John Foster began his steel industry career at J&L Steel,where he became acquainted with the full range of steel products,from flat rolled to pipe to longs.He later worked at CF&I Steel,serving as General Manager of the bar,rod,wire and rail mill before moving on to Ferrostaal in 1990,managing the Rod and Wire Division.He is currently President and CEO of Coutinho&Ferrostaal North America and serves on the board of C&F Incorporated,CF-Mexico and CF Ltd.Canada.He is also a long-term member of the American Wire Producers Association and Wire Association International.In December 2010,Foster was elected Chairman of the American Institute for International Steel(AIIS),and assumed office in January 2011.
At this time last year,steel import activity in the US was described as a"rugged upward climb."Since then,import levels have followed a series of bumps and dips,while still maintaining a significant recovery from 2009 levels.To what do you attribute the continued instability in import levels?
JF:In reality,one can attribute the continued instability in import levels to the same overriding dynamic that governs when things are more normal-that being the condition of the global marketplace versus the US marketplace.Or,in more simple terms,Economics 101 where supply and demand dictates what is ultimately bought and sold.Importantly however,the prevailing dynamics are indeed more unique in this latest series of cycles for two primary reasons.One is the cost/push element of market pricing which provides a much less comfortable feeling for our buyers than the more predictable and familiar demand/pull environment.The second is somewhat related and could be termed the"fear factor."The depth and damage of the recent recession will remain fresh on most people's minds for quite some time to come.This is what drives the customer base to live with lower average inventory levels and an aversion to long lead time futures unless the domestic market is perceived as exhibiting some signs of sustainable strength or firmness.Therefore,expect greater than normal fluctuation for the next six to eight months.
Preliminary census data from the US Department of Commerce show that import levels from this past March reached over 2.2 million metric tons,a high point not seen since October 2008-the peak of pre-crash import activity,at 2.8 million mt.Were March levels an anomaly,or do you think it is possible to maintain such high levels of imports,and even surpass them?
JH:The March levels could be said to fall into the anomaly category but suffice it to say that number would not have been reached if the marketplace did not perceive the need.As it was,the beginning of the new year showed notable boosts in manufacturing activity and consumer confidence and both the domestic buyers and mills were all feeling a bit bullish and ready to at least begin addressing what is widely recognized as pent-up demand.To be sure,the stars were well aligned for a more robust first quarter ranging from some attractive value differentials in rebar and flat steels to anticipated improved demand needs in the energy sectors.More to the question at hand however,a 2.2 million metric ton month would equate to an annualized 26.4 million ton import year or roughly a 25 percent import penetration,which I believe going forward is not as likely any time soon and as it was in years past.The US market needs imported steel,but with the ever more efficient domestic operations combined with new capacities coming on stream,the US will have to compete with other developing country demands for steel imports and I see import penetrations being somewhat lower for the next year or two.
Imported rebar surged in both March and April,but the most notable aspect of the increase was Turkey overtaking Mexico as the US number one source of imported rebar(license data for April show close to 60,000 mt from Turkey alone,compared to just under 12,000 mt from Mexico).What do you think has made Turkish rebar so attractive to US buyers this year?
JH:Turkey is historically one of the most adept and savvy steel exporters in the world and are perhaps the best at rebar.They know their costs and manage their inputs of scrap well against the regular markets they serve in terms of output.Also importantly,they maintain a rather organized system of marketing their product.We have found the Mexican mills taking a different approach to their marketing by expanding their commercial chain more vertically,which is simply a different philosophy.Unlike the Turkish mills however,a vertical approach can at times overlap commercial channels and this can be challenging to the upstream buyers and sellers.In the end,and perhaps more so in rebar than any other product,price dictates the sale.When price and all else is perceived as equal however,much of the marketplace seems to gravitate to the Turkish option.
So far in 2011,Japan has been among the US'top five sources of imported steel.Aside from the widely-reported effects of the recent disaster on Japan's steel industry(reduced steel production,shortage of auto parts,etc.)what other implications does Japan's situation have on the US steel industry?
JH:The Japanese are certainly recognized as some of the most quality conscious and dependable steel producers in the world.At the same time,the US manufacturing sector is maintaining its role in developing new technologies that will allow it to delve into even more sophisticated products for use here and for export.Between these two dynamics,the steel relationship between Japan and the US has a bright future together.At the same time,the US steel industry itself is making significant advances in steel quality in terms of new or upgraded capacity.The new carbon and stainless ThyssenKrupp operation in Alabama is a clear example of this.The effects of the unfortunate event in Japan are still being understood,but logic would dictate their energy sector is facing some important changes and costs may well be affected.Our excellent trade relationship will continue no doubt,but I believe Japanese exports will be looking at a more competitive marketplace here in the US than in the past.
We recently heard that some import orders to the US from Brazil were canceled because Brazil's steel consumption is increasing at an incredibly rapid rate and they need nearly all the steel they can produce.Do you see this situation as an opportunity to boost exports to Brazil,as well as other emerging South American countries?
JH:Brazil is one of my favorite steel markets in the world because it has excellent steel producers and a sophisticated global steel mentality.Indeed,Brazil is a country that has had a routine and organized steel exporting program for many years and then some game changing events began to take hold.It is my opinion this started with a new government regime some years back that,politics aside,understood that supporting business more vigorously and fundamental capitalism can bring value to the country as a whole.There was also some fiscal prudence that was directed to improving the country's infrastructure and has led today to a country that has been granted both an Olympics and a World Cup soccer event.Long answer to a short question,Brazil is booming and their steel industry is running to catch up.Therefore,Brazil is absolutely an export destination opportunity.Furthermore,as the engine of South America,it can be said a rising tide lifts all boats.Brazil's appetite for steel and other raw materials and capital goods touches first its most immediate neighbors.We know well that steel related activities in Chile,Peru,Ecuador and Colombia have been ramping up over the past couple of years and proving positive for the region as a whole.Indirectly it is also having a positive influence on such important items as the Free Trade Agreement initiatives for Colombia and other pending countries in the region.
In February,AIIS President Dave Phelps commented on the 29.3 percent growth in US steel exports in 2010,saying"These data show the positive reactions from international markets for high value and high quality steel products made in the US."Which US-made steel products do you think will drive exports in 2011?
JH:Steel exports have been and will continue to be a growing aspect of our domestic industry.And importantly,should be expected to expand beyond our traditional heavily weighted"dry border"trading partners of Canada and Mexico.Needless to say,the soft dollar provides a notable stimulator to promote all exports,and I believe our domestic mill sector is taking an increased interest in the benefits selective exports can provide.In terms of the products involved,the factor of delivered cost governs elsewhere in the world just as it does here,of course.With that in mind,and understanding our domestic producers can reasonably compete cost wise with any other Tier 1 producer around the world,the variable of logistics costs come very much into play.In the realm of global trade,that generally means having as much water transportation involved as possible or a material value high enough that freight costs are a lesser component percentage than usual.That said,we are also finding that the domestic mill capacity utilization models are not overly oriented toward the generally larger lot quantities(15,000-25,000 tons)needed for longer transits,or it simply makes more sense to stay as far upstream in the production process to keep the cost components as low as possible.As some examples,I foresee those mills that are on or close to river and coastal ports being best suited to export billets to Central and South America who have short supply at this time.Somewhat at the opposite end of the scale,I see an array of special steels going both South,and East to parts of Europe where high levels of sophistication are needed.Even China is finding a place in the higher value exports portfolio from US mills with 46 percent of US 2010 exports being alloy steels and 15 percent as stainless.
There are a few pending and proposed free trade agreements in the US(with South Korea,Colombia,Taiwan,Middle East,etc.)--which one do you think will be the most promising for the US steel industry?
JH:Well,being a free trader,I am excited about any FTA because it puts new and less fettered options into both our buy and sell portfolio.Out of the list you mention however,and all are good,I would say Colombia if I had to pick one.I say this because here is a country that is hugely rich in raw materials that are used by the US steel industry;it is closer in physical proximity than the other countries mentioned and it is logistically favorable in terms of other countries where business opportunities lie in terms of exports like Panama,Ecuador,Guatemala and Costa Rica to name a few.Colombia has also become quite a bit more politically centered of late and I think could serve as a stabilizing influence in the general region and a welcome political offset to its neighbor to the east in Venezuela.South Korea and Taiwan are indeed economic steel engines in their own right,but much more export-oriented and well served by other Asian rim steel players when needed.The Middle East is probably the least synergistic vis-a-vis the US steel industry and is better suited to the Eastern European and other regional players,I think.
What do you consider the number one concern for US steel traders at this time?
JH:You mean I have to pick only one?Seriously though and perhaps in its most simple form,the first answer that comes to mind would be the fundamental element of risk management.This has never been more true as we all come out of the 2008-2010"pre-depression"as some have called it and fear continues to be pervasive in the market,particularly on the customer side.As I have always said,risk management is the fulcrum of trading with financing and trade services on the right and left.Thinking more deeply about that question however,a more strategic and structural concern is what is to be the place of steel trading in the commercial chain going forward.This question was last briefly touched on back around 1999 or 2000 if I recall correctly when the IT explosion had steel trading being replaced by the Internet.None of us believed it then and the whole concept was a bit of a flash in the pan.It could be said to have been a mild wake-up call however,and did indeed cause the industry to quietly question its value-added basis and I contend,served as the catalyst for more than a few aware players to do some important introspection.
Fast forwarding to today,that question is again being posed but for more fundamental and realistic reasons due to dramatically increased global supply,massive amounts of up-to-the-second global information available,a cost-sensitive environment that rattles the full length of the commercial chain and a risk management profile that is being pushed upstream albeit just short of the producer.In other words,the trading community.The good news is that the most adept in the industry have been addressing this issue for several years now and in its best Darwinian fashion has been adapting quite well.Each trader has approached any reinvention in their own way,but the blocking and tackling fundamentals are basically the same.First is a financing component that will allow the trader to perform certain banking functions,but technically being better than a bank because their function physically engages them in the transaction at hand.A second concept has been to approach the buy/sell partners with a multi-faceted package transaction rather than the traditional spot back-to-back piece of business before moving on to the next.These concepts can become rather proprietary and not for general publication,but suffice it to say,it is a bundling concept that opens up a new generation of trade services.Yet another is one I believe we will see more of and that is strategic alliances and partnering.The traditional trading landscape has always been extremely"turf conscious"as a rule.As that landscape has become ever more competitive and complicated however,carefully crafted alliances can make sense.Because of the inherent aversion to the concept of sharing,alliances or partnerships do not come quickly or easily,and the cement of trust,credibility and ethics appreciation dries slowly,so to speak.In a growing number of cases however,it is likely no one party has all the value points necessary to make a viable transaction so this is yet another arrow in the industry's quiver to offset concerns.
Last year,obtaining credit was a depressing force on the economic recovery,as steel companies that survived the recession found difficulty securing funds for facility expansion and even inventory stock-up.Have you seen the so-called"credit crunch"ease up since then?How are your smaller-scale customers in particular handling credit issues?
JH:The credit crunch you mention was real and protracted to say the least.We have however,seen some easing by the banking sector but only as their clients'balance sheets show consistent improvement over two or more quarters in most cases.For the better finance players in the trading community,the banking crunch actually provided opportunities for new business based upon its own level of trade financing.Importantly,the risk factors were not deemed overly aggressive since,as mentioned earlier,the trader was closer to both the customer and their transactions and thus had a more complete picture of the risks generally with fall-back options as well.
Regarding smaller customers,I am not sure if the size of the client is as important as the health of their balance sheet.At the same time,the smaller customer is more susceptible to any major or unexpected negative swings in the market and thus more open to risk management assistance.This is why I feel the Tier 1 trading community is finding more opportunities than less in a tight credit environment.
In April,the CME launched three new steel products in its futures offerings:HMS scrap,Black Sea billet and European hot-rolled coil.?That news,combined with the LME setting up delivery facilities throughout the US,has substantially expanded the presence of futures in the US steel market in the last year.From a trader's perspective,what is your opinion on the development?
JH:The efforts and patience by the likes of the LME and CME in this regard have been commendable,it must be said.The overall steel community has been slow to accept the whole hedging concept while the non-ferrous side lives it in major terms on a daily basis.As I recall in one LME presentation however,the full acceptance by the aluminum sector took over a decade or two to get into full swing.That said,one of the reluctance points from the steel side has simply been the very large number of producers we have in the world versus what has been a relatively small and more manageable number of aluminum producers.Those larger numbers inherently create less discipline in the steel sector and thus more volatility,which is a factor we see continuing for the foreseeable future.Logically it is that very volatility that should garner support for any mechanism that would allow our customers to go out and bid on longer term projects or conversely for the mills to offer firm forward pricing.Heretofore,the mill,the customer or the trader has had to bear the risk,if they would even do so.The contracts you mention should all have some correlation to the actual steel sold by the producing sector and a number of industry players are indeed participating on a case-by-case basis.A key question remains:over time,will there be adequate involvement from the steel community to ensure liquidity and long term success for the contracts?In the meantime,certain modifications are also being applied to the more conventional trade model that can serve as short term hedges,but those fall into the proprietary approaches mentioned in a previous question.
Describe any synergies you have experienced as CEO of a major steel trading company and Chairman of AIIS.
JH:The synergies are quite fundamental in that the American Institute for International Steel is an organization comprised of core steel traders and producers as well as a large and respected list of associate members from the trade service community.These range from stevedores,truckers,logistics companies,custom brokers,port administrations,railroads,surveyors and insurance brokers just to name a few.In overseeing my company's North American operations and going back to my first day as a trader in June 1990,I have had the honor and pleasure to physically interface with all these industry disciplines.By way of that interfacing,I would like to believe I can relate to and empathize with the issues of all our members because-pun intended-we are all in the same boat.In similar fashion I am proud to say my first 16 years in the steel business were on the domestic mill side and I like to believe that background provides an innate appreciation for the concerns from that side of our business as well.It is my strong belief that as this ever more globalized and complex steel market of ours evolves,the importing/exporting community and the domestic sector share and value more and more common ground.This ground covers full support for a strong manufacturing base in this country,compliance with the prevailing trade laws and free and responsible trade in steel.
There is a well-known rivalry in ideology between the AIIS and the American Iron and Steel Institute(AISI),boiling down to one side welcoming steel imports in the US and the other promoting US-made steel instead.What would you say is the single most convincing reason why imports are helping the US steel industry,rather than harming it?
JH:I think as just discussed,the well known rivalry you mention is a dynamic that is being compromised as our shared steel market evolves and all sides understand there is both room and a need for our respective steel disciplines in the US market.Moreover,I refer back to the last question in regard to a single most convincing reason why imports are helping the US steel industry rather than harming it-they help the industry seek out competitiveness in the global marketplace and help our domestic manufacturing base survive in a challenging world environment so we all can share and sustain those critical relationships.The AIIS understands and supports that the US needs a strong domestic steel industry.We also understand that the industry in turn needs a strong manufacturing base.Competitive,freely traded and responsible imports help our manufacturing customers survive both domestically against imported downstream products as well as with exports which can mean more steel requirements for all.It should also be mentioned that it is not only steel consumers who need to import steel,it is also the steel producers themselves,be it the growing and substantial level of mill-to-mill slab imports or the pig iron and DRI by some mini mills,importing is a critical part of what helps make the domestic steel industry itself and our customers successful.I contend we have more of a symbiotic relationship than many understand.
