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Metals players bracing for sequestration effect

Keywords: Tags  sequestration, Metals USA, defense, Tom Danjczek, Steel Manufacturers Association, Lourenco Goncalvez, catherine ngai

NEW YORK — With politicians on Capitol Hill unable to find middle ground ahead of imminent across-the-board budget cuts, steel and manufacturing players are mulling the short- and long-term impact that sequestration could have on their businesses.

After months of wrangling, congressional leaders were unable to reach a compromise before a March 1 deadline that automatically triggered budget cuts at government agencies totaling some $1.2 trillion over 10 years. The cuts are expected to be split evenly between the defense sector and domestic discretionary spending in an attempt to ratchet down a ballooning U.S. national debt.

Government agencies technically have until the end of the fiscal year, or Sept. 30, to determine where to cut. However, the House Armed Services Committee has said the Department of Defense (DoD) intends to begin making reductions immediately, and other agencies may follow suit.

"The Defense Department operates off long-term plans and budgets, making important and irrevocable decisions years before they are implemented. In order to meet the timeline of the BCA (Budget Control Act) and make the required cuts to comply with spending caps, the DoD will begin cuts immediately," the committee said of the sequestration’s expected impact. "The DoD will have to frontload many of the cuts because of high short-term costs, such as separation payments and penalties for canceling contracts. Even if Congress were to amend the sequestration triggers in the next year, some decisions would be irrevocable."

As a result, the metals sector may feel the effect more quickly than other industries, particularly those tied to government contracts in infrastructure, construction and defense.

"Sequestration is real, especially when you’re talking about a company that sells a lot to the military," Lourenco Goncalves, chairman, president and chief executive officer of Metals USA Holdings Corp., said during a panel discussion at the Port of Tampa’s 24th Annual Steel Conference.

Metals USA is a major supplier of metal to the defense sector, he said, so cutting spending will have a negative and immediate impact on the Fort Lauderdale, Fla.-based service center, among others.

"We would be better off if our politicians get their act together. They’re not Democrats or Republicans but Americans. The fact of the matter is that (the political uncertainty is) hurting everyone," Goncalves added.

Meanwhile, U.S. Customs and Border Protection is expected to see a 6.5-percent reduction in its budget, logistics firm OHL Trade Services said in a letter to customers, which could hurt importers because the elimination of overtime hours would mean delays in examining cargo.

"Business has been pretty bad and people are very concerned about the market. And, of course, the sequestration isn’t helping," one steel trader said. "It’s creating more uncertainty in the market."

While others said it’s too early to tell what sequestration’s immediate impact will be on the metals sector, most agreed that the steel industry as a whole will feel the heat if sequestration ultimately limits gross domestic product (GDP) growth.

"Typically, we need about 3 percent (GDP growth) to maintain steel production at normal levels. I think it’s uncertain to what extent sequestration ... is going to impact steel. It’s too early," Thomas A. Danjczek, president of the Steel Manufacturers Association, told AMM. "I think the greater problem is the gridlock in Washington, whether it be the infrastructure bill, energy bills, environmental regulation (or) safety regulations."

Job losses related to the cuts could increase the unemployment rate by 0.7 percent and decrease gross domestic product by almost 1 percent by 2014, according to a National Association of Manufacturers (NAM) study.

"As the sequester hits, manufacturers are again reminded and frustrated by Washington’s inability to take on the hard challenges facing our country," Aric Newhouse, NAM senior vice president for policy and government relations, said in a statement. "Manufacturers—both inside and outside of the defense supply chain—warned against this meat-grinder approach that will cost manufacturing jobs."

Although the $85 billion in cuts slated for fiscal 2013 is a significant sum, market players conceded that the number is only fraction of Congress’ total budget.

"I hope long term that the spending cuts make us more competitive. But right now, we’ve got some bumps to work through," Danjczek said.

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