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
"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
sequestrations 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
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 youre 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 Tampas 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. Theyre not Democrats
or Republicans but Americans. The fact of the matter is that
(the political uncertainty is) hurting everyone," Goncalves
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
"Business has been pretty bad
and people are very concerned about the market. And, of course,
the sequestration isnt helping," one steel trader said.
"Its creating more uncertainty in the market."
While others said its too
early to tell what sequestrations 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 its uncertain to what extent
sequestration ... is going to impact steel. Its 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)
"As the sequester hits,
manufacturers are again reminded and frustrated by
Washingtons 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.
"Manufacturersboth inside and outside of the defense
supply chainwarned 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
"I hope long term that the
spending cuts make us more competitive. But right now,
weve got some bumps to work through," Danjczek said.