Leading through COVID: Buying and Selling Steel as the Global Supply Chain Frays

Adapted from a phone interview, May 11, 2020.

Q: How has the pandemic impacted your company?

Titan Steel has been fortunate so far. One of our main products is the steel that’s used to make food cans. With canned food flying off the grocery shelves, we’re not only very busy, but in the two states where we have plants, Illinois and Maryland, we were deemed to be essential businesses.

To minimize the number of people around the workplace, those of us who can work from home have done so, but three-quarters of our workforce have to be physically in our plants to run the processing operation.

Q: Steel has been in the news in recent years. What was the context for the company before COVID-19 hit?

We both import and export steel. In early 2018, the U.S. government implemented Section 232 Tariffs on Steel and Aluminum. That had a major impact on us. With our imports, we had to navigate the new challenge. But the bigger impact was the retaliatory tariffs on U.S. origin steel. Steel exports from the U.S. account for a very small percentage of the overall steel trade, but it was an important part of our business. It all created an unwelcome shock which has not been kind to our performance.

In the last few years we have been purchasing a larger percentage of our steel from non-U.S. sources, increased our value-added processing, and shifted more to sales to customers located in the United States. The tariffs and quotas accelerated all of that. But our total volume is lower today than it would have been if the tariffs and quotas had never been implemented.

Q: How did COVID-19 impact the company from a business standpoint?

This is a very global business. I work with people all over the world every day. We source some of our steel from Asia. In February and early March, our concern was on the supply side. Then, as there were indications that countries in Asia had their infection under control, boom, Europe, the United States, and Canada shut down; it immediately became a demand issue.

Over a very short period of time—say 30 to 45 days—the pendulum swung from one extreme to the other.

For the steel industry, the outlook is very challenging. Steel goes into autos, consumer durables, construction, and energy. All those sectors have been very hard hit. There’s a lot more supply than demand for those end uses.

We service many different end uses—auto-related products, building products, consumer durables. All of that activity has been sharply curtailed. Steel for packaging—food cans, paint cans, aerosol cans— is our largest end use and it still has high demand, but overall, it’s not going to be a great year by any stretch.

Q: Are you shifting what you are producing?

We’re tweaking as we can, but it’s impossible for us to shift on a dime. If we could use the steel we bought to make oil filters for food cans, we’d be very happy right now. But it doesn’t work that way. The steel we’re processing is produced with an end issue in mind and generally, you’re ordering with three- to five-month lead times.

You have to be very careful about chasing the market because you don’t know what it’s going to be doing three to five months out. Food packaging is a perfect example. What happens when everybody realizes they have enough canned food in their house for the next three years?

It’s too tough to guess which way the winds are going to blow on this, so we are not placing any huge bets.

Q: How do you navigate a time of so much uncertainty?

It’s clear this month and next month are going to be very challenging. After that, my guess is no better than anybody else’s. I simply don’t know. Countries are taking so many different approaches to dealing with COVID-19; it’s a real patchwork. Those different approaches are affecting businesses differently. It’s a lot to keep track of.

Because we’re dealing with suppliers and customers in so many different places, I’m devoting mental bandwidth, week in, week out, to what’s happening in Latin America, country by country; in Europe, country by country. We’re having to watch to figure out which orders may be put on hold, which can we expect to move ahead.

I’m paying attention to what’s going in the United States. When will our economy get back on its feet? I don’t think it will happen quickly, but I think it will recover sooner than it would have without the federal government’s interventions.

In parts of the developing world, they’re doing similar stay-at-home quarantines and closing nonessential businesses but without compensating action by governments to mitigate the economic pain. Many governments simply can’t afford to do it. Looking ahead, I worry much more about those economies recovering.

Q: Will this shape how you think about risk management?

We set our risk-management tolerance with the expectation that it would be tested by real-world events, whether business or economic cycles or something unexpected like COVID. On that front, I think we did pretty well with our risk management. Our diversification helped.

I think quite a few companies were more aggressive in taking on risk than they truly understood. For a long period, there’s been a discounting of risks of from globalization and other sources, until, in recent years, we saw the increase in trade tensions. We saw people considering political risk associated with far-flung supply chains and or sourcing everything through imports. There’s a lot of rethinking of globalization. Now people are going to be thinking about risk with respect to health.

Shareholders, credit markets, and bank lenders may well be applying pressure to companies to rethink risk and rethink diversification. People tend to look at concentration—customer concentration or supplier concentration—with different lenses depending upon recent experience. This may be an experience where the wrong customer or supplier concentration isn’t going to be forgotten soon.

Q: How do you approach diversification?

Where the opportunity presents itself to diversify, we diversify. We talk to our customers and indeed to our suppliers about diversification all the time. With customers we say, “It’s in your interest if we bring you additional supply possibilities from other parts of the world. They may not even be as competitive as your most familiar source, but it’s diversification for risk management purposes.” Likewise, with our suppliers we’ll point out the value of geographic and use diversification in their customers.

Coming out of this, we’re going to have more receptivity to the idea of diversification on both sides of our supply chain.