This is the second in a two part series on the role of private equity firms at two specific companies. This second piece examines the role of Platinum Equity at Ryerson. You can read the first piece here.
MetalMiner readers might recall a point we made previously, “when you hear something once, it’s a data point…twice, it’s a line and the third time, well, it’s a trend.” So it isn’t surprising in the world of sourcing that one might hear less than flattering commentary about a supplier once in awhile. And let’s face it – we all have our “preferred” suppliers so it’s no surprise to hear a bit more about the non-favored suppliers. But when I start hearing the same comment three or more times, in different parts of the country, from people that don’t know one another, it makes me start to wonder.
The first container of metal I ever brought into the United States I sold to Ryerson. This was years ago. So I have a little special place in my heart for Ryerson. But now I’m connecting dots and companies we have either worked directly with or prospects from around the country are telling us the same thing – Ryerson appears to be stumbling in two specific areas reliability and quality. My examples cut across regions from Houston to Cincinnati to my hometown of Chicago. I have to admit I haven’t tracked Ryerson’s owners, Platinum Equity, too closely but one of the most in depth pieces on them came from the Metal Service Center Institute. The piece can be found here. That piece, though lengthy, contains some excellent insight into Platinum Equity. And from what I can see, they seem to have quite an operations-oriented approach.
The article, very well researched and written describes Platinum’s philosophy on the metals industry. Specifically Platinum’s “research on and confidence in the metals industry into the “4 Cs” of costs, currency, consolidation and China,” explain the basis from which they make decisions. We’ll summarize these points here because I believe they shed light on some of Ryerson’s current customer service and delivery stumbling blocks:
- Costs. “Platinum concluded it could not predict with any reliable accuracy the likely costs for energy or raw materials required to make metals. “But what you can get very comfortable with is that over the long term, those costs are going to move up,” he says. [Editor’s Note: the “he” is Jacob Kotzubei one of the key partners at Platinum Equity] The article also mentions that Platinum Equity views global raw material growth as a “long term positive trend”
- Currency – Here the article discusses that the PE firm did not believe that the dollar would strengthen. Platinum Equity inferred this as ” A net positive, in other words, for U.S. exports and manufacturers.”
- Consolidation. Platinum Equity felt that the steel industry had changed mainly due to management acting as “rational managers” and taking capacity offline if the supply/demand equation fell out of balance. The article also discussed how Platinum did not see the degree of price swings (but then again, few if any really did)
- China. According to the article, “China is problematic because “if it stumbles meaningfully, it will have a dramatically negative impact on this industry,” Kotzubei says. “But our view was that even if they do have a hiccup, it will be short term and will not reverse the long-term growth trend.”
The four C’s offer insight which may help explain why Ryerson does not appear to be successfully implementing its brand promise, which they refer to as the Big 5 (their tagline says ” Why Ryerson is Five Times Better”). Essentially, with the exception of 3 above, consolidation, each of the other C’s has gone against Ryerson. Let’s examine each in detail:
Costs – Well, we all know that assumption turned out not just a little wrong, but dead wrong. Costs for raw materials and energy are tumbling. Though we at MetalMiner still do believe in the emerging market “super-cycle” we may be in for lower prices for quite some time (we will come out with our market predictions by the first week of January) So though the long term prospects on costs might be correct, the short and possibly mid term prospects undoubtedly impact strategy.
The currency situation remains uncertain. Competing pressures on the dollar – both up and down, challenge the assumption that the issue of currency will provide a lift for US exports and manufacturers. First, there is no clarity that the dollar will remain low (it has been gradually moving up against the Euro and the GBP) but in recent days it has fallen considerably against the Japanese Yen, due to the failed automotive bail-out attempt. Platinum’s position on consolidation appears spot on – the industry (e.g. aluminum, steel, copper, zinc etc) have quickly tried to pull capacity offline to better match supply with demand.
China, like the currency issue, raises some pretty big questions. Last week this post on MetalMiner suggested where things could go from a metals perspective for China. Any reversal in exchange rate policies, export taxes, VAT rebates etc could quickly change the look and feel of a variety of metals categories from a US import perspective. Second, if China demand continues to slow or stays at or near its current sluggish +/-7% growth rate (7% is widely viewed as sluggish enough to create civil unrest), US companies will have trouble exporting their value-added manufactured products. And though long term, we don’t see China’s growth stopping, in the short to mid-term China’s pain might feel a lot more like acid indigestion as opposed to a mere hiccup.
So where do all of these factors leave Ryerson? More important, how do any of these factors touch on delivery commitments, customer service levels and overall product quality? Delivery and quality performance are signals of a company’s overall health. Honda knows this best. When performance starts to slip, the SRM (Supplier Relationship Management) teams are deployed to both analyze current troubles and more important, to assess financial health. And though cost cutting remains paramount in uncertain times, the time it takes to win back customers may negate large portions of cost-savings. And as some of you know, the market has shifted in favor of buyers. Supply assurance and high quality remain the ante to both winning and keeping business. Let’s hope for Ryerson’s sake, Platinum Equity starts taking this critique to heart. Otherwise, they stand a lot to lose.