Steel producers such as Charter Manufacturing Company Inc., which serve the automotive and construction industries, are bracing for an economic contradiction of terms in 2008.
On one hand, many predict a tough time for the traditional Big Three U.S. automakers and the new domestic makers such as Toyota, Nissan and Honda.
However, global demand for American steel is high, driven by the weak U.S. dollar.
Charter Manufacturing, headquartered in Mequon, has four operating units:
• Charter Steel, the largest unit, produces steel bars, rods and coiled wire from facilities in Saukville, Cleveland, Ohio, Fostoria, Ohio and Detroit.
• Charter Specialty Steel, a processor of stainless steel coils that operates in Fond du Lac.
• Charter Wire, based in Milwaukee’s Third Ward, produces cold-finished bar and cold-rolled steel profiles used in the auto, construction, defense, energy, lawn and garden and other industries.
• Milwaukee Wire Products, located on Milwaukee’s northwest side, is a tier 1 automotive supplier. Milwaukee Wire has an auto parts plant in the United Kingdom.
“Charter Steel is the bulk of what we do,” said John Mellowes, chairman and CEO of Charter Manufacturing. “The other companies are customers of Charter Steel.”
The domestic automotive industry, one of Charter’s main customers, doesn’t have a great year ahead, Mellowes said
“The automotive business will be flat at best in 2008,” Mellowes said.
Companies that make components for the auto industry may face tough markets in the coming year, he said.
“It’s very tough for a lot of our customers who are parts suppliers,” Mellowes said. “We worry about them.”
The result is an odd business climate.
“In the steel industry, we’re seeing prices go up now,” Mellowes said. “It’s counter-intuitive when you look at the automotive and construction industries.”
However, global demand for steel is still very robust, and the weak dollar makes American-made steel quite competitive, particularly in Asia.
“American steel prices, compared to Europe and even Asia, are low,” Mellowes said. “For the first time, we’re doing a little exporting to Germany and Brazil where our customers have operations.”
Over the past 20 years, Charter has averaged 11- to 12-percent annual revenue growth, Mellowes said. Last year, the company had an approximate 7 percent increase, largely because of slower orders from the auto industry.
The company projects 6- to 7-percent growth in 2008. A large part of its growth will come from Charter Steel’s Cleveland plant, which will increase production this year.
“The place is not run anywhere near capacity yet,” Mellowes said. “(This year) we will have the capability to produce more steel. It’s a matter of hiring and training people and fine-tuning equipment.”
Charter shipped about 880,000 tons of steel in 2007 and will ship about 950,000 tons in 2008. It projects shipping more than 1 million tons in 2009, largely because of increased capacity in Cleveland.
With that capacity, Charter Steel will be able to produce greater quantities of suspension springs and higher grades of steel – things that automotive producers want more of, Mellowes said.
That, in turn, may help the company gain market share with new domestic automakers, Mellowes said.
“It’s harder to sell to the transplants than it is to the Big Three,” he said. “To break into the keiretsu system takes longer.”
Charter also is trying to sell more steel to other markets.
“We have to broaden our scope to penetrate the construction market and other markets a little further,” Mellowes said. “I’m confident we can do that.”
The company’s new targeted customers are in the construction business, Mellowes said. Charter Steel is capable of producing high-tensile wire for pre-stressed concrete beams used in road and commercial construction.
Some construction equipment makers will struggle in 2008, but those who make road and bridge-building equipment show signs of growth, Mellowes said.
“One of the areas in particular that we think will be good is government projects for road construction,” he said.
One of Charter’s customers makes bolts and nuts for the bridge-building industry. The large number of ongoing or planned urban highway construction projects around the globe will drive growth for that customer and its competitors, Mellowes said.
“It looks like it’s got a positive future,” he said. “Go to Houston, and you’ll see 10 projects like the Marquette (Interchange) going on. Go to Dallas, and you’ll see the same thing. Go to Shanghai.”
Charter also sees opportunity in the aircraft industry.
“That’s one of the main reasons we got into the stainless industry – the aircraft industry uses a fair amount of it,” Mellowes said. “Aircraft is a relatively small, niche market. It’s tough to serve. Prices are high. The competition is much more rarified in the aircraft steel business.”
Even if Charter’s aircraft sales doubled, it would still be a small part of the company’s business. However, Mellowes believes there’s potential for long-term growth there.
“We’re looking to get more of a foothold,” he said. “It’s a very small segment of our business, but I think that 10 years from now it might be more important from a profit standpoint.”
The steel industry has consolidated a great deal in recent years. Most steel producers, aside from U.S. Steel, have been through bankruptcy, and most have been rolled up into groups of companies or sold off, Mellowes said.
That, in turn has also helped maintain higher steel prices, because there is less competition.
For future growth, Charter Manufacturing wants to grow its niche steel production in areas such as the airline industry, Mellowes said.
“We don’t want to compete in commodity steel if we don’t have to,” he said. “Ultimately, we’d like to build the business completely on niches.”
Charter is actively looking at potential acquisitions, Mellowes said. The company recently hired an employee to work on its strategic planning, which includes potential acquisitions.
“To continue to grow our steel business might be difficult without getting out of our niche,” Mellowes said. “We’re the biggest at what we do, selling to the customer base that we do. We might look for downstream opportunities.”
Charter Manufacturing Company Inc.
President and chairman: John Mellowes
Divisions: Charter Steel, Charter Specialty Steel, Charter Wire, Milwaukee Wire Products
Headquarters: Mequon
Industry: Manufacturer of steel bars, rods and coils and related products
Number of employees: About 1,500
Growth: About 7 percent in 2007
Web page: www.chartermfg.com
