This is the third (and final post) of a three part series examining the current domestic steel collusion case currently in discovery. You can read the first post here and the second post here. The previous posts examine a range of issues. This final post aims to address the role of imports during the period covered in the case, the changed structure of the steel industry, the validity of the plaintiffs case and finally, what impact (if any) this case will have on steel sourcing organizations.
Let’s start with imports. Plaintiffs allege, “Â¦the US market for steel is characterized by significant barriers to entry, high capital requirements, and regulatory barriers, while import competition is limited by transportation costs (including ocean freight rates), trade duties and currency exchange rates. Whereas we can’t argue with the former, we have reposted here an analysis we conducted of the steel trade (deficit) as of the end of 2009:
Although this snapshot covers the period of 2009 (not part of the current legal case), we can assure MetalMiner readers that the steel trade deficit was alive and well during the periods covered by this legal case. In other words, there was no shortage of steel imports coming to the US to help fill the gap. The notion that import competition was somehow limited by transportation costs, trade duties (many of which came later), and currency exchange rates are “spurious to borrow a legal term.
Imports made up over 20% of the market during the period in question and clearly played a large role in supplying the domestic market.
In the olden days (we’re talking pre-2000), when steel mills operated in the non-profit motif of keeping lines running (due to the high fixed cost environment), some mills (those that aren’t here today) would take orders, even if they didn’t cover marginal costs. Well, after the industry consolidated between 2000-2004, many of these high cost mills were shuddered. Now here is a question for all of you manufacturers out there when demand sank in 2009, did your management allow you to sell your products below marginal cost? Perhaps for some of you that answer was yes but for others, did you dare do what the steel mills did? Did you lay people off, reduce hours and/or shifts or shut lines down? Of course you did! That’s what any logical firm might do if they see demand dropping. Why would anyone be surprised that the more streamlined domestic steel industry post-2004 idled capacity when it saw demand dip? But there is another claim in the plaintiffs’ argument that seems a little out of whack. Whereas a mini-mill can essentially shut down a line with a flip of the switch (okay, we’ll give it a little more time than that), an integrated facility takes at least three weeks to “turn back on not to mention incur expense in shutting a line down. The notion that the industry can both ramp up and down on a dime particularly during the time periods identified by plaintiffs also seems a little far-fetched.
So what’s our take? We think the plaintiffs will have a difficult time proving a conspiracy. The reality is this: a more mature domestic steel industry in greater control of its economic destiny with greater economies of scale will naturally become more efficient. With the weak firms off the playing field, the balance of the industry will become more effective reading the economic tea leaves giving the impression that there is some sinister coordinated production discipline but unless plaintiffs can prove collusion, this case should go in favor of defendants.
Instead, metal-buying organizations should get used to the new reality the domestic steel industry is in greater control of its own economics. The days of $400/ton HRC are over. Consider other tools of the sourcing trade to achieve cost savings aggregation of spend, volume commitments, strive for better demand forecasting capability, create strategic supplier relationships, move away from the 3-quote monthly bid (so extremely prevalent in this industry), benchmark, analyze your suppliers’ cost structures, introduce competition, etc. And forget about trying to extract concessions via collusion cases. There are more effective methodsÂ¦.
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