The question of diversification is a vital one for distributors in North America, even as steel continues to dominate most service centers business. This years AMM survey of the top revenue generators (see page 24) shows that many distributors are still buying, fabricating and selling a diverse group of metals.
About half of the service centers report dealing in all six of the categories the survey tracks: aluminum, carbon flat steel, carbon plate, steel bar, tubing and structurals, stainless steel and copper and brass. About 24 percent said they work exclusively with only one product category, with the rest handling between two and six categories.
Of the top 50 companies, only nine rely on aluminum for 15 percent or more of their revenue, while only six companies rely on similar levels of stainless steel. Slightly more than two-thirds of service centers polled this summer said that aluminum, stainless steel, and copper and brass accounted for at least some of their business. The vast majority of those that do sell aluminum, stainless steel, and copper and brass said they rely on each of those metals for less than 15 percent of their overall revenue.
Clearly, strong diversificationÑan approach practiced by the biggest companiesÑis contributing something substantial to the bottom line, as the bigger distributors recognize and are able to implement.
But diversity does not end at product lines. Several distributors are using a wide array of upgrade strategies. All but seven of the top 50 revenue generators said they have made an upgrade during the past year.
Business in 2014 generally has been reflecting the benefits of the diversification of products and upgrades, according to the latest Metals Service Center Institute (MSCI) data.
U.S. service centers steel shipments totaled 3.69 million tons in June, down 1.7 percent from 3.75 million tons in May but up 10.2 percent from 3.35 million tons in June 2013, according to MSCI data.
Increased business has meant an increase in steel prices, at least among select products, such as flat-rolled carbon steel, which saw prices rise in June.
Those increases werent designed to stick. They were made to take advantage of supply constraints. So now prices have peaked and theyre settling back down to where they belong, a Mid-Atlantic service center source said.
Some market sources cautioned that betting on the summer doldrums to drive down prices could be a risky strategy, especially since the summer of 2013 proved to be busier than expected. With inventories already lean, any uptick in business activity could see lead times shoot out and prices shoot up, they said.
Its about keeping inventories low and turns high these days, so if the herd doesnt move (prices) fall and if they doÑbangÑprices go up, a Midwest service center source said.
Lean stocks come as the procurement model in the United States has changed dramatically, with service centers focusing on turning inventory and shying away from buying speculative tons, given pricing volatility and tight credit markets, Mark D. Millett, president and chief executive officer of Fort Wayne, Ind.-based Steel Dynamics Inc., said this summer. Short mill lead times have generally facilitated that model over the past four to five years, he added.
Meanwhile, robust demand from stainless steel end markets drove distributor shipments higher. Distributors have noted increased orders in a robust North American stainless market, with most domestic stainless mills capitalizing on lead times that extend well through the summer.
But not all products have been on the upswing. Reflecting the somewhat subdued outlook, U.S. distributors shipments of carbon pipe and tubing have had some rough months so far this year, according to MSCI data.
But here is where product diversity can help smooth out volatility, some sources said. The dynamics of supply and demand have made the copper and brass service center space ripe for consolidation, according to executives at Reliance Steel & Aluminum Co. and ThyssenKrupp Materials NA Inc.
We have seen a fair amount of consolidation already on the mill side in this market, and if you look at the dynamics of where its happening in other metalsÑlike carbon, aluminum and stainlessÑit makes sense for consolidation to happen in red metals, both on the service center side and the mill side, said William K. Sales Jr., senior vice president of operations at Los Angeles-based Reliance.
Midsize centers are most likely to benefit from consolidation, he said. On one side you have the big companies, and then you have the small, niche companies. The ones in the middle are likely to feel the squeeze at times, he said, adding that mergers also can be a good option for family owned centers.
The demand side of the market also is likely to encourage consolidation, said David S. Buhl, vice president at Southfield, Mich.-based ThyssenKrupp Materials copper and brass sales division. The size of the market is such that there just isnt enough space for a lot of players, he said. In some cases, the market is half of what it was and this will definitely force some consolidation. (For example) on the plumbing side of the business, some of the screw machine players feeding some of the bigger players just dont exist anymore.
Increasing demands on service centers also could make it harder for smaller players to participate.
The demands (on service centers) are changing every day. You have to raise your game a lot, Buhl said. In the energy business, for example, some of the detail that is required of service centers is amazing, and we try to differentiate ourselves by providing these services.