[TheForge] standard materials on hand

[Schade]

On Jun 13, 2009, at 3:05 AM, terry l. ridder wrote:

> hello;
>
> given the low prices on metal in general i was wondering

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This article is about stainless steel makers but it seems that the  
same dynamic would/could apply to plain steel. If so, todays lower  
prices could go away soon.

Bob

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JUNE 10, 2009

Fixed Costs Chafe at Steel MillsCapital-Intensive Producers Are  
Raising Prices Despite Weak Demand
By ROBERT GUY MATTHEWS
BRIDGEVILLE, Pa. -- Many stainless steel makers, facing high operating  
costs, are increasing prices despite weak demand.

"We are raising prices because of the increased costs of operating our  
mills at the current lower levels. We are not seeing an increase in  
demand," said Dennis Oates, chief executive officer of Universal  
Stainless & Alloy Products Inc. He has boosted prices 5% to 6% twice  
since the beginning of May.

Universal isn't alone. Other producers in the capital-intense steel  
business are beginning to do the same. In April, Allegheny  
Technologies Inc., AK Steel Corp. and North American Stainless Inc.  
each said they would increase prices for some types of stainless steel  
about 5% to 6%. Last month, RathGibson Inc., a small specialty  
steelmaker based in Lincolnshire, Ill., told customers it was  
increasing prices 6% on average.

"Unlike mill increases announced in recent years, this is obviously  
not driven by increasing global demand, but rather by fixed costs  
being proportioned across significantly lower demand," the company  
said in a letter to customers.

To understand why steelmakers would raise prices when demand is  
terrible, it helps to understand modern factories -- and the operating  
demands of their equipment.

At Universal's plant here a huge disk-shaped blower called a pre- 
heater shoots 2,300 degrees Fahrenheit hot air at a giant ladle that  
holds melting steel. The pre-heater must be kept running even if the  
plant isn't making steel. It is kept hot to prevent the refractory  
bricks inside from disintegrating.

The same is true with the mill's baghouse, essentially a huge vacuum  
for pollutants. Its industrial-sized fans run continuously because  
turning the motors on and off can damage them. Whether the mill makes  
two batches or six of steel, the costs are the same.

"We're getting pinched," said Mr. Oates.

John E. Lichtenstein, managing director of Accenture's Metal Industry  
Group, said raising prices in this economy is a smart business move  
for some steel makers. In past recessions, steel mills would actually  
increase mill production, believing that selling steel cheaply at  
least brought in cash.

The problem, though, is that sales prices eventually fell so low that  
the mills went into bankruptcy.

"The whole mindset has been changed in the industry," he said.  
"Sometimes you have to accept the fact that raising prices is a risk.  
But you are better off not chasing that last sale to the bottom."

The increases aren't industry wide, however, and steel prices in  
general continue a downward trend, with producers reducing or keeping  
prices unchanged.

Mining companies, aluminum makers and other manufacturers with high  
material and production costs are grappling with the same issue, said  
Jason Goulden, vice president of research for Metals Economics Group,  
an information and consulting company. The stubbornly high costs of  
running mines and smelters has forced many miners to shut operations,  
he said.

In the past, many producers would stay in business and continue to  
sell their commodities at lower and lower prices, hoping the market  
would turn upward in time to save their businesses.

But the low prices and higher operating rates actually delayed  
recovery. "It is much better to have this type of reaction. Because  
when demand does return you will see a steeper increase in prices," he  
said.

The world's steel plants are operating currently at less than 45% of  
capacity -- some of the lowest operating rates ever -- which has  
escalated production costs and led to huge losses.

Universal Stainless said it lost $3.8 million in the first quarter of  
2008, citing among other things, the costs of running its plants at  
such low operating rates.

The losses come in spite of significant strides in the company's costs  
and productivity. Streamlined trucking routes and computer tracking  
systems have reduced delivery times by 10%. Universal now makes  
100,000 pound batches of the most common steel product, instead of  
filling individual orders.

Kevin Smith, a supervisor in the melt shop said he would rather have a  
bit more inventory of basic product that he knows he can sell, than  
have the cost of starting and stopping production for custom orders.

Such changes, along with reduced overtime and shifts, should help cut  
costs by 25% from last year, a significant reduction but not enough to  
offset the 40% to 50% drop in sales.

Universal's Mr. Oates said nearly all of his customers have accepted  
the price hike, although he acknowledges some are in financial trouble  
themselves and can't afford it.

Steel service centers, middlemen who buy from the mills and sell to  
manufacturers, appear to be paying the higher prices, in part because  
they think they can pass them on and because they have fewer  
opportunities to find cheaper alternatives.

"We should be successful at passing through the price increase," said  
Brian Deck, vice president of finance and treasurer at Ryerson Inc., a  
large Chicago-based steel service center.

Mr. Lichtenstein of Accenture, said service centers have less  
opportunity to buy lower priced foreign steel. "The tightness of  
credit is straining the ability for service centers to buy material  
off shore."

Steel buyers also are reluctant to place an offshore order that  
wouldn't show up in the U.S. for months.

"You have no idea what the market is going to be 50 to 90 days from  
now. The last thing you want to do is pay for steel today and have the  
margin drop 20% to 30% once you get it," Mr. Lichtenstein said. Tom  
McCarty, owner of Westbrook, Conn.-based stainless steel service  
center McCarty & Sons Inc., said that he is paying more for stainless  
steel and is absorbing the costs because his customers aren't going to  
pay more. His profit margin is reduced, but he is still profitable, he  
said. "You see what the big guys are losing on the books."

Write to Robert Guy Matthews at robertguy.matthews at wsj.com