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Distributors expecting the same old, same old in 2014

Dec 31, 2013 | 08:00 PM | Corinna Petry

Tags  North American service centers, Alan Wilkinson, Marmon Distribution Services Inc., Michael D. Siegal, Olympic Steel Inc., residential construction, A.M. Castle, Scott J. Dolan Corinna Petry

North American service center operators generally expect 2014 metal demand to mirror that of last year, with perhaps a slight increase matching any growth in gross domestic product (GDP).

As a rule, they will buy material to match their incoming orders and not take any inordinate risks with competitively priced domestic or foreign offers.

“We poll our top accounts monthly. Sixty percent of them project their business will be up to steady in the first quarter, and that makes us somewhat optimistic through the first half,” said Alan Wilkinson, president of Butler, Pa.-based Marmon Distribution Services Inc., which carries primarily carbon and alloy pipe and tube, and specialty bar products. “Canada is a little flat. (Marmon branches there have) suffered from low material cost and increased competition. Canada’s energy market has been good, but mining and manufacturing in Quebec and Ontario are less busy.”

Companywide, “we have seen improvements in bookings and we are receiving good forecasts from some of our larger customers. Will things really turn around? Probably not, but we are well diversified,” Wilkinson said.

“Customers by and large are neither optimistic nor pessimistic. They are upset by price increases. They are mildly optimistic about volume opportunities,” Michael D. Siegal, chairman and chief executive officer of Olympic Steel Inc., Highland Hills, Ohio, said. “The surprise of 2013 was automotive. 2014 looks comparable” in terms of steel demand from that industry, especially as more suppliers are reshoring production to U.S. factories. Residential construction has improved and nonresidential activity is “mildly better, but it has continued to lag,” he said.

On mining equipment, “Caterpillar (Inc.) speaks pretty loudly about its concerns in global mining,” and the view is negative for 2014, Siegal said. “On infrastructure, whether it’s logging or general construction, we don’t have a great deal of optimism.”

Across most markets, he worries that price increases “may forestall” some consuming industries from some opportunities.

As for Olympic’s inventory management strategy, “we have stated objectives about turnover, and we will stay within that discipline,” Siegal said.

Oak Brook, Ill.-based A.M. Castle & Co., a distributor of carbon and alloy plate, bar and tubing, aluminum and nickel products, also is managing inventories in a tighter range, with a goal of getting and keeping them to 100 days sales of inventory (DSI).

“Our strategy is to get our DSI to be more competitive with the industry. Our DSI (is) in the 180 range, and best in class is closer to 100. ... With the DSI improvement, that doesn’t mean you’re not growing your business,” A.M. Castle president and chief executive officer Scott J. Dolan said. “We’re trying to get the right investment in the right place at the right time to drive turns, (requiring) a lot of coordination between supply chain and commercial teams.”

As for Castle’s outlook, the strength of the Institute for Supply Management’s purchasing managers’ index (PMI) during the second half of 2013 portends demand growth for Castle six to 12 months forward. Many of Castle’s customers have sales and production cycles that lag certain other industries, like automotive, Dolan said, but if the positive PMI trend continues “we’ll see a pickup (in orders) sometime in the first quarter and, at the latest, second quarter.”

The company is seeing stronger first-quarter bookings from customers in the oil and gas market. In addition, “we are seeing a trend where larger (energy producers) are trying to be more predicable with their needs and get out of the big ups and downs of demand,” he said. “It has to do with centralizing (planning) and getting more control over their spend. A lot of companies have grown through acquisition and now they’re getting (the acquired assets) streamlined.” Drill rig counts are rather static, “but on the existing rigs they’re getting more down-hole completion business, and horizontal directional drilling leads well into our tube business.”

Although crude oil prices remain fairly strong, natural gas has been more volatile. When the price moves above $4 per million British thermal unit (BTU), “that changes the landscape as well,” Dolan said.

Although commercial aerospace production has grown, buoyed by a strong backlog, airframe builders overbought heat-treated aluminum and “the inventory overhang has hindered our ability to take advantage of strong demand. But it will start to burn off, which will help us,” Dolan said.

Karla Lewis, executive vice president and chief financial officer of Reliance Steel & Aluminum Co., agreed with that assessment. She expects 2014 demand from the aerospace sector to improve over last year, but the pace “depends on when (original equipment manufacturers) get build rates going. The backlogs are there, so that’s encouraging.”

The energy market has remained healthy for Los Angeles-based Reliance, she said. The peaks of 2011 and early 2012 were not met in 2013, but should improve again in 2014.

Truck trailer manufacturing will probably remain steady, “depending on who the customers are.”

For nonresidential construction, “look at the numbers out there: 2013 was down a little from 2012, but we have seen steady demand,” Lewis said. “More inquiries have turned into orders. We see strength in the Northeast and in Silicon Valley, and we expect that to improve further in 2014. Positive indicators include (the Architectural Billings Index), and the housing market itself needs the support of infrastructure and public facilities, so we are anticipating a pickup there. We think that things are trending positively, but we remain cautious. ... In pricing (of metal products), we think there will be downward pressure.”

Dolan said that in the first part of 2014 material prices outside of flat-rolled steel will likely stay “consistently soft because end markets are not strong enough to constrict inventory or push out lead times.” If general industrial business grows, however, it could change those dynamics for the better.

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