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One of the most innovative Enron steel products is inventory management. About half of flat-rolled products are produced by mills and go directly to end-users. The other half goes to service centers and processors, which turn the steel into a customized product for end-users and original equipment manufacturers. These wholesale buyers and sellers of steel are the customers Enron's inventory services product is designed to help.
Service centers and processors need steel on hand, which ties up a lot of their working capital in inventory. Enron can finance inventory to help lower the cost of carrying it; additionally, Enron can deliver the physical inventory product on a just-in-time delivery basis. As a result, wholesalers enhance liquidity by reducing the amount of working capital they have tied up in their inventory. Also, Enron helps wholesalers deal with another difficult problem: they may acquire inventory at a certain price, but then the market price falls before they sell it. Enron can manage this directional price risk for the service centers and processors, which hold so much of the inventory burden of the industry.
Example: Huntco Steel
Enron is in the steel business to help companies like Huntco Steel, a U.S. steel processor and wholesaler. The companies signed an agreement on April 30 in which Enron agreed to provide price risk management, financing and other inventory procurement services. As part of the transaction, Enron gains access to Huntco's national network of steel distribution centers, which it will use as trading and distribution hubs, and acquires Huntco's cold-rolling and certain coil-pickling operations (which process the type of steel favored by automobile makers) in Blytheville, Arkansas.
Steel prices are at a 20-year low, and steel wholesalers like Huntco are caught in a pricing crosshair: they're obliged to have lots of steel on hand so they can quickly deliver steel when customers need it, but they often sell it below the acquiring price. For example, a wholesaler might pay $275 a ton and be forced to sell it at $250 if market prices drop.
Under the terms of a 15-year agreement, Enron will provide inventory price risk management services and will eventually provide more than 600,000 tons per year of hot-rolled, cold-rolled and galvanized steel products to Huntco to minimize Huntco's price risk and cut its inventory costs. Huntco "enhances its liquidity by reducing the amount of working capital tied up in its inventory," says Tim Battaglia, vice president and head of steel origination.
"Price volatility has impaired our earnings and liquidity," says Robert Marischen, president and CEO of Huntco. "Enron has offered us creative and practical solutions for overcoming these impediments to our success. This is a new beginning for Huntco Steel."
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