Service Centers

Letter to the Editor: Service Centers as Scapegoats

Written by John Packard

The following “letter to the editor” was prompted by comments made by Lourenco Goncalves CEO of Cliffs Natural Resources during his earnings conference call with analysts and reported on by Steel Market Update (and others). The comments below were made by an executive at a domestic steel service center in response to Mr. Goncalves:

I’m not normally driven to write letters to the editor but I feel compelled after reading the insulting and self-serving quotes directed at the steel service center community from Mr. Goncalves, currently Chairman of Cliffs.  I am choosing to remain anonymous because my steel service center is a relatively small company and Mr. Goncalves has many friends in the steel producing community, more so now since he’s been working for Cliffs, as he is vitally dependent on these steel companies to be his customers.

Mr. Goncalves’ false assertions are primarily twofold.  First, he says that service centers are importing illegal steel, implying in that statement both that it’s an industry practice and that these service centers must then be acting illegally.  He continues with his insults by saying, cleverly, without naming names, that “a couple of service centers [will be] hit hard by the force of the law”.  In the current political environment, rife with accusations, anger and vitriol, this almost sounds as if these service centers should be or even will be arrested and thrown in jail for their treasonous actions. 

Goncalves also refers obliquely to the current claim by the US steel producers that hot rolled steel made in China, sold to Vietnam, reduced to cold rolled steel, galvanized (coated with zinc) and sold to the US market, is a circumvention of US trade law.  The mills claim that because the Chinese producers have duties on hot rolled, cold rolled and galvanized steel, and the steel they’re selling to Vietnam is not undergoing substantial transformation, that constitutes circumvention.   I’m not going to discuss the dubious merits of that case here; it will be decided one way or another by the US Department of Commerce or perhaps the courts.

But until the government or a court rules in the US mills’ favor on this issue, the steel is not “illegal” and the service centers are breaking no law.  I’m not aware of any companies changing the country of origin on finished steel coils that were finished in China and then shipping those coils to US buyers.  That would be against the law.  And if the US buyers were aware of that fact set for the coils they were buying, I think they would be violating the law also.  If Mr. Goncalves is aware of this, then he should notify US Customs.

His comments denigrating service centers who import steel are especially interesting because when he oversaw Metals USA, a large service center, that company was certainly no stranger to buying large quantities of imported steel whenever it made sense for them financially.

Secondly, Mr. Goncalves falsely blames the mills’ weak order books on the unwillingness of the service centers to place orders, keeping their inventories “dangerously low.”  Though service centers are a very large customer base for the mills, the weak order books of the mills are not a problem that would have been corrected by the service centers rebuilding their inventories.  And rather than their low inventories being dangerously low, it would be far more correct to assert that the largest danger and harm to the service centers is buying steel and re-building inventories when prices are falling, something that’s been happening for the last 2 or 3 months.  As Mr. Goncalves knows very well from his days in this business, inventory is the single largest asset that a service center has and keeping lean inventories, especially at a time when prices are falling, is the smartest thing a service center can do.

There are several reasons why the mills’ order books are weak, among them a combination of a weak industrial economy due to a strong dollar, weak demand in areas like energy, agriculture, heavy equipment, rail, etc., steel prices that have been far higher in the US than anywhere else in the world, including, Europe, South America, and Asia, and yes, service centers and end users who slow down their purchases when prices are in retreat.

Lastly, how does Mr. Goncalves expect manufacturers in the US to compete when there is a very real and present danger of finished goods from overseas supplanting raw steel imports?  Interestingly enough, he blithely says “We know about that and we’re paying a lot of attention to that.”  When he says “we” who is he referring to, Cliffs and the US steel producers or just Cliffs?  And what are “we” going to do about it?  “Paying attention” does nothing.

Mr. Goncalves, when you were head of Metals USA you criticized the US steel producers freely and frequently.  As head of Cliffs you have often blamed low steel prices on low priced iron ore from Australia.  Now you’re blaming low prices and weak mill order books on illegal imports, illegally acting service centers, and service centers who are unwilling to place orders when prices have had further to fall.  Certainly, there are bits and pieces of truth in some of the things you say, but at the end of the day it’s time for everyone to look in the mirror and reshape their business to deal with the global market.  Manufacturers who consume steel certainly have been for years, as they relocate to Asia or Mexico and advantage themselves with lower cost steel.  Insulting service centers whose existence depends on a robust steel consuming industry accomplishes nothing positive; it only deflects attention away from solving the real problems.

Latest in Service Centers