Steelmakers, from global
integrated majors to regional operators of electric-arc
furnaces, at times remain hesitant to embrace the enterprise
resource planning (ERP) software systems that have been widely
adopted in discrete manufacturing and even in some other
process industries, notably petrochemicals. Thats not to
say that steel mills are averse to cutting-edge information
technology (IT). Indeed, a mill in the United Kingdom recently
employed a latest-generation risk-management system to plan and
execute a plantwide maintenance turn and was even able to
complete the project early.
Other mills are increasing their
use of hedging to offset commodity price risk for raw materials
and energy. Chicago-based CME Group Inc. confirms growing
business among commercial customers for its futures contracts.
And in a major vote of confidence for commodity exchanges, New
York-based INTL FCStone Inc. has taken a controlling equity
stake in Cleartrade Exchange Pte. Ltd., a fast-growing
Singapore-based commodity market operating globally.
Steel industry leaders broadly
agree that their industry has not embraced enterprise IT as
enthusiastically as other sectors of the economy, but they also
note that steel moves on a different investment cycle than does
discrete manufacturing or other process industries.
continue to be evolution in hedging for raw materials,
said Thomas Danjczek, president of the Steel Manufacturers
Association, and for my members the second- or
third-leading cost component is energy, and they can hedge
that. But for the bigger enterprise-wide packages, to date the
value proposition for those initiatives, as evaluated by
management of my member companies, has just not been there. The
derivative market, the people who are promoting these tools and
techniques, has to do a better job of selling them.
Danjczek noted one important
reason for that. Our industry works on such a small
margin, maybe 4 percent on invested capital, that we cannot
afford to leave anything on the table, he said.
There are lots of ways of managing risk: One is equity
investment in the supply chain. Another is debt restructuring.
The question on any initiative is very simple: What can I
do to improve the fundamental profitability of the
company? The case for the big software packages has not
been made in that context.
The top two ERP providers, SAP
Inc. and Oracle Corp., have some activity in the steel sector,
but it is not a major business segment for either. Similarly,
major process-control companies such as Burlington, Mass.-based
Aspen Technology Inc. and London-based Invensys Plc, parent
company of Invensys Foxboro, also have mining and metals
groups, but they are predominantly active at mines upstream of
Several multi-client studies by
different global consultancies over the past two years
identified the steel industry as a laggard in the adoption of
ERP and commodity trading/risk management (CTRM) software. That
may be a good thing, according to some senior industry
officials. One noted, The aluminum industry is 20 years
ahead of us in CTRM--they have all these tools and hedges and
risk management and everything--and they are a
Many software suppliers say they
are seeing adoption on an islands-of-automation basis, either
to support supply efficiencies, fine-tune risk management or
treasury functions, or handle specific projects or initiatives.
In such discrete chunks, new approaches to automation and
systems integration are more manageable.
A case in point was the
maintenance turn at a blast furnace in the United Kingdom, one
of the largest in Europe. The mill agreed to provide some
information but declined to be named. Having suffered cost and
schedule overruns on previous turns, the mill hired an outside
consultant to shepherd the process; the management firm, in
turn, licensed a risk- and decision-analysis system from
Ithaca, N.Y.-based software company Palisade Corp. called
According to the
mill, the business assessments were conducted on the
companys entire commercial section to assess the impact
of the blast furnace outage on the company. The business
assessments identified key risks to the business--commercial,
financial, technical and logistical--and a process model was
designed using @Risk to forecast production throughput at the
business sites incorporating the effects of those risks. This
was then used to provide management with guidance on steel
stock build requirements, allowing commercial and production
decisions to be made and tested.
The project was a major success.
The furnace reline was completed with a total outage of 68 days
and 9 hours, which was within the extremely
aggressive 70-day window. Each day of lost production
would have cost a significant amount, so speed was
Most of our work in the
steel sector is project management, said Randy Heffernan,
vice president of Palisade. We are engaged because a
project went over time or over budget in the past, and they
know they cant do that again. In countries outside the
United States and Canada, it is also common to have some
government involvement, meaning more entities in the decision
The software uses Monte Carlo
simulation, which is most common in financial planning.
Traditionally, we make assumptions to estimate uncertain
factors, Heffernan said. These individual point
estimates are added up and you get an answer. Most often you
get three: best and worst case, and most likely. What Monte
Carlo does is to build in the likelihoods for each variable
then samples them through many iterations. It is a much better
way of describing probabilities.
One of the most powerful uses of
such simulations is that variables or inputs can be ranked,
Heffernan said. You can tell which variables have the
most effect on your outcome. Often, those are not intuitive in
the regular models. For example, if the worst case for
one variable is highly likely but it would cost the project
only one day, then it would be less important than trying to
control for a variable with a lower probability but a more
severe worst-case scenario.
In trying to develop
comprehensive risk management tools for the steel sector,
Youngjin Chang, director of metals research and product
development at CME, said that her exchange examined how the
steel supply chain is similar to and different from other
process industries. In contrast to oil, which is very
linear--basically one input--steel is much more chunked with
many inputs: ore, scrap, coke, gas, electricity, she
said. That makes the ideal of a virtual steel mill, a
completely liquid market in risk management for all the inputs,
much more desirable, but also much more difficult.
Some of the tools we have
out in this segment are very new, and we are encouraged by
their growth, Chang said. But we are thinking about
this as a 10-year project, and we have to be patient as
financial and commercial users get familiar with the tools. The
economy overall is picking up, but not yet so much in steel and
that adds a further level of risk and volatility. She
noted that hot-rolled coil contracts are seeing record volume
and almost daily trading, the scrap contracts launched last
fall are growing in line with expectations and an iron ore
contract was just launched on Globex. We are already
seeing some volume and open interest on that.
Chang added, with some
satisfaction, that the early adopters, the pioneers, are
starting to see the fruits of their efforts. I heard just
recently from a commercial market participant (a real user, not
a speculator) that their first trial hedges worked as they
hoped and they look forward to building up to a 100-percent
hedged position over time. We are also getting calls for
information from some commercial prospects saying they lost
business when a competitor could offer a better deal because
they could lay off price risk by hedging. People at all stages
of the steel segment are looking at what they can do to
stabilize business and profitability.
Manav Garg, founder
and chief executive officer of Bangalore, India-based Eka
Software Solutions Pvt. Ltd., is alert to those realities.
The steel industry does not have much money yet to put
into ERP and CTRM solutions, but those opportunities will
come, he said. We see coal already getting more
interested now that shale gas is putting pressure on their
profitability. The whole energy sector is affected. The coal
sector traditionally had underinvested in supply-chain
automation. So we expect to see the same developments in
One of the complications, Garg
noted, is that for those steel companies that have invested in
ERP, those systems often come with CTRM functions. There
are many cases where the big mills have tried to do CTRM from
their ERP platform, and they have not been happy with the
results. The ERP platforms are optimized for certain corporate
functions, while the dedicated CTRM systems are optimized for
things like hedging, invoicing, mark-to-market calculations.
People are starting to prefer dedicated systems that can link
up to an ERP platform.
Those fits and starts in hedging
and risk management are playing out all over the world and,
notably, attracting growth capital. INTL FCStone, a provider of
execution and advisory services in commodities, currencies and
international securities, in May acquired immediate voting
control of Cleartrade Exchange along with the right to acquire
up to 90 percent of equity interest over the next five years.
The value of the deal was not disclosed.
Cleartrade, a recognized market
operator regulated by the Monetary Authority of Singapore, is a
futures market for commodity futures and over-the-counter
cleared derivatives. It was founded only in February 2010 and
began operations in March 2011, when it received its regulatory
license, and already has more than 30 trading members. It
offers 43 commodity contracts, electronic connections to
London-based LCH.Clearnet Group, Singapore Exchange Ltd. and
NOS Clearing ASA, as well as price distribution via desktop and
With this investment by
FCStone, we have broadened the structure of the exchange and
made it attractive to a wider range of clients, Richard
Baker, chief executive officer of Cleartrade, said. The
real challenge now is building liquidity across all the
instruments. We are keen for Cleartrade to be known as the
market that gives good access to spreads for all inputs and
outputs to the steel business.
In that spirit, Richard Heath,
head of product at Cleartrade, said that mills are slowly
getting into the trading and hedging markets. They have been
very vocal about the squeeze on input costs and the
flat-to-declining prices for their finished products. Indeed,
the vast majority of our users in the steel segment are real
users hedging their exposures.
Scott Sweden, head of business
development for metals at Cleartrade, said that pressure is
coming from end users. In Europe, all the end users are
hedging their risk. They may not be coming into the brokered
market directly, but they are hedging through banks and other
financial intermediaries. We have seen this especially since
late last year. We have also seen the same in other steel
end-use markets, like power and construction.
He acknowledged that those guys are keen, but the
mills are not. However, we are starting to see some
of the mills in northwest Europe develop risk statistics; some
of their treasury departments are starting risk management
teams. They are still in the information-gathering stage,
trying to get their arms around it. Last year, their customers
were twisting their arms. This year, they are actively