A battle has been building in the service center industry for a few years now. The major protagonists, of course, are Reliance Steel & Aluminum Co. and Ryerson Inc., the two largest players—by some distance—in the sector.
The two Rs have competed on several fronts for business and customers, for bragging rights and to claim the mantle of No. 1. More importantly, Reliance and Ryerson have represented two rival business models—ideologies, even—of ownership and operation in one of the most critical links along the supply chain.
Reliance, which has risen to the top of the pile through an extraordinarily aggressive acquisition campaign, is not really a large service center at all. Rather, it is an umbrella organization that owns a multitude of quasi-independent businesses. As long as these businesses meet certain metrics or performance measures, the service centers in the group are essentially free to do their thing. Reliance carries out certain key functions, most important of which is probably counting the mountains of cash the company has made in the past few years.
Ryerson, on the other hand, has pursued a more traditional pattern of consolidation. Acquisitions have been less frequent, but when they've come the operations have tended to be integrated into the core.
In a sense, it's a federal vs. a centralist approach, if you like. And right now, it looks like the federalists are on top.
Of course, it's impossible to tell for sure whether Reliance's relative success is a result of David H. Hannah's hands-off model or a combination of other factors, ranging from seasoned management to the geographic and product markets in which it concentrates. It seems, however, that certain key aspects of the Reliance template have served it well, not the least of which is buying quality assets with quality people in the first place. Although they ultimately report to a higher power, Reliance service centers are for all intents and purposes local businesses with local customers. For the most part, Reliance is not dependent on large national accounts, and that might well be the single biggest key to its success.
Ryerson, on the other hand, is built to handle exactly those major accounts that Reliance has carefully avoided courting. And as any Tier 1 supplier to the automotive industry will tell you, serving big clients that control mega-million-dollar purchasing budgets can be a tough row to hoe.
Having emerged the apparent winner of a protracted proxy fight, Ryerson (and its future new owner) faces a series of tough questions. What's the strategy to be from here? Will Platinum Equity LLC seek to integrate Ryerson, or parts of it, with its existing operations, or will it take a leaf out of Reliance's book and allow the various businesses to run independently?
It's unlikely that Ryerson will turn its back on its major accounts. If the company can manage the relationships properly—and private ownership might give it more freedom to be aggressive in its approach—there is plenty of opportunity and potential implicit in serving sectors such as appliances.
Service centers have taken on an increasingly pivotal role in the steel industry, particularly in recent years. As mills consolidate and grow bigger, the need for suppliers with the flexibility to handle smaller orders has grown. At the same time, large-volume customers—those big enough to buy directly from mills—also have a need. The rigors of just-in-time delivery, for one, have led major manufacturers and the mills that do business with them to rely on various discrete links along the supply chain to warehouse and transport metal from where it is produced to where it's transformed into a manufactured product.
All things considered, is there a preferred model for service center ownership/management and the room and rationale for three or four service centers the size of Ryerson or larger to thrive?
Acquisition-by-acquisition, the industry is on a path toward consolidation, as underscored by the large number of purchases so far in this young century. And many of the most active buyers have been service centers that have followed the Reliance model. Such companies as O'Neal Steel Inc., for example, also allow their acquisitions to conduct business with considerable freedom.
The question remains, however, whether with the right management and backing, a service center that consolidates assets and targets major national clients can prosper in the current manufacturing environment, where major metals consumers are themselves under pressure as a result of increasing competition from China and elsewhere.
Over the next few months Platinum Equity, among others, will have the opportunity—and face the challenge—of proving whether there's life in the Ryerson model yet.
Senior vice president