing: Bite the bullet and deliver the goods. And that’s exactly what we did.

I filed that experience under Lessons in Trading: Yes, short selling is slightly less risky than taking positions, but you have to move fast and fix your order before much time passes. If you cannot make the deal with your supplier quickly, let your customer know immediately that the order is not confirmed. Otherwise, you will have to make a purchase at a higher price and endure a big loss, or worse, you will risk your reputation as a trader and fail to deliver on your promises. And if you don't want to play a part in the next market crash, be a responsible short seller -- Don't exaggerate prices and rattle the already nervous buyers and sellers.

Should we bail out the Big Three?

Tue, 23 Dec 2008 19:31:25 +0200

The CEOs of the Big Three Detroit automakers flew to Washington in their private jets last month. They told Congress that they will run out of operating cash before the end of the year and need US$25 billion to keep their companies running. They also said that letting the Big Three fail would cause a “catastrophic collapse” of the US economy.

So, what did Congress do? They sent them packing to their private jets, telling them that they don’t have a good business plan. They told the CEOs that they need to show them the plan before they can show them the money. Oh, really? Why didn’t they think of that before? A business plan was all they needed. I can already envision the plan that they will produce in a week or two. It will probably look worse than my college term papers that I wrote half-drunk, the day before the deadline.

But seriously, I don’t think they need a business plan. Many of their problems are obvious and long-established. And I believe that their management is, unfortunately, not in the right place to solve them. I will, of course, offer my ideas for a solution in a bit.

But first, let’s visit the massive problems they're facing today.

Basically, domestic automakers are faced with two predicaments: a) People don’t want to buy the big gas-guzzling cars that the Big Three so foolishly invested in, and b) Domestic cars are more expensive to produce due to high labor, health care, and and retiree pension costs. A double whammy.

Can this double whammy be fixed? Actually, yes. You can let these companies go bankrupt and under Chapter 11 bankruptcy court they can restructure and come back. But because of their sheer size, the restructuring could take up to five years. And in the meantime, who would want buy a car from a bankrupt company? A bankruptcy situation may lead to liquidation and total closure of the plants and loss of jobs. In short, the bankruptcy option doesn’t look like the right solution to turn things around.

We should also consider the state of our economy. After all, the US economy is going through rough times -- Some people even compare today's situation to the Great Depression. We are already losing hundreds of thousands of jobs per month. Potentially losing three million more jobs could hurt our economy and, in its fragile state, push it over the edge. Regardless of where we are living in the US, all of us would feel the ripple effects of this industry collapsing. It could threaten our livelihood. We need people working and paying taxes and spending money to get out of this economic slump, not the opposite.

Having said all that, we certainly cannot give the industry a blank check. The automakers' problems were in the making for many years and without a serious restructuring, they will not go away. If we bail them out without conditions now, they will soon run out of money again.

OK, you may ask, what should be done then? I say, desperate times require desperate measures.

At this juncture, we don’t need a business plan; we need leadership from our government, A.K.A. sugar daddy. The Big Three’s management cannot steer the companies into the clear because they don’t have the power or the coordination to do so. Years of distrust with the labor unions cannot be mended in just a few months. Therefore, we have to have a government committee and a high-level government negotiator negotiate an agreement between the management, workers, lenders, suppliers and other stakeholders. None of them want to, but they will all have to sacrifice in order to save the boat from sinking.

Can it be done? I think so. Our government is in a place where it can demand concrete results and changes in order to bail the industry out. We have to demand limits for executive salaries and bonuses, and there should not be any dividends to shareholders until the companies are healthy again. If there are layoffs, companies have to layoff white collar workers in proportion to blue collar workers. They will have to implement strict cost controls to avoid waste, so no more silly corporate jets. We have to demand that automakers focus their production on consumer- and eco-friendly vehicles and that quality and productivity gains continue.

Workers have to agree on a simpler, more flexible contract that is more fitting to 21^st century standards and probably accept pay and benefit cuts. And finally, lenders and suppliers will have to postpone some of their loans and receivables, extend terms and possibly accept less for each dollar that they loaned to the car makers.

In the end, a restructured and healthy automotive industry will be good for the steel industry in the North America, but all parties have to align and work together in order to achieve structural changes. Otherwise, the boat sinks and we all lose.

It is the fourth quarter, and the Home Team is behind. Time is running out. If, as a nation, we cannot afford for them to lose, we have to coach them for a magnificent comeback. It can be done. We have a few months to work with all of the involved parties and forge a workable agreement. If we can do this, we'll eventually be driving American cars that we can all be proud of.

Making the most of a recession

Sat, 07 Feb 2009 03:18:31 +0200

It is hard to think positively right now. The bad news just won't stop coming. Jobless numbers keep rising, pushing the economy deeper into recession. Steel sales are down at least 30 percent in volume and perhaps more in dollar figures. Once providing a glimmer of hope, the massive US stimulus package is now projected to provide only a minor boost to the struggling steel industry this year, and there is a strong possibility that the market won't even benefit from it at all until late 2010 or early 2011. As for the overall economic conditions, the consensus is slowly building that a turnaround will not be seen before the end of 2010. This is not just a US problem; the whole world is suffering right along with it.

Perhaps we are facing at least two solid years of recession, sagging sales and shrinking markets. We have seen the first reactions from the business world already. Most companies, including steel firms, are in survival mode right now. Think about an armadillo faced with grave danger, curled up in a protective ball. Companies are hunkering down, laying off workers and employees, cutting even the most essential expenses. Growth and expansion are not even on the radar right now as businesses struggle to just stay afloat.

But can we maintain this state of fear for two years, or however long it takes for us to get out of this deep recession? Certainly not! Let’s disconnect from our primitive brain for a second and think about what can we achieve during these two long years. Are there any opportunities that we can capitalize on? Can we come out of this stronger than ever?

You betcha! These are the times that separate the boys from the men. Everyone does well in a strong market but these are the times in which the strong will survive and the weak will perish.

So let’s get out of our protective cocoon, pick ourselves up from the ground and get back on our feet. Let’s look for opportunities, examine our processes and focus on efficiency and customer service again. It’s time to take our destiny into our own hands rather than letting the wind blow us where ever it desires.

Smart managers know that recessions are rare opportunities that one has to take advantage of. Recessions are times when the status quo changes, companies undergo transformations and new dynamics are set.

Despite the gloomy conditions, growth can certainly be in the cards for some steel companies during this time of recession. Asset prices have come back down to earth and you might be able to pick some of your struggling competitors at bargain prices and turn them around by making them more efficient. Moreover, the most important assets of any company, experienced workers and employees, are easier to find. Some may have lost their jobs in the shuffle of cost-cutting initiatives and they may be waiting to join your company to make a positive impact immediately. You can also poach talents from the industry much easier. Most of your competitors will be miserly about bonuses and promotions, so with a diligent recruitment strategy, you may come out of the recession with an all-star team.

Recessions are perfect opportunities to self-examine, get rid of inefficiencies and fix what’s not working for you. Consider the following: Every company has some unproductive personnel that don’t fit in with the rest of the group. Your organizations simply outgrew these individuals and it is good for them and good for your company to release these people. However, it is also important to treat your core staff well and fairly during these tough times. They will appreciate the company, stick together and strengthen the corporate culture.

Check your processes. Are there duplication of tasks? Get rid of them and work on improving efficiency. Think about the big projects that you always wanted to undertake but never had the time; the time is now. Even after the recession is over, credit will be harder to get. So, why not take your time and nurture the relationships with your suppliers and lenders again?

And finally, customers are still king. Take advantage of the bad customer service that your competitor has gotten away with for the longest time. Maybe your competitor laid off some of their sales reps or reduced hours. Make sure your customers are aware that you are alive and doing well. Get in there and grab those customers who you couldn’t break into in the past.

Most importantly, remember that it is not all doom and gloom. We can’t accomplish anything by hiding and maintaining the status quo. There is work to be done. Seize this opportunity to improve your business. If you work harder and smarter than your competition in a recessionary environment, they will fail and you will thrive.

(Do you have a recession success story? Post it here as a comment.)

Steel workers don’t care about their jobs, so why should we?

Wed, 12 Aug 2009 21:46:55 +0300

Talk about cutting the branch you are sitting on. Steel workers at ArcelorMittal’s Georgetown, South Carolina wire rod mill were given a choice: either continue to work under your pre-global financial crisis labor contract, which would mean a temporary cut in pay and benefits, or the plant will be shut down due to financial hardship. The ”continue working” option that the company proposed would have been a luxury for many workers in these tough economic times. Over the past six months, many production plants have been closed without management ever presenting such a choice to workers.

After all, wire rod, which Georgetown produces, is among the steel products that have been hardest-hit by the recession, with US rod consumption down by at least 50 percent from 2008 levels and 75 percent below 2006 levels. The plant was obviously bleeding money and the only way for it to keep operating was to get some concessions from the labor force.

I think, for most of us, this would have been an easy decision. Sure, we wouldn’t like for our salaries to be cut or for our benefits to shrink, but what is the alternative? Losing our jobs altogether? Most of us would say: let’s work through these tough times until conditions improve and then we can talk about getting our sacrifices back. But the steel workers of Georgetown said “no” to any such concessions and the plant was shut down in July.

It’s a pity. Every operator of a wire drawing machine I've talked to loved Georgetown rods -- big coils, good, consistent chemistry and they never broke. But despite the great quality, the plant has never been too successful financially, even though its ownership and management have changed hands several times in the last two decades.

And Georgetown is not the only financially-strapped rod plant out there. In fact, I've always wondered why most rod mills in North America struggle, while rebar mills seem to do quite well. I asked this question to an executive of one of the largest wire rod producers in the US at an industry function. He suggested that US producers have been weakened because of wire rod imports, and each time they file an antidumping petition, their customers fight it fiercely. I argued that the antidumping cases are lessening the competitiveness of their customers and are therefore slowly killing the US wire and wire rod industry as downstream product imports are penetrating the market more competitively than domestic products. Also, import competition exists for rebar too. So why aren't rebar mills in as bad of a shape as the rod mills? A possible reason came from one of his deputies: wire rod plants are generally unionized while rebar plants are mostly non-union. Hmm, that’s a thought ...

Coming back to Georgetown, the steel workers at the plant had ulterior motives. The workforce was aging and most were close to retirement. According to their latest labor contract, they would get paid a substantial amount of their salaries for up to two years even if the plant closed. So, against the recommendation of union leadership and without regard to younger workers, the health of their company or the future of the plant, the union members voted against making sacrifices and opted to stop working instead.

We have been hearing a lot of talk as of late about the lost steel jobs in the US. Recently, the United Steelworkers Union (USW) filed a Section 421 petition with the International Trade Commission (ITC) against Chinese tires, citing job losses. It’s interesting to note: the only petitioner was the union and no US tire manufacturers participated in this filing. The ITC recommended implementation of duties, and according to rules, the President now has to make a decision. The President can choose to safeguard the tire industry workers and deny many low-income Americans competitively-priced tires. Just another case in which union and public interests are at odds.

Of course, we all want and need a healthy US steel industry and unions can, indeed, be a part of it. Yet, trying to erect artificial obstacles against trade is not going to provide a healthy industry, nor will it help to secure steel jobs in the long run. Whether they like it or not, the unions must share responsibility for the financial health of the companies they work for. It is not “labor versus management” anymore. They are both on the same boat, which happens to be stuck in this horrible storm. All parties have to work together to improve efficiencies, avoid waste, make sacrifices and ultimately, survive.

Can they work together? It has happened before. Steel workers and producers aligned under the dire conditions of the early 2000s when steel makers were going bankrupt one after another. They revised their rigid labor contracts, giving the American steelmakers the wings to fly high in the boom years of 2004 through 2008. Now it’s time to step up to the next level -- otherwise, the fate of Georgetown looms for many other steel plants.

$2000 steel revisited

Wed, 10 Jun 2009 20:11:12 +0300

$2000 steel revisited

It was right about this time last year when I predicted in this column that prices for common steel would go up to $2000 per ton in two years. Looking back, that prediction doesn’t sound too smart, does it? So, what has changed since then? And was I dumb to make such a prediction?

I was clearly caught up in the moment. Prices had an incredible momentum, and even after we published the article, more price increases were announced. We even confirmed orders of $1500 per ton for wire rod in international trade. We were hearing of prices going up every day and it seemed that there was just not enough steel production to satisfy the ferocious appetite of the developing nations. I surmised that the price increases had little to do with the US; in fact, despite being the usual driving engine of the world, the US was not consuming anything in extraordinary amounts and was only watching the international prices rising to incredible highs and then raising their prices to reflect the foreign markets. It seemed the US didn’t matter in this rally. It only made sense. We had the two most populous countries in the world, China and India, building quickly to catch up with the developed West. They needed to consume a lot of steel to build their infrastructure and raise their standard of living. And I do believe that this is still the case.

I also mentioned in that same article: “..any slowdown or downturn in steel will be short-lived, provided that the world’s financial systems don’t melt down because of the US’ housing and mortgage problems, which is, unfortunately, a possibility.”

Yes, there were already signs of an impending melt-down this time last year. US housing prices had started to come down, prompting foreclosures and eventually rendering mortgage-backed securities, heavily invested in by the world's largest financial institutions, worthless. When I wrote that article, we were only at the beginning of the crisis and the scale of the melt-down eventually exceeded our wildest imaginations.

But are the financial melt-down and credit crisis the only causes of the incredible deceleration we have experienced since September 2008? Certainly not. I ask this question to all steel people: has the crisis curtailed your ability to get loans? The answer is generally no. Most of the slow-down in activity is voluntary. People have chosen not to build new facilities or expand and to delay the start of new projects – it is not because they can’t get financing but because they just don’t want to risk it in these uncertain times. In times of uncertainty, we freeze, and this time, our collective “deer in the headlights” hesitation caused a massive domino effect which spread, across industry lines, throughout the whole global economy. In other words, things got worse when they really did not have to.

We also live in an information age in which bad news travels fast, fueling the above scenario. With the speed at which information travels, everyone instantly knows about any developments in the supply and demand balances in every major market. In the old days, we relied on the word of mouth from our suppliers to let us know the happenings of other markets, and that took some time. There wasn’t a lot of certainty, either. Today's buyers and sellers are well-informed. They collectively stop selling or buying to wait for better prices. This could be one of the causes of the volatility we are experiencing. And it could be how we can best explain the feast or famine situation we experienced in 2008. When we thought there was a shortage of supplies, sellers -- mills and traders -- were holding onto their production and stocks, hoping prices would continue to go up. This created a false perception of shortage. Probably there was never even a shortage to start with.

Now we are on the other side of the coin. Now we think that supply is so plentiful, even though the production cuts are real and significant. But this, too, will change. Let’s not get caught up in the moment again. We have over-corrected and are still contracting due to the global recession. But the governments of the world are reacting in a much saner fashion than the businesses and consumers. They know they are the ones that can break the cycle and change our collective psyche. So they spend and cut taxes to stimulate the economies around the world. Once the massive stimulus spending packages change the tide and the doom and gloom mentality subsides, we will be in for another rally. Remember: you can’t get production up to speed instantaneously. The fundamental realities and needs of developing nations have not changed, and the mid-term prospects for world steel consumption are still excellent. I am not sure when, but the pent-up demand will eventually kick in. When it does, supply will have to play catch-up again.

So do I still stand by my $2000 steel prediction? Hey, I still have one more year to admit defeat but it surely doesn’t look good for me right now. It’s highly unlikely that the bubble will inflate to those levels again. But in the world of volatile commodities, I can’t yet rule it out, either.

Tell me what you think by clicking below...

How to establish sustainable steel exports from the US

Wed, 10 Jun 2009 20:15:13 +0300

How to establish sustainable steel exports from the US

There are steel traders who have worked in the United States for over 30 years and have never concluded one export order. Having worked in the trading business for close to 15 years, I have to shamefully admit that I am one of those export virgins, too. Fortunately, misery loves company and there are plenty of export virgin traders out there besides myself. But why is that?

Everyone knows that the US is a net importer of steel. OK, but so what? Does that somehow prohibit US mills from exporting their production? Just look at most of the European steel powerhouses. They are both importers and exporters and the steel trade balance is fairly equal. According to the Iron and Steel Statistics Bureau, while, in 2008, the 27 members of the European Union imported 40 million tons of steel products, they also exported a very respectable 34 million tons. This is not counting their 115 million tons of internal steel trade. So, being a large importer of steel doesn’t quite justify the US' lack of exporting activity.

Is it cost competitiveness or the quality of US products? US mills claim that they are the most efficient and competitive steelmakers in the world. We also know that US steel products have an acceptable, if not exceptional quality. So what is preventing the US from being a consistent exporter of steel products?

The answer has to do with the evolution of the steel market in the US. American steel mills were primarily created to satisfy domestic demand and were therefore built in inland locations that were far away from major ports. This put the US mills at a cost disadvantage right from the start. Also, the US dollar has been strong for many decades, which has also made exporting harder for US mills.

But more importantly, from early on, steelmakers chose to resist steel imports by means of various protective measures like antidumping and countervailing duty investigations, section 201 safeguards and the trigger price mechanism. While these measures gave steelmakers temporary relief, they also created artificially high US prices. In the meantime, after years of being in a combative relationship, the rift between the trading community and steelmakers widened. Due to lack of daily interactions with traders, the US steelmakers were not fully informed about all of the international trade opportunities. Thus, US mills only considered exporting when they were desperate for orders. They have always been spot players in the international markets and they pay dearly for being such inconsistent suppliers. Oftentimes, they have to offer a price discount compared to the offers of more regular steel suppliers in these markets for their equally qualified goods.

It is, of course, possible to change that inconsistency discount into a consistency premium. But it requires a dedicated export strategy. In 2008, many US finally mills booked serious export orders with the help of the weak dollar and strong international prices. But since the end of 2008, the export focus seems to have dissipated once again. If the US mills had better export focus, perhaps they would not have been forced to cut as much production as they have. Other regions around the world still require and consume significant amounts of steel, and these are markets where American steel can and should find a home. It is now obvious from the US steel market's current severe downturn just how dangerous it is to depend on only one market.

How can the US build a sustainable export business then? The US mills have to set up dedicated and coordinated export departments with serious intentions of exporting at least 10 to 20 percent of their production, not only to NAFTA but also to Latin America, Asia and Europe. The mills will be required to think about the demands of international customers, including their desired sizes, grades and product packaging. ASTM sizes and grades won’t cut it in many parts of the world, and many US mills still have no idea how to package vulnerable steel cargoes for ocean-going vessel transportation.

Most importantly, they will have to endure cyclical low prices in certain markets, and keep supplying to good customers despite the lower returns compared to their home market. But when those export markets come back roaring, US mills will also enjoy price premiums over other spot suppliers.

US mills will have to change their mentality to become part of the world supply chain. But that’s not the only requirement. American traders, too, will have to make serious efforts to cultivate relationships with the US steelmakers, inform them about the possibilities in other major markets, and help them with their financing, logistics and know-how. Their efforts may not immediately bear fruits but they should consider this as an investment in the future.
Why do you think US mills lack consistency in export markets? Click below to comment...

Change is inevitable – and often good. Just ask Pittsburgh!

Sat, 24 Oct 2009 02:45:52 +0300

Change is inevitable – and often good. Just ask Pittsburgh!

When my wife told me that she wanted to have another baby I asked her, “What’s wrong with the first one?” After all, I was already an older father and having two brats running circles around me in my 40s didn’t sound too appealing. But as most of you guys reading this article already know -- men have no say in this decision. So of course, my wife kept on grinding and slowly wore me down. One way or another she was going to have another baby, so I said to myself, “It might as well be mine!”

Fast forward to today. Our little Selma was born in September 2009 and I am now the proud father of two daughters. Despite my initial objections and worries, everything turned out to be perfect. Just like it did for Pittsburgh.

Pittsburgh’s transformation was even more impressive than my own. Most Americans still think of Pittsburgh as a smoky steel town but this couldn’t be further from the truth. Apart from headquartering US Steel and a few galvanizing plants, there is basically no heavy steel industry left in Pittsburgh. There is not even one steel plant within the city limits today. It’s hard to imagine that this town once produced as much as half of the national output of raw and rolled steel in the 1910s and 1920s. As the steel industry continued to flourish all the way until the 1960s, so did Pittsburgh. But as the '70s and '80s rolled along, so did the decline of big steel. Many blamed imports. But the more likely culprit is probably the more efficient, better-managed, non-union minimills that were built in the southern US.

While big steel was busy resisting change and attempting all possible trade remedies to eliminate imports, the city of Pittsburgh was making great strides, investing in education, attracting new businesses from fields like healthcare, technology and financial services, and redeveloping abandoned industrial sites into shopping centers, housing and offices. It didn’t happen easy, but Pittsburgh has become one of the cleanest, greenest and most livable American cities. It’s fair to say that Pittsburgh adapted to change much faster than other big rust belt cities like Cleveland, Detroit or Toledo, which are still struggling today.

Let’s face it. Steel production may have been the sexiest thing in the 1920s but we can hardly say the same thing today. Commercial grades of steel can be easily produced and there aren’t very many barriers to entry. New and efficient minimills can be built anywhere in the world without massive investments. Steelmaking is an old technology and the know-how is pretty universal. It is only natural for basic steel manufacturing activity to slowly to migrate from highly developed nations to developing countries, just the same way that we, in our careers, would eventually like to move on to bigger and better things and pass the baton to the up-and-coming youngsters.

But if a nation can’t manage to move on and change, it is sometimes forced to, even though the temptation to fight the change is always there. We surely fear the unknown and don’t want to see our jobs coming under attack. Still, in a dynamic society like the US, job losses are not the end of the world, and often they are part of the solution. Every month, the US loses hundreds of thousands of jobs but many of these workers are re-trained and usually land comparable jobs in advancing industries. That’s how America evolved to be one of the most innovative and productive workforces in the world.

The rebirth of Pittsburgh was possible by adapting to change. Perhaps that was the reason why Obama chose this city to host the recent G20 meeting. "This is a recognition that Pittsburgh is a world-class city," he said. "That it represents the transition of the US economy from (an) industrial state to a mix of strong industry -- steel -- but also now biotech and clean energy. It has transformed itself, after some very tough times, into a city that's competing in the world economy."

Just remember to ask me again how I am adapting to change and transforming myself when my girls become teenagers.

The lost art of negotiation

Tue, 19 Jan 2010 21:39:03 +0200

The lost art of negotiation

Recessions do funny things to Americans. All of a sudden, we have become thrifty, we started saving, and at last, we discovered negotiating.

To me, negotiating has always come naturally. Growing up, I watched my dad and mom negotiate the price of everything from tomatoes to houses. But ordinary Americans are usually afraid, uncomfortable and unwilling to haggle for better prices or buying conditions. For example, when I suggest to my wife that she ask for a better price for a purchase she is about to make, oftentimes she refuses. She is worried about offending the seller as though her asking is somehow degrading or unethical. Or perhaps she assumes the vendor will lose money and his children will starve as a result.

But we in wholesales steel, of course, are not unfamiliar with negotiating. We know there is always some room to negotiate the price of our next purchase.

The market price for a steel product on any given day is determined through thousands of quotes and inquiries which essentially reflect the equilibrium of supply and demand. So, no matter how good your negotiation skills are, chances are that you will never be too far from that equilibrium price. However, we also work in an industry in which small margins can separate success from failure. This means that if you are doing a lousy job buying or selling, you are probably losing several percentage points in your net profit, which can make or break your deal. Trust me, you don’t want to be the boob who pays the highest price for steel and you don’t want to be the seller who leaves money on the table all the time. You might get love but you will get no respect for being a lousy buyer or seller. But it is not always about the price either. Your long-term objective is to build a respectful and ongoing relationship with your customers and vendors while maintaining a competitive price level for your company.

So how are you going to achieve this? Unlike in retail business, each deal that you put together will have the lifecycle of a relationship. Just look at it as though you were looking for a mate.

Dating: As a first step, keep your eyes and ears open and increase your options for commercial transactions. Know your legitimate and eligible vendors. Increase your knowledge of the market and its players and prices. If your job is to buy, you have to talk to your potential supplier. Sounds pretty basic, doesn’t it? But I can’t count the times I approached a potential customer and never received a reply. Do your job and after you get your information from a network of suppliers, you have the ammunition to go to the next stage: engage for a close negotiation.

Engagement: As a buyer, now it’s time to narrow your options and focus on the best potential supplier for your purchase. You already know what they have to offer. One of the easiest ways of negotiating is to just ask. Nine out of ten times, you will get something. Vendors are usually not comfortable with saying no if you have a legitimate request. Know what’s important for you. Is it the price, or payment terms or something else? And get a feel for what your vendor may be comfortable compromising on. Another great way of getting the best deal is using a firm bid. At times, quantity is more important to your supplier than profit margin. If you read your vendor correctly, you will probably end up significantly below that equilibrium market price. But also beware: you can actually offend a supplier. If you go too aggressive, the supplier may feel that you are trying to be too clever at his or her expense and are taking advantage of his or her predicament. You might get a fantastic price just this once, but you could also leave a lasting bad taste in your supplier’s mouth. To avoid that, always explain yourself when you know you are asking for a special price or condition. Perhaps, you will be stacking the order for a long period of time, or perhaps your managers don’t want you to commit to above a certain price level, or maybe there is another vendor willing to offer these special conditions.

Marriage: Once you’ve agreed on all the terms and conditions, you can sign the contract and enter a binding relationship with that partner. But just like any marriage, your order, too, requires commitment and potentially working through some tough times together. You can negotiate hard during the engagement period, but once you are married, you should be committed to the deal you signed up for.

To sum up, date as many as suppliers as possible, but engage with only one and let your conditions be known. And if it all works out, tie the knot and stay in good faith for the length of your order. Repeat for new orders.

Are high raw material prices good for steel?

Thu, 29 Apr 2010 02:26:42 +0300

Are high raw material prices good for steel?

In case you missed the steel mills crying foul over the iron ore contracts, let me just remind you of a few sound bites.

Eurofer, which represents European steel mills, has complained to the European commission about the possible price fixing scheme by the three major iron ore producers, namely Vale, Rio Tinto and BHP Billiton. Some went further and accused the three miners of being an oligopoly. The fury was unleashed when the steel mills couldn’t agree on yearly contracts and settled for quarterly pricing updates. Miners were also asking for an almost a 100 percent increase, up from $60/mt to $110-$120/mt. To add insult to injury, two of these big boys, Rio Tinto and BHP Billiton, would like to merge Australian mining operations and further increase their pricing power. This way, they could control production and charge customers whatever they would like, even in this crummy global economy. How else can you make a 100 percent price increase work in this recessionary environment?

True, these three miners own roughly 80 percent of iron ore production in the world. But it’s also true that this picture hasn’t changed much in the last few years. Regardless, we have seen the iron prices go down, but those down cycles were fairly short-lived. Why is that? Is there a sinister plot going on, or despite the perception of low steel demand around the world, there is even more demand for raw materials?

Let’s look at the other raw material, ferrous scrap, which is totally unrelated to iron ore other than both are used to make steel. Scrap is not mined, it’s collected; and unlike iron ore, there are thousands or perhaps even millions of recyclers and processors around the world. Yet, scrap prices also went up by about 120 percent since this time last year. Is there also an oligopoly here?

And let’s look at steel prices. Take the basic hot rolled coil prices in the US Midwest. Last April, coil prices were just below $18.00 cwt. ($396/mt) and now they are pushing $35.00 cwt. ($771/mt)—nearly a 100 percent increase! Is there also an oligopoly here?

No, the real reason is the ever-increasing appetite for steel making; not from the G7s of this world but from developing nations with big populations like China, India and Brazil. We had a meltdown on Wall Street, but the world didn’t come to an end. All the billions of people in the developing world who have no cars, no fridges or no washing machines have their eyes on our lifestyles and they will eventually buy those items made with steel. This basic fact is not going to change for many decades. And it’s not just for steel; other commodities and energy are also in high demand. That’s why the oil prices too have gained more than 100 percent from their lowest point in 2009.

The year-on-year price increase the steel mills achieved is $375/mt but when it comes to iron ore, the world will come apart if the ore cartel shoves their $60/mt increases down steel mills’ throats. Some economists even predicted that these increases might threaten the fragile recovery of steel consumption markets: construction, appliances, automotive, you name it.

I have some news for these economists: steel prices have already increased with the anticipation of the raw materials increases. What’s more, increasing raw material prices are the best thing that could happen to the steel industry. Without a strong rebound of raw materials, steel prices could have no chance to rebound to the current levels. After all, raw material prices are the best excuse steel sales people can give to their customers who complain about grim sales and high steel prices. They always say: “Raw material prices are going up significantly, we have no choice but to raise our prices as well.” So, relax and stop complaining about the high iron ore and scrap prices. Be grateful and thank your friendly raw materials suppliers for raising your prices.

Greetings from the middle of the earth

Mon, 08 Mar 2010 20:34:02 +0200

Greetings from the middle of the earth

I am the head of SteelOrbis Americas. Since I am an expert on the Americas now, I can tell you how many Americas there are on Earth, if you’re wondering. Well, maybe I still can’t … I am still considered to be a lightweight when it comes to everything south of the United States of America, or that little region we lovingly call “Latin America.”

Sure, I have been to Latin America before. In my trading years, we imported beams and rods from Brazil, merchant bars from Argentina and rebar from Paraguay. But as far as exports to Latin America – nada! I think I made the shameful confession in this column before that I was an export virgin. All of my commercial activities have involved imports. Why? Because I was busy up to my eyeballs with business in North America. But things have certainly changed for traders -- Latin America, specifically South America, is the new frontier for international steel traders.

Perhaps that’s why I decided to attend my first ILAFA (Latin American Iron and Steel Institute) conference in Quito, Ecuador last October. I had frequently heard about Latin America’s main steel conference and had wanted to attend before, but I always had some excuse that prevented me from going. But this time, in order to honor my title at SteelOrbis, I booked my hotel and flight and started to get excited about my trip. Once the date came, however, my flight was cut short in Houston due to – listen to this, a volcanic eruption. When I texted my friends in Quito, they told me that there was no eruption and that visibility was good all the way to Houston. If you travel as much as I do, you learn not to be bothered by these small changes in plans. So after a few grumblings about the US airlines and an overnight stay with no change of clothes, I made it to Quito the next day.

I don’t need to mention all the steel happenings and macroeconomic data about Latin America in this column. You can just read the cover story of this issue and accompanying expert interviews to understand why Latin America has been one of the shining stars in this gloomy global financial crisis. However, my own global indicator of a hot market is based on how many fellow Turkish steel guys I see at these conferences. My fellow Turkish traders and mill export managers have a perfect nose for smelling business around the world and they don’t mind making the 22-hour trip from Turkey to mingle with potential customers. I noted that they were certainly well-represented in Quito, outnumbering attendees from many Latin American countries. In their opinion, the hot sales markets were Brazil, Columbia, Chile, Peru and Ecuador, primarily for long products such as rebars and merchant bars, but also for some flat rolled products as well. The trade didn’t have to be in massive quantities either;there was plenty of container business between the Middle East and South America. It was interesting to learn that Brazil, once only an export market, had started to import a lot of steel products as well.

While I enjoyed the conference and was impressed by the attendance, my shortcomings probably kept me from benefiting fully. A lot of the presentations were in Spanish, and while they were spontaneously translated into English through a headset, listening to long-winded presentations translated by a monotone voice is not necessarily my kind of fun. Also, while most attendees spoke English, there were plenty who didn’t. But who am I to complain? It’s a Latin American conference! I always wanted to learn Spanish and perhaps that’s why I took Spanish 101 about six times. My advice is to attend with a Spanish-speaking team member if your Spanish is as inadequate as mine, and then hopefully you won’t miss as much.

The highlight of my trip wasn’t steel related. Some 22 years ago, while I attended a summer school in England, I had an Ecuadorian roommate for a few weeks. I don’t know if it was because we were born on the same day, but we became great friends and wrote snail mails to each other for a few years afterward. Several months back, he found me on Facebook after years without communicating, and by coincidence and sheer luck, I was going to be in Quito during our 40^th birthday. Normally birthdays are not eventful for me, but this one was really special. We had a nice birthday party at his house with his lovely family, and they took me to all the good spots in Quito including, of course, the actual “middle of the earth” – the equator. What an appropriate place to spend my 40th birthday.