How do you sell steel?

Q: What does Titan do?

We do steel processing, steel trading, and steel distribution. Our niche is what's known as tinmill products. That is thin gauge, cold rolled steel that has been coated with either tin or chromium. It's what's used to make containers for food, paint, aerosols, and many other products.

Our headquarters is here in Baltimore, but more than 60% of our sales are to customers outside of the United States and Canada. Last year, we did business in 32 different countries.

Q: Where does Titan fit in the universe of the steel industry?

Steel is a ubiquitous part of both the industrial economy and the consumer economy. The steel business in the U.S. was at the vanguard of restructuring. Long before the automotive industry, for example, the steel industry had already gone through huge bankruptcies, Chapter 7 liquidations, and difficult changes in employment practices.

The forces of global competition in the steel industry started earlier and have driven a lot of business practices people would not associate with what is perceived as being part of the "old economy." As the U.S. steel industry restructured and focused their business on core activities, it opened up space for niche companies like Titan.

In terms of our competitors, there are other value added tinmill products service centers out there. They're not as big as we are, but they are certainly substantial competition. We are the largest independent distributor of tinmill products in the world, meaning we're not owned by a steel mill. Particularly overseas, our competition really comes down to steel mills themselves. In many cases, a steel mill that is our supplier in one market will be our competitor in another.

Q: Cans are everywhere. It seems like you could expand indefinitely.

Without a doubt, there are always new customers out there. There are always new people putting up metal packaging lines, somewhere in the world. It's a business which is expanding, probably at a rate comparable to the rate of global GDP growth. That's a bit skewed though; demand for metal packaging materials is increasing faster than GDP growth in emerging markets, and slower than GDP growth in developed markets.

That has to do with cost and product substitution. Steel for packaging has some tough competition in plastics, aluminum, composite materials. And some of the advantages of steel packaging material are more relevant to conditions in emerging markets, particularly those with less sophisticated transportation networks, where the conditions of handling are not always the most gentle.

Q: What is the future of Titan?

Our future is built upon new business development, continuous improvement, and risk management. These are the challenges that I devote most of my time to.

Titan's focus on new business development has proven to be immensely valuable during the challenging times of the past several years. In 2010 more than one third of our global volume went to customers that we added since 2007. You can't be complacent in the global marketplace regardless of the business you are in.

Over 90 of our 120 worldwide employees work in our steel processing facilities so focusing on continuous improvement not only improves our performance—significantly—but also involves all levels of our staff in team efforts.

Finally, in the steel business, risk management is huge. It's relatively easy to just simply grow. It always goes back to risk management.

We're constantly aware of inventory risk management and receivables risk management. Steel prices are highly volatile. To give an example, in 2008, prices for many flat -rolled steel products dropped by almost 50%. So if you're a steel distributor—meaning, by definition, you're long on inventory, since there are not effective ways to hedge your position—you have tremendous inventory price exposure. We remain very cognizant of the price risk in whatever steel we're stocking.

On the receivable side, it's a question of getting paid. Margins are not that great, so you can't afford substantial bad debts. You've got to be terribly careful. And it can be tempting—there's always that last piece of business out there at the right price, but often it comes with substantially more risk. That's why not all growth opportunities are to be seized on. They need careful analysis.

I am constantly keeping an eye on macroeconomic trends, trying to factor those back into how it might affect steel supply and demand. And in turn how that is going to affect us, our customers, and very importantly our suppliers. Our supplier base is majority North American, but we're buying steel all over the world.

It's interesting: a lot of times the chief officer is thinking about the sell side, which is obviously terribly important. But in our business, we have just as close an eye on developments on the supply side. Which steel mills around the world have availability for export? Who is adding new production capacity? Who is maybe facing slack demand in their domestic markets?

Q: How do exchange rates impact the business?

Exchange rates have a huge impact on us. We are in a price sensitive business selling mostly to customers whose native currency is not the U.S. dollar.

We manage exchange rate risk on several levels. First, we hedge all transactions where the purchase or sale is denominated in a currency other than the U.S. dollar. Second, we keep a particularly close eye on exchange rates relative to the U.S. dollar for those countries where we have overseas operations. Finally, we monitor global economic trends—short- and long-term—to assess where future shifts in exchange rates might present challenges and opportunities.

Q: What are the keys to succeeding in this business?

The key thing that makes us succeed is a very deep and thorough understanding of our customers' end uses. That lets us know exactly what kind and quality of steels they can use, which will be the lowest cost but still be suitable for the end use that they have in mind. Let me explain this, because you could reasonably look and say, well, a can's a can, whether it's a paint can, an aerosol can, or a food can. Actually, the specific can size, what's going to go into a container, and several other factors, give rise to a myriad of different specification requirements, and a myriad of different tolerances for different kinds of defects in the steel.

Understanding those end uses, and what works for one but won't work for another, is the closest thing we have to proprietary expertise, and that knowledge is not just in the heads of a few people at the managerial level. It's throughout our workforce. The guys running the equipment and handling the steel have to understand what is acceptable and what isn't, based on the customer, the market, and the end use.

Q: Does the volatility of your market push you to have a longer-term perspective, knowing there will inevitably be ups and downs?

No, the opposite. It forces a very short-term perspective. It's hard to break out of a mentality that says, okay, what do the next 90 days hold? How can I take advantage of conditions as they are today to do more business in the next 30 to 60 days? Our planning cycle is very, very short.

That also goes back to risk management. We have policies that guide our actions, but at the end of the day there is no substitute for the top management of a company like this being closely involved in the details. I go through the receivables myself, once a week. That's not the most exciting thing I do, but it's totally necessary. We all know from recent years what can happen when senior executives delegate out or lack understanding of essential nitty-gritty responsibilities.

It's important to see and understand the big picture, but it's equally important to zero in on details and to solve problems that arise at that level too. The key is to discern the details that really bear closer scrutiny and analysis.

Q: How do you plan for five years out in a business like this?

That's not easy. We're a transaction-oriented business in a highly volatile market where quick tactical decisions are critical. Those things force me toward the here and now. I do the long-term planning during off hours. I love to garden, so usually it's on the weekend when I'm pulling weeds that I mull things over. Even then it's not five years, it's 12, 24, maybe 36 months.

Q: How do macro trends impact your business?

We closed our office in São Paolo not long ago. Brazil had been a substantial net exporter of finished steel products. In the last five years, the boom in the Brazilian economy and, especially, in the appreciation of the Brazilian real relative to the U.S. dollar, switched them to being a substantial net importer of steel. The office that we had in São Paolo was geared towards exporting. Between domestic demand and the exchange rate, the opportunity just went away.

China is moving in the opposite direction. For many years after their market opened and started to liberalize, they remained a massive net importer of steel. Now China has shifted to being one of the world's largest net steel exporters. That's a major reason why we opened an office there.

India is another country we keep on the radar screen as being an up-and-coming major exporter of steel. India has the advantage over China in that they have greater domestic sources of the raw materials that are used to make steel.

Q: How does transportation play into the business?

Obviously, steel weighs a lot. Our freight expenses are substantial. But North America is traditionally overall a net importer of steel. The United States also has a large trade imbalance. Titan benefits from both those factors.

In many cases, we are shipping against the prevailing direction of trade, so we're able to get very competitive freight rates for our cargo when it's traveling on lanes where containers would, otherwise, be getting shipped empty, back from North America to places like Asia.

Tinmill products are shipped almost exclusively through containerization. The advent of containerized ocean freight was a huge overlooked factor behind globalization; it changed everything for so many products that are now traded globally.

It actually costs our company less to ship a container of steel from our plant in Baltimore to Hong Kong than it would to truck the same container to Pittsburgh, if you can believe that.

Interview conducted and edited by Ted O'Callahan.