From Hazardous Cargo Bulletin, January 2003
OVERVIEW: Some say the least evolved creatures are most likely to survive harsh conditions than others, their design being one of longevity rather than sophistication. Could this theory be applied to steel drums, which have changed little in the century since they appeared and are riding out the recession by sticking to what they do best?
"The greatest challenge in 2002 has been to remain profitable, while suffering a sudden 50 per cent increase in raw materials prices," says president and chief executive officer at the Chicago-based Skolnik Industries, Howard Skolnik. "Of all the new product developments and changes, this single factor affected every department at Skolnik as we had to streamline our operation for maximum efficiencies."
Echoing Skolnik's comments, Berenfield Containers vice-president Greg Berenfield tells a similar story. "The US steel market has been volatile through 2002 with the implementation of Section 201 steel tariffs," he says. "By working closely with our suppliers, we have been fortunate in maintaining a relatively constant stream of supply, but the pricing volatility is of key concern to us and our customers." The Mason-based company has had no choice but to pass a portion of the price rise on to customers. "We have made our case to the customer base concerning the necessity of the price increases, which they understand," Berenfield explains.
"The steel tariffs are by far the largest and most influential factors affecting the market," agrees Trilla Steel Drum Corporation vice-president, marketing, James Heffernan. "When the cost of your prime material – 70 per cent or more of the manufacturing costs – goes up over 60 per cent in less than five months, it has a devastating effect." Taking an active role in opposing the tariffs, company president Lester Trilla has left his head offices in Chicago to rally steel drum industry leaders, as well as some from other steel-using industries, to petition legislatures and the national media in an effort to raise awareness of the issue. "For the most part, this exerted effort has fallen on deaf ears, but we look to realise some sensibility into steel pricing in early 2003."
Taking a quieter and more introspective approach to the negative effects of the tariffs, Skolnik has focused on maximising efficiency within the company. Slimming down internal operations has proved to be no easy task at Skolnik, where company pride rides on how fat the finished metal product's construction is. "Whereas most drum manufacturers boast about their units per hour, we take our pride from the fact that we have the only drum manufacturing line in the world that is able to produce over 400 combinations of drum with varying diameters, heights and metal thickness," explains Skolnik. "If we boast, it is about the fact that in one day, we make an average of 10 to 15 different drum types. Thus, margins to us are very important and the steel tariffs were a serious issue that we had to address quickly."
The current economic recession has further impacted the US steel drum industry, with international industrial packaging manufacturer Greif Bros Corporation forecasting weak conditions continuing into 2003. "The economic outlook for fiscal 2003 remains uncertain and the recovery in North America tentative," says director, corporate communications Krista Heins. "The company anticipates a sluggish start, followed by improvement later in the year."
Berenfield reports a 30 per cent reduction in orders from individual customers. "Fortunately, this was somewhat offset by the addition of new customers during 2002," Berenfield continues. "We are guardedly optimistic that business activity will pick up for 2003." The company has seen a slight shift back to drums as customers examine the cost structure of larger packagings options. Alongside this, the company is vigorously promoting the economic shipping benefits of the steel drum. The company joined the International Packaging Network (IPN) earlier this year and is now able to provide drums and other containment solutions on a global basis.
Battling through the adverse economic conditions, Trilla has managed to obtain some large accounts while maintaining existing accounts. "We exceeded both our 2001 sales as well as our 2002 sales forecast," says Heffernan. "We expect this trend to continue." Citing overcapacity as the biggest challenge to US steel drum manufacturing, Heffernan is adamant that consolidation must take place, with well managed, financially strong companies taking the lead.
Trilla plans to be "very aggressive" in 2003. "We are in a good position financially to withstand almost any economic condition and to offer any new steel drum user the kind of quality and service that is expected as a routine condition of sale in the marketplace," says Heffernan. "Adjusting to the escalation and de-escalation in the price of steel and in the marketplace will be paramount in our industry for the near term."
Conversely, Skolnik reports increased activity among US customers, while European, African and South American markets are quieter. Security issues are influencing packaging selection post-September 11 and customers are starting to see added value in the durability and strength of Skolnik's products.
"Our customers are willing to add some peace of mind to their packaging," says Skolnik. "For example, offering greater metal thicknesses adds to the security of the drum while in transit. Greater thickness also makes the drum more valuable to a reconditioner when emptied." The company has also capitalised on the success of its 'whack-no-more' drum, which features a quick lever ring closure as it allows easy access and re-access to open-head drums.
Interest in security has also spurred Skolnik on to research container tracking with barcodes and radio frequency identification (RFID). "Container tracking is becoming a hot ticket item due to the need for secure asset status tracking," he says. "We hope to have an array of tracking options available this year." He is confident that the company will have a successful 2003 as new products and equipment and the company's reputation of being a highly skilled manufacturer will help it pursue new opportunities. "Given the unusual circumstances of global events, we expect new, exciting and challenging opportunities to be presented."
Further afield, Asia is presenting an attractive option for global steel drum manufacturers and manufacturing alliances. "In emerging markets, we are planning for growth opportunities, specifically in Russia and China," says Heins. Next month, Greif is opening a new manufacturing facility in Taicang, China.
"Asian markets are growing at a rapid level," agrees Marc Jaeger, Gallay's deputy general manager and Drumnet spokesman. "China has become an important market where Drumnet, through its regional members, already has four manufacturing facilities." The trade consortium of steel drum producers worldwide has also extended activities into Brasil.
"In Europe, a rationalisation process is going on with the closure of a few more facilities in Italy, France and Germany, while we concentrate on well located, well equipped manufacturing facilities," Jaeger continues. Gallay's keg factory in Lyon has recently expanded in order to supply French, German, Italian, Spanish and Benelux markets. Drumnet has gained substantial business in the lubricant market after successful bidding processes for steel drums and kegs.
In Europe, smaller packagings are winning markets in dangerous goods transport, as German company Huber testifies. Its UN approved canisters, ranging in size from 250 ml to 30 litres, have been designed to appeal to the hazardous cargo market, where steel packagings present an economical containment option and are, some industry spokespeople maintain, easier to recycle or dispose of.
Market conditions are very differentiated, he reports, between countries. "Generally speaking, the Benelux and German markets have been stable, while UK, Italy and France were weakening in 2002," says Jaeger. "Substantial steel price increases were affecting our margins as recovery through weak market conditions was not easy." The cost of raw materials is still the main issue for the industry as it represents more than 50 per cent of the product cost.
"Concentration among suppliers, which is taking place in Europe, US and Japan, is reducing the number of sources of steel, and will affect our purchasing power in the long term," Jaeger expects. "Substantial efforts are being made to evaluate new potential suppliers and start purchasing from them."
Jaeger is confident that Drumnet's statistics for 2002 will show some stability, globally, in turnover, quantities and profitability. 2003 is expected to be more dynamic in many areas, he says. "The challenges for our industry will be to resist and where possible to gain market shares on our main competitors such as plastic drums and composite intermediate bulk containers (IBCs). We believe the cost of economic development for plastic packagings will affect their growth soon, as it will show that the cost may be as much as four times higher than the cost for the use of steel industrial packagings. We believe it will probably result in the transfer from plastic to steel."
In Japan, where Greif closed its drum manufacturing operations last year, Drumnet member Nippon Steel Drum (NSD) reports that the economic climate is still presenting companies with a struggle. Customers in the petroleum and chemical industries have undergone major rationalisation and restructuring to counter the long-lasting economic depression.
Steel prices rose this past October and the merger in April of Kawasaki Container and Kokan Drum, which represented respectively the second and third largest companies in the new steel drum market, to form new company JFE Container Co has been challenging for NSD. The new company is expected to have the largest share of the new steel drum market.
"To cope with severe market conditions, NSD has implemented a number of cost-reduction and quality-enhancing measures," says Michio Utsumi, manager, overseas affairs. "The introduction of laboursaving equipment, installation of a seaming machine and external coating machine - both of which are of updated vertical type - and a leakproofness tester in all its four plants and the improvement of inner-lining equipment productivity are all aiming simultaneously at actively improving quality and supplying higher-quality steel drums that meet our customers' satisfaction."
With new president Tadashi Imai, who succeeded Yoshihide Adachi earlier this year, NSD is continuing to add value to its products. Production and sales control systems were renewed earlier this year, drum transport systems have been rationalised and the company has been accredited with ISO14001 Environmental Management Systems following existing ISO9001 Quality Management Certification.
Shipment of new steel drums in Japan rose seven per cent between April and September 2002, to 6.3m. Utsumi notes that increases in chemical industry shipments and the paint industry in particular, which account for about 80 per cent of the new steel drum market, were higher. In this time, NSD sold 2.4m steel drums, an increase of almost 11 per cent. "In NSD's case, shipments for the chemical industry showed an increase of almost 16 per cent and there was a 6.7 per cent increase for the paint industry," he explains. "These are attributed to the increase in exports to South East Asian countries in the chemical and paint industries and partial shifts in general from reconditioned steel drums to new steel drums." However, sales values rose by just under four per cent as a drop in the sales price could not be helped, he adds.
"Despite the drop in sales price, profit after depreciation and interest increased by 35.7 per cent from the corresponding half of fiscal 2001, thanks to lower steel sheet prices and cost-reducing efforts," elaborates Utsumi. "Since depression still continues to exist throughout the rest of fiscal 2002, and since the high level of export as experienced in the first half of fiscal 2002 can not be expected again, it is logical to assume that the shipment of steel drums in Japan throughout the entire fiscal 2002 will show only four per cent increase as compared to fiscal 2001. NSD anticipates lower production in the second half when drum prices rise to cover the steel price hike, and is of primary concern to the company."
For the year ahead, NSD expects that drum shipments throughout Japan will remain at the same levels as 2002 and that, correspondingly, the company's ordinary profit will stay in line with this. Planning the development of new products to meet customer needs and further cooperation with drum reconditioning companies for 2003, Utsumi points out that "steel drum reuse systems are valuable assets of the entire steel drum industry and the cooperation of new steel drum manufacturers with reconditioning companies is vital for the system maintenance and improvement".