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Distributors slim down ahead of the new year

Oct 31, 2013 | 08:00 PM | Gregory DL Morris

Tags  service centers, service center inventories, David H. Hannah, Reliance Steel & Aluminum, Metals USA, Collins Pipe, Biran Tuohey, Scott Dolan A.M. Castle

Service centers have struggled this year in most end-use markets with price or volume--sometimes both--and the effects have a direct impact on steelmakers as well.

Three of the largest distributors have responded in different ways. Los Angeles-based Reliance Steel & Aluminum Co. has had a relatively quiet year since completing its purchase of Metals USA Holdings Corp. in April, its biggest acquisition to date; East Windsor, Conn.-based Collins Pipe & Supply Co. Inc. took a major geographic and market step in acquiring Tulsa, Okla.-based Apex Remington Co.’s process pipe facility at Marcus Hook, Pa.; while Oak Brook, Ill.-based A.M. Castle & Co. has largely completed its rationalization of several operating sites and the reorganization of its sales structure to eliminate silos by market.

While the distributors differed greatly in their response to the recent headwinds of a slow and uneven recovery in the U.S. economy, one theme resonates through their initiatives: they are not interested in hammering mills for the last penny per pound. Quite the contrary, they are cultivating suppliers to improve logistics.

“Metals USA has been business as usual since day one,” Reliance Steel & Aluminum chairman and chief executive officer David H. Hannah said. “From an integration standpoint there just was not a lot of overlap, so there was hardly any of the rationalization that you might see in another combination of two such big companies. There was not a lot of overlap in the geographies of the two companies, and where there was some, there was not much overlap in product lines, so we did not close or combine facilities. Even in the few cases where there was direct competition between a Metals USA facility and a previously existing Reliance facility, we are used to that. We are not bothered if there is some apparent competition between our own operations. We don’t draw lines on sales territories or product lines.”

The biggest part of the integration was personnel and personality, which has gone “fantastically well,” Hannah said. “Our president (and chief operating officer) Gregg Mollins ran meetings with executives and business-unit managers from both organizations. There has been so much camaraderie and willingness to help, regardless of whether people are legacy Reliance or legacy Metals. People are learning about their new colleagues and about the capabilities of their new sister operations.”

That said, there are some synergies that have come to the fore. “We have really focused on inventory--sizes, types, grades, as well as customers and geography. But mostly just amount,” Hannah said. “In the first two and a half months of the combination, running through the end of June, we reduced inventory at legacy Metals operations by $66 million.”

Hannah also noted that rationalization of facilities can and does happen, but Reliance prefers to let the market make the decision rather than impose it from above. “As long as a facility can deliver the returns that we expect, we want them to continue. The nature of our business is very local, regional at best. Large locations are harder to manage. Independent operations are more nimble. Customers call today and want their metal tomorrow.”

There are occasions when the market does give a clear signal. “We recently closed a facility near San Francisco Bay because their customers just never came back after the recession,” Hannah said. “We folded those remaining operations in with another facility nearby. We did the same thing last year with an operation in Portland, Ore. We will close facilities, but that will be driven by the customers.”

Overall, Hannah said service center business is “just OK, not terrific,” adding that the pricing environment has been challenging in all product lines. “Internally, we are very pleased with the way our operations have been able to hold the line on price this year. We want to compete on service, not price,” he said.

Hannah said that Reliance is behind in most metrics from the same point last year, but “that is probably not as bad as it might seem, especially from a demand perspective. But price is a really difficult headwind. We are a very diversified shop, even more so now with Metals USA, and we rarely see a situation where price is down across all lines and all locations.”

Hannah noted that sales into the energy sector “are still very strong, just not as strong as last year. If in 2011-12 we were going 100 mph, now we are going 70 mph. That is still clipping along, but year on year not as good.”

The same is true in aerospace, which is among the best-performing sectors this year but is behind last year’s numbers. Farm equipment took a beating because of the droughts, but has been fair this year, while non-mining heavy equipment also is doing only fair, as is nonresidential construction.

At first glance it might seem that the combination would give the new, bigger Reliance more pricing leverage with mills, but Hannah said that was not expected. “We were both already big buyers, and in many cases from the same mills,” he said. “There was just not a lot of buy-side opportunity available. As separate entities, we and Metals USA were already getting the best available prices.”

Hannah said the merger’s big upstream advantage is better informal relations with mills. “When metal gets tight, our size and our relationship with the mills will play out, not on pricing but on security of supply. That will be a huge benefit to our customers. When we treat our suppliers with loyalty, they will enable us to treat our customers with loyalty.”

Collins Pipe acquired Apex Remington’s Marcus Hook pipe mill south of Philadelphia in July to expand into the oil and gas market. “We changed the sign out front, and the phone system and payroll, and that is it,” Collins Pipe president Brian Tuohey said. “We were primarily a supplier of valves and fittings, and also pipe that connected to our equipment. This is a logical extension for us not only in product line, but also geography. We are strong in New England, so this represents the next step in adding territory. The Apex folks contacted us first about the Marcus Hook facility, and we have always been interested in synergistic, logical extensions of our territory.”

It also puts Collins Pipe into the hub of a booming pipe and equipment center. Driven by the same bonanza in unconventional oil and gas development that is fueling demand for drill string and oil country tubular goods, the entire plumbing of the East Coast refining and processing complex, centered in and around Philadelphia, is being changed.

The two big refineries in Philadelphia are being reconfigured to take deliveries of light, sweet crude from the Bakken formation in and around North Dakota. Most of the pipelines in the United States run north to south, so the only way to get the mid-continent oil to the East Coast is by rail, a booming business in itself.

New facilities for receiving trains, typically 100 cars long, and transloading the crude to barges or local networks for final delivery means huge demand for pipe, valves, pumps, manifolds and related equipment. One small refinery adjacent to the Marcus Hook facility was acquired by Atlanta-based Delta Air Lines Inc. and is being reconfigured to make primarily jet fuel. Another small refinery is being re­plumbed to be a natural-gas liquid export terminal. There also are plans to bring natural gas and crude oil from the Marcellus shale in western Pennsylvania east, rather than through pipelines that run south and west.

“It is a real metamorphosis in the refining and chemicals industry, and the Marcus Hook mill puts us in the middle of all that,” Tuohey said. “It has also been a benefit to the other branches of Collins Pipe. Marcus Hook is primarily a carbon-steel shop, and we are using that expertise to develop skills at our other locations. Before this transaction, we were mostly an engineered products company. We are making use of the Marcus Hook relationships as connections to our other products.”

There is no definite time line for all the ebb and flow of expertise and relationships, but Tuohey said the first priority was to integrate the Marcus Hook facility into the Collins Pipe system and then diffuse the carbon steel knowledge through the other Collins operations. Finally, engineered products business could flow into Marcus Hook.

However business flows, sales have been looking good for Collins. “Not counting Marcus Hook, our gross sales are up 16 percent year to date and gross profits are up 20 percent,” Tuohey said. “The company is growing nicely even if the market overall is only OK, not booming. We had an acquisition last year that is doing well, and our growth in these market conditions is being driven by new locations. Same-store sales are flat, maybe even a little down.”

Tuohey said he sits on several company boards and does a good deal of independent research. “It is just a soft year,” he said. Under such conditions, Collins Pipe might be tempted to focus on moving tons, but Tuohey said quite the contrary. “We don’t need every single pipe and valve order. Our goal is to sell every piece of pipe and equipment on which we can make a decent return. We can be a little selective.”

With similar savvy, Collins has retained and reinforced Marcus Hook’s previous facility supplier relationships. “Apex was Bear Tubular, and was a master distributor for pipe,” Tuohey said. “They had strong relationships and we are continuing those. We are very line loyal and manufacturer loyal.”

A.M. Castle is going through a major overhaul, having consolidated five locations and recast its corporate structure. “We have completed the nuts and bolts of the restructuring,” chief executive officer Scott Dolan said. “While we had to shut five facilities and we had to lay off about 10 percent of our work force, we did not get out of any markets. The biggest development was reorganizing our sales force to be territorial rather than by end-use market. We now have one commercial leader and all sales staff can sell all products to all customers.”

Dolan said that under the previous structure Castle might have had three different sales managers working in the same state: one for aerospace, one for oil and gas, and one for industrial customers. Now those three will have territories within the state, and call on all customers. “Our people spend less time driving, more time with customers,” he said. “Our larger customers often go across the vertical market segments, so this enables us to be more efficient and also to build relationships with strategic customers.”

The five locations that were consolidated were in the Los Angeles area, where there was another facility just 10 miles away; in Kent, Wash., which is now being served out of Portland, Ore., and northern California; in Kansas City, Mo., now being served out of Chicago, Dallas and Wichita, Kan.; in Connecticut, now being served out of other East Coast facilities; and in Letchworth, England, that is being served out of other U.K. facilities.

Dolan detailed an immediate bump Castle has received from inventory reductions. “We expect to free about $125 million in cash from that, of which we have already realized about 80 percent. The commercial structure transformation should be completed by the end of the year, while the supply chain and logistics restructuring benefits will be seen starting next year.”

He said that the point of supply chain optimization is “not just go beat up on the vendors,” but rather to work with them, operations managers and customers to make a more efficient system overall, yielding benefits for everyone. “We have good relations with the mills, and that is not going to change. They will see a more sophisticated, robust supply chain management operation out of us, and more strategic buying. But we are really emphasizing a complete supply service that involves our mills and our customers. Price is a part of that, but service, quality and reliability are just as important.”

Dolan is sanguine that Castle’s retool will stand the company in good stead during the current market challenges, and put it in a good position to grow when demand picks up. “Pricing has held fair for us across the business this year, but volumes are definitely down,” he said. “Oil and gas are OK, but nothing like last year. General industrial tends to lag the purchasing managers’ index, which has been trending up in recent months, so that is positive for next year. Mining is not very good, but aerospace is steady.”

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