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Tapping into upside potential

Aug 03, 2017 | 08:00 PM | Bette Kovach


The year 2016 served up mixed results for the 60 respondents to AMM’s annual service center survey. And the jagged nature of the events that transpired during those twelve months were echoed in the assessments shared by service center executives of the year that just was.

The Association of Steel Distributors (ASD) described 2016 as “a very tumultuous market” for pricing and demand although the overall results were positive, Andrew Gross, ASD’s president who is also president and chief executive officer of Alliance Steel, Bedford Park, Ill, noted.


“Finally we had a year in which the service center industry didn’t get crushed,” Gross said. “Most people made good money.”

The service center sector started the year “on a very rough note” amid plummeting oil and gas prices followed by economic uncertainty from the then political election season, M. Robert Weidner III, president and chief executive officer of the Metal Service Center Institute (MSCI) recalled. That weakness in the service center sector was reflected in MSCI shipment data, which indicated shipments were down 6.3 percent in 2016 vs. 2015. 

“Last year was not a great year for manufacturing and the industrial metals supply chain,” Weidner said. “Many businesses were making the minimum amount of investments in terms of capital budgets.”

But, that could change in 2017. While the market continues its slow recovery, investment in equipment remains high with most respondents to AMM’s 2017 service center survey reporting spending on their facilities over the past year to enhance quality and productivity and to enter new markets or strengthen their existing positions.


Roughly half (28 out of 60) of survey participants indicated they had invested to upgrade their facilities over the past three years. 

Going forward, the number of service centers poised to invest in their facilities over the next three years is robust with 40 of the 60 respondents indicating plans to upgrade. (See bar chart on page 23 to identify factors driving these planned investments.

Although a few companies realized gains in year-over-year revenue, most stayed even with a handful reporting lower revenue than that logged in the previous year. Some reported consecutive declines in revenue over the past two years since the strong market experienced in 2014 into early 2015. 

While those companies ranking in the top tier or first 15 of the service center organizations listed largely held their positions, few notched year-over-year gains in revenue.

Samuel, Son & Co. leapfrogged over MRC Global to capture the No. 2 position behind Reliance Steel & Aluminum Co., the largest firm servicing North America for the past several years. 



When reporting Reliance’s 2016 yearend results, Gregg Mollins, chairman, acknowledged that the macro environment “although somewhat improved from 2015, continued to be challenging, with overall lower demand levels and price volatility resulting in a sales decline . . . due mostly to lower metal pricing.”

In 2016, MRC Global sold its oil country tubular goods (OCTG) business, resulting in a 29-percent drop in sales.

Looking ahead, many steel industry participants and observers see 2017 as a year with greater upside potential as a result of the election of President Donald Trump, who campaigned on issues important to the nation’s manufacturing base. 

“Euphoric” is the word the ASD’s Gross used to describe the reaction of service centers when hearing the news of Trump’s election. “There was a sense that the steel industry would rise again,” he said,

The MSCI’s Weidner is also upbeat when it comes to the current administration’s impact on the fortunes of the nation’s service centers.  “I am more optimistic today than I have been in a long time, he said.  “The mood in the industrial heartland is clearly much more positive and the voices of many are being heard.”

Events in Washington are hardly the only key variables to keep an eye on in the coming months. Some are internal to the sector and individual companies participating in it.


Service centers got caught with excess inventory in 2015 and needed to lean down in 2016, ASD’s Gross observed. “Make sure you can sell what you have,” he advised going forward.

Other influencing factors are public and apply across the board. One pivotal issue of national importance involves selecting the right trading company for foreign-made products to guard against getting swept up in trade cases that are expected to multiply under the Trump administration. 

Other external factors of importance to service centers range from access to capital to help fuel upgrades and the sustainability of the energy sector’s resurgence to the impact of steel imports on steel pricing and the current administration’s efforts to jump start infrastructure spending. 

“We need shovel-ready infrastructure projects, not just political commentary,” MSCI’s Weidner emphasized, noting that only a small percentage of the 2008 stimulus spending actually went into infrastructure. 

On the merger and acquisition (M&A) front, 11 survey respondents indicated they anticipate growing by acquisition alone over the next three years while an additional seven said they expect to make an acquisition as well as expanding existing facilities and/or adding a greenfield plant. 

The time for additional M&A activity in and around the steel industry may well be ripe according to a panel of financial services executives participating at a Steel Survival Strategies XXXII conference in New York City in late June.

“With better market conditions in 2017, it is easier for steel companies to access bond and institutional loan markets,” Andy Pappas, BMO Harris Bank managing director, pointed out.

His sentiments were echoed by Vince Pappalardo, managing director of Brown Gibbons Lang & Co., who said that companies are looking for inorganic ways to grow.  “The service center is kind of invading the fabrication industry . . . They are moving downstream, meaning they are looking for higher margins and more processing,” Pappalardo observed.



 

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