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Jeremy Flack on steel and metals distribution and price risk management


As a young man growing up in a very small town in the United States in the 1970s, Jeremy Flack developed his first interest in business despite there being few local role-models to draw on. “There were few businesspeople around me. I was fascinated by it, but I didn’t know what it was,” he said.
That early fascination led to him study finance in college – he is a cum laude graduate of Miami University with a bachelor’s degree in finance, and he holds an MBA from Cleveland State University awarded in 1998.

Some early turns in his career saw it become interwoven with the steel industry. “When I started working at PNC Bank [in 1992] after college, I was an analyst. They gave us a project, which was to study this thing called a mini-mill: What is it? What is the impact going to be on the integrated steel manufacturers in the United States?”
The long-established Pittsburgh bank lent money to traditional steel manufacturers. Flack recalls that back then they really were not sure what mini-mills, championed by steel producers like Nucor, were about.

“We did the study and report and gave that to the credit committee at the bank. So, I learnt a little about the landscape and history of the steel industry in the United States,” Flack recalled. Living in the famous US steelmaking city of Pittsburgh gave him a further framework for his growing early interest in the industry.

“We are all products of our environments to some degree,” he noted. “My environment early on exposed me to the steel industry. Otherwise, I didn’t even know that it existed. How would I have ever known?”

The next project saw him assigned to the real estate division of the bank, where he was a young commercial lender from 1992 to 1995. “The Chicago Board of Trade wanted to build a new trading floor in Chicago. It was going to be a very expensive project with a suspended floor between two buildings, over a city street, and they wanted to borrow the money to do it,” said Flack.

To make the loan, the bank had to understand the credit profile of the Board of Trade, how it made money, including earnings and cash flows. “I veered off in wanting to understand the history of the Board of Trade, and then I wanted to understand what futures and options are. So I took a detour on my own and started learning about what they are, just out of curiosity,” Flack recalled. That knowledge gained was to take center stage later on in his career.
He left the bank and became chief financial officer and treasurer of Encore Manufacturing Corp. in Cleveland for a couple of years, before he entered the steel industry in 1998 by joining Lawson Steel, a small distributor.

“I was looking around, and there was no hedging, and the mini-mills had pretty well taken over the industry at that point and had made a big dent in integrated steel production. They had really catalysed change,” he recalled.

“I got into the steel industry, and I thought ‘Oh my gosh, here is this massive commodity business, that has seen enormous change and there is no hedging’.” That was a realization Flack sees as a key root of the later founding of FGM.

“I walked into this industry and thought it was so wasteful – there was no business certainty here, there was no predictability. And there also wasn’t nearly as much volatility then.”

Looking back, he questions whether the steel industry actually needed to hedge in the late 1990s. “Things moved around so slowly. It probably wasn’t a primary necessity back then. But that is where the beginnings of the FGM business model started from.”
He said that realization that the steel industry did not hedge “was a huge lightbulb moment for me,” adding that “It is not really a commodity, but it prices itself like a commodity.”

China changed everything

The next big revelation was China. “When the Chinese market got big enough and influential enough in the steel industry to really start driving the global discussion, that was an incredible lightbulb moment,” said Flack.

China’s growing involvement in international steel markets would fuel the biggest volatility that had been seen in steel since the 1970s, he recalled, and it would be a point at which all the rules were going to change. “The market wasn’t going to revolve around the US anymore. The market was going to revolve around Asia, and this was going to drive volatility because the US was steel short,” he said.
He remembered thinking, “I have been working for a distributor in an industry that is dependent on foreign steel because there is not enough domestic production to make enough for all our flat-rolled consumption here in the US.”

“Now I’m five or six years into my career when all this massive volatility comes from China, and it just doesn’t end. It continues forward through the early 2000s. Of course, we ride the financial crisis, there is enormous volatility in commodities business, no hedge exists yet, and there is lots of pain and destruction in that period.”

The idea thus emerged to Flack of creating a steel distribution company that would be out front on the risk management side of the business and combine the physical with the financial together.
Not everyone agreed with the merits of the idea at the time. Naysayers posed difficult questions: “Who in their right minds would start another service center in 2010? Why do that?” Flack recalled that at the time there were plenty of conventional distributors. “More distributors than anybody needed. Fighting tooth and nail is a cliché, but chewing each other to pieces in trying to get business because there was too much supply and not enough demand,” he added.

Further headwinds were pointed out to him: “‘You are starting a business in a recession. You are starting a business in an oversupplied industry. You’ll never make money, and you’ll never succeed.

This will never work.’ That was the feedback I got from banks and counterparties in the industry. Just about everyone gave me feedback that this was a bad idea,” he said.

“But we tried it anyway. Because fundamentally it made sense that hedging and steel should be linked, and that that linkage would occur, and I had discussions with the LME and Nymex in the early 2000s. I knew that hedge development was being rolled out in late 2008-09 during the recession.”

By the time Flack decided to launch FGM in 2010, he had become co-owner, president and treasurer of Lawson Steel, but he divested his interests in Lawson to establish Flack Steel. “I became an accidental, reluctant entrepreneur!” he recalled.
He pointed out that the big personal decision to back his own instinct is an illustration of his own character, but one that he doesn’t see as unique. “I think that is a familiar story in the US. I don’t think it’s an unfamiliar one. You have an idea. You think it can work. I am a natural risk taker. I have a very high tolerance to risk and pain. I can handle it and I thought that if I didn’t try it – I was 39 years old – I’d have been okay to have made a little bit of money. But for me to bob along wasn’t an acceptable outcome for me personally. I needed to make a mark. I wanted to be respected in the industry someday. I wanted to be someone who contributes to the industry – not just someone bobbing along in it.”

Structure and strategy

“Our business case is about protecting capital. About risk management – commodity price risk management. Look at the FGM business model, and the guts underneath it, not necessarily on the exterior but on the interior, it is about protecting capital.”

That comes against a backdrop of a steel industry where there has been a lot of waste, he added. “It lends itself to consolidation. I don’t know if that has contributed to the volatility, but I think structurally, if you look at the business in the US, the industry is the most volatile steel market in the world statistically. And it is also the only first-world, or G7, economy to be 70% EAF production of flat-rolled, heading towards 80% of production of flat-rolled.”

He added that while Europe and China also have mini-mills, integrated steelmaking is still dominant in both locations. “There will be more mini-mills, but the US is way out in front of other developed economies with EAF-based steel manufacture,” he noted.
Flack said that steel price volatility in the US makes the case for FGM’s business model. “We are all about hedging out that volatility and creating durable earnings predictability,” he said. “These structural changes point to greater volatility, not less. Some might say, ‘Well there is consolidation so there should be less volatility,’ but I don’t know that the two meet each other. I think consolidation is a result of mismanaged businesses; why combine if you’re doing great?”

Flack noted that there were about 25 steel-production companies in the US when he started over 20 years ago, and now there are six. “A lot of that consolidation came from companies that were not doing well. They were not financially well,” he recalled.

“And now you have a financially sound mill business in the US, which you didn’t have 25 years ago. So, the steel mills have managed to create a structure in a market where they are financially sound.” He said that a variable overhead manufacturing structure within the mini-mill business contributes to that structure. “If scrap goes to 200 dollars [per ton], you can sell coils for 500 bucks. If scrap goes to 1,000 bucks, you’re selling coils for 1,600 dollars. So they can move with the input and protect their business,” he elaborated.

While 30 years ago the US steel sector had a fixed-cost business, now it is a variable-cost business, Flack added. “You can make steel in the US as efficiently as anywhere in the world and, because we are surrounded by water and we have great waterways internally, logistics are very good. So it is a great place to make steel.”
He said the natural hedgers are the steel mills, the distributors and the OEMs. “The steel mills have said they are not that interested in it, so that leaves the OEMs and the service centers, for which we are in front of that discussion. We have the most sophisticated capital markets desk in ferrous in the US,” he declared. “It is all designed to deal with this volatility that we believe is embedded now in this market.”

“Look at the trends, look at the demographics, look at the industry and how it is setting itself up and we have lined ourselves up with,” he added. “At this point our strategy is to follow along because this market is going to go on some wild rides, and it is going to change minds.”

He said that global events over the past two years, including the Covid-19 pandemic and the war in Ukraine, recent thoughts that raw material supply chains around the world will be forever altered, and the idea of the nationalization of commodities, changes the game: “It creates more volatility, not less.”
He added that FGM’s strategy is to look around and support the market. “We want to support our customers. We want to support the growth of the futures and options markets in steel and the ferrous complex... What we’re really trying to do is change buyer behaviour and have an option for them to express risk management ideas and easy access and conduit to the marketplace.”

He said FGM believes that global macro trends will “caven the community down to a belief that everyone should be engaging in price risk management in their supply chain. Everyone should be taking that price risk and minimizing it. We build a supply chain and we do price risk management, so for us it’s ‘let’s just follow along, let’s incrementally create products and services that will support the community as it gravitates towards this inevitability,’ which is that CEOs and CFOs of companies don’t like it when their raw material price whips all over the place and they cannot plan their business.”

“This is going to create a positive environment for change, and we want to be part of that,” he summarized.

New products and services

When Flack spoke with Metal Market Magazine in November last year about FGM winning the award for Ferrous Futures Trading Company of the Year in the Fastmarkets Global Awards for Steel Excellence, he mentioned that two of the company’s priorities for 2022 are to launch Metal Bank Structured Transactions and to build its hot-rolled coil market-making desk, and market-making book. A carbon trading desk is a third priority.

“When we introduced the concept [of the Metal Bank Structured Transactions], we weren’t ready to hit the market yet. We hadn’t finished the term sheets and all the legal [aspects] behind everything. That has now been completed. So we are in a good solid position to go forward,” Flack updated.

FGM has hired Keith Shuttlesworth, who was formerly the chief commercial officer for Big River Steel, as executive vice president of FGM’s Metal Bank. “We’ve now brought Keith in to run the Metal Bank Structured Transactions products,” said Flack, noting that FGM is in discussion with several potential customers for the product.
Flack said that it is a challenge to roll a new product into the market and that a particular challenge for FGM is that some OEMs see FGM as a steel distributor, and not a financial services company. “So the tendency is for us to get into the supply chain people and not into the C-suites. Really this Metal Bank product is a C-suite product to be consumed by the C-suite. Certainly, the supply chain people need to be involved, but you need to have both there,” he said – interlocking his fingers to stress the importance of their combined input – “One cannot do without the other.”

He said that FGM is getting a quick education in rolling out a financial services product as a physical player. “That is why we created the Metal Bank moniker, so that we can try to connect with the financial people inside OEMs and have them see us for a financial services company. Yes, we have a distributor arm and we do supply physical – but we want to put forward this idea that as much as we are a physical distributor, we are a financial services provider as well.” That challenge right now we are working through.
FGM is hiring another expert for the market-making desk, and is also launching its carbon-offsets desk starting in April, trading the voluntary and compliance carbon markets. “We are also going to wrap carbon offsets into our steel products in order to help our customers offset the carbon footprint etc,” Flack added.

He said that FGM continues to work on the physical side of the business, because the company is still a physical distributor. “We are working on developing a service center in Houston. So I would say that we are 80% along the way with having a physical presence in Houston, which we hope to announce officially later on into April,” said Flack.

FGM announced last November that it had become a member firm of the CME Group. Flack said the benefits of membership are working very well for the business. “We have been a vocal proponent of the CME and of HRC futures for 12 years, so to be a part of the CME Group, a participant member, it drives collegial [support] and bonding to the market and gets us closer to the market than our competitors,” he said.

Entrepreneurial spirit

Asked what advice he would give a young recruit about how to succeed as an entrepreneur, Flack initially said, smiling, “I think we all sometimes wonder how did I get here or what am I doing!” But he followed up with clear views on the ambition, drive, determination, persistence, resilience, and willingness to take risks and work long hours that are needed to achieve success.

“I’ve been willing to do things that others aren’t. I’ve been willing to get to the office as a young person in the business two hours before everyone was there, and two hours after everyone left – week in, week out; month-in, month-out; year-in, year-out,” he said. I have also aligned myself with like-minded entrepreneurs, like Ben Bucci, FGM’s President, who joined FGM when Flack Steel and Globenet Metals merged in 2013. “Ben and I have done and do just about everything together, probably to excess.”

“I think that if you really want success beyond general career growth, and something big, it takes way more than eight hours a day, five days a week. It takes dogged determination and I think you do have to have an appetite for risk. You have to have an appetite to take a chance to fail, and to learn from your failure and you need people around you who share this affinity for risk. You’ve got to have an outlook on failure that says ‘I’m learning from this. Yes, it’s horrible, but I’m going to learn from this and work my way out of it.’”

Like many businesses, he said that FGM has faced challenges over the past 12 years that he and his team have had to work through. “So, learning from those experiences and realising that it is okay and that there is usually a way forward, and being willing to put in whatever time it takes to be good at something,” he added.
He said the Japanese say that it takes 30 years to become a master, going through various levels of mastery. “If you are going to commit to an industry or to a business and you really want to make an impact, you need to be willing to do more than everyone else around you,” he said.

“I see a lot of hard-working people in the world. But you have to be a bit obsessed – and I don’t know if that’s healthy, he smiled. But if you’re asking me what it takes... I have been dedicated to my work and it has been the most important thing to me – sometimes more important than my family.”

He realizes the gravity of such dedication to work and added “I’d say you look around you, make sure you have support around you and that you have family support. Make sure that if you want to be an entrepreneur, you have a partner or a spouse, or mother or father, or children who understand that is how it is going to be.”
He also said that if it were not for the unwavering support he has gotten from Mr Bucci and others at FGM (many of which have been with the company over 10 of the company’s 12 years in operation), he likely would not have made some of the bolder moves he has made over the years. “I do nothing and have done nothing, alone” Mr Flack stated.

He recognized that not being home from work at the same time every night, or not always being available to play with your children is not acceptable to many people, “but you have got to ask those questions if you get into entrepreneurship, because entrepreneurship is all-consuming if you’re going to be successful,” he re-iterated.

Flack pointed to the unwavering support of his second wife. “I would not be on this conservation with you if it were not for the support of my wife – there’s no way. There’s no way I do what I do without her – absolutely no way. She is not making any decisions about the business. She’s not helping me plan the business. She is not involved in the company. What I mean is the support I get at home is unwavering, it is complete, and she is willing to sacrifice for this to work. And she knows that her support ends up helping everyone here as well.”
Flack added that he thinks a lot of people dip in [to trying to be an entrepreneur] and then think, “‘Oh my god, I never thought it would be this hard,’ and then it’s a problem, because when it gets hard, you have to work harder and when it gets even tougher, you have to dig even deeper.”

In his view, successful entrepreneurs often do not get the credit they deserve because people look at some of the wealthiest and think they now have it easy, while forgetting or being unaware of the time, effort and determination they put into achieving success.

“Look at the result and we either revere it or we hate it... But what these people had to do to get where they got to, those are the forgotten stories that are not really told, and I think that there are a lot of heroes in this country that are entrepreneurs. They are heroes because they create places where people can come... Things are changing. People look at their job and their workplace and this is really where they find community and find one another - I know we have this at FGM”

“Entrepreneurs – not all of them are good and not all of them are bad – do in this country create a place and create a positive movement, for careers, for growth, for personal growth, for values. I think the entrepreneurs in this country are great unsung heroes,” he added.

Flack also said that the opportunities he has had to progress have been nurtured by the US democratic system, spirit and way. “The more that I think about the world that we live in globally, the more respect and admiration I have for the system we have in the United States. The American Dream is not dead,” he declared.
He noted that some people in America talk the country down and say that the opportunities are no longer there, or that capitalism is bad, “but I think one of the principal reasons that I’m here is that, as a child, I heard about this thing called the American Dream.”

If you are willing to take the risk the system works, he said. “If you are a little lucky and are very good and very dedicated and have the right mixture of things, you can get it done in the United States. The path has been available to me because of the country I live in.”

“So we’re here and we are successful. We have 60 professionals that make a nice living, support their families and grow their lives and do their thing in the United States. I think that the biggest reason that we are here is that it allows for us to be here.”

FGM’s mission

Flack is aware that some steel industry participants have a residual fear of, or dislike, the influence that trading steel on futures and options markets may have on the physical supply of steel. He is also aware of the broader general concerns that some have about innovative ‘disruptive’ enterprises squeezing out smaller players in other business sectors. FGM has its roots in both the physical and financial worlds and Flack is keen to reassure them about his firm’s mission.

“We’re trying with this company to support the industry. The industry has been treating itself as a zero-sum game, but it’s not. With our leadership, help or involvement – whatever it is – we’re searching for all ships to rise on the tide. Everybody wins outcome,” he said. “And we want to be part of the solution. We are not disrupting the market. We are not a disruptor. We’re not looking to change it in a way where we are looking to vanquish all competitors. We are really trying to be the next evolutionary step in the way that the industry deals with risk and with the supply chain.”
He said that he stresses those points because he thinks that FGM’s mission has been misperceived by some in the steel trade and industry, when in fact he says that “It is to provide certainty – that’s what the business is here for. That is the model. That is everything we do, whether we’re supplying the physical steel or simply helping you hedge your risks out. Whatever entry point we have with a vendor or a customer, it’s all positive.”

He thinks there are still some people in the industry who are sceptical and scared. “I get that, but really it’s a movement for good, a force for good and a force for stability. And when you talk about business and business valuation, it sustains a business’s life.”

“Many are searching for stability and certainty and that is what this business is designed to do,” he stressed. “We just have that as a primary activity. I’m really becoming sensitive to this fear that is out there. It is not really founded in anything. It’s really ‘If I don’t understand something then I am going to fear it.’ And we have a lot of happy customers who come back again and again because we are seeing good results!”

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