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Why do-it-yourself distribution won’t fly . . . or die

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Despite one recent notable exception, domestic steelmakers haven't given much reason for industry to expect they're looking to move into the service center business. Still, it's a topic that just won't go away, and few mill executives are willing to shut the door on a strategy that has proved more popular in Europe than in the United States.

"We're not taking a position on this," said Keith Busse, chairman and chief executive officer of Fort Wayne, Ind.-based Steel Dynamics Inc. (SDI). Busse, who is also chairman of the American Iron and Steel Institute, noted that "there are still some (service center) executives who will tell you the European model isn't correct for North America." But he doesn't believe they've made a clear case why it won't work.

When the topic of domestic mills owning service centers comes up, the discussion invariably turns to U.S. Steel Corp., Pittsburgh. In 2003, after losing more than $100 million in less than two years, the company shut down its Straightline Source division, a "technology enabled" operation described as a "virtual" distribution unit that—despite U.S. Steel's denials—a number of service centers viewed as competition.

Several years before that, U.S. Steel sold off its former U.S. Steel Supply distribution arm. Even today, some service center veterans with long memories point to U.S. Steel Supply as the best example of how a mill-owned service center shouldn't be run, maintaining that in many cases it operated not as a profit center but rather as a vehicle to move the parent mill's output, disrupting the markets of independent distributors.

One of the most recent public comments on U.S. Steel's view toward service center investments came during an investors' telephone conference call in April last year, when John Surma, chairman and chief executive officer, was asked for his views on possible combinations of mills and distributors. Surma replied that U.S. Steel didn't want to stray far from its "core business," and there's been no indication since then that he's changed his mind. Most outsiders see U.S. Steel's expansion efforts focused on such areas as tubular production, characterized by its $2.1-billion acquisition of Lone Star Technologies Inc., Dallas, in 2007.

One example of service center ownership outside the steel industry shows why it still holds some appeal. Pittsburgh-based titanium producer RTI International Metals Inc. brought its distribution in-house several years ago and hasn't looked back. Today it has six distribution locations in North America and two in Europe.

"It's part of our strategy," said Michael C. Wellham, RTI's president and chief operating officer. "It gets us closer to the customers and helps us diversify our business model."

Moreover, the service centers also "support the growth" in RTI's mill product business, Wellham said, not only by adding value to the output of its own plants but also with products that it doesn't produce, such as nickel-based and corrosion-resistant alloys, specialty stainless and alloy steels for oil and gas and aerospace markets. Today, 65 to 70 percent of the products shipped from RTI's distribution centers have some measure of value added to them compared with about 35 percent five years ago, he estimated.

However, one steel producer with domestic operations that has actually moved into the service center business recently is OAO Severstal, Cherepovets, Russia, which in August completed its $1.25-billion takeover of Esmark Inc., acquiring the former Esmark Steel Services Inc. operations and rechristening them as Northern Steel Group Inc. (AMM, Aug. 6). The company runs its U.S. operations out of Dearborn, Mich., under its Severstal North America Inc. division.

Despite speculation that Esmark's former owners wanted to buy back the service centers, Severstal insisted shortly after the acquisition was completed that it wasn't looking to flip its newly acquired centers.

"We're trying to figure out our strategy; we're new to this business," a Severstal spokesman said about distribution, noting that the service centers' role in the company's overall corporate structure "is to be identified." Severstal is "excited about that business (service centers)" and had made no decision to divest them. "No, not at all," the spokesman reiterated when asked whether the company is seeking a quick sell-off of the centers. "We bought (the Esmark centers) to run them."

For his part, James Bouchard, former chairman and chief executive officer of Esmark, told AMM that he was retired and wasn't looking to buy back the service centers.

Severstal aside, and despite domestic mills' apparent disinterest today in making big service center investments, it's unlikely the matter is closed.

Busse expects that sometime in the future certain producers are likely to think more seriously about a role in distribution as a way to ensure their place in the supply chain. "People will probably dip their toes in the water and test that arena again," he said.


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