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Steel price volatility has turned coated coil and sheet suppliers to the ailing HVAC market lean and mean

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The worst might be almost over for residential builders, but with commercial construction still in the doldrums companies participating in the heating, ventilation and air conditioning (HVAC) market are expecting the latter to put a damper on their business.

Players in the HVAC market are unlikely to see real recovery for the galvanized steel-intensive sector until 2012, even though the residential market appears to have bottomed out.

"This year is shaping up to be better because our mix is skewed toward residential. Last year was a disaster for residential. We are seeing improvement, but it is slim at best. We were in a recession for 18 months and I think the bottom hit at the end of December. While the bottom has been hit, I think it will be a slow, measured climb," said David Boggs, metal manager at Elkridge, Md.-based Lyon, Conklin & Co. Inc. The company, the largest independent Trane distributor in the country, also sells galvanized steel to ductwork fabricators.

"Across the board every one of our customers is struggling as we are. We are about 30 percent down from the heyday," he said, noting that around 70 percent of the company's business serves the residential market while the remaining 30 percent serves commercial real estate.

"HVAC players are participating in a mixture of service work and building add-on work to supplement the weakness in new residential construction builds," Boggs said. "The new dealers have found they can't survive on new construction and need to tap the replacement and service markets."

"Big contractors have had to close their doors because the business is not there," said a mid-South source who supplies sheet metal and mechanical contractors in Alabama, Arkansas, Kentucky, Mississippi, Missouri and Tennessee. "With the downturn, everyone is chasing add-on and replacement business and it has become super-competitive. The replacement business is thriving due to available energy tax credits. Between the tax credits and savings on utility bills, the thing pays for itself in a year or two."

The recession and weak market conditions are still taking a toll on competition-and the customer base, Boggs said. "We have had some customers that folded and some are in precarious positions right now. And the conditions out there are such that some competitors have to be struggling. I don't know how they can continue to carry costs. I know the impact it has had on us, and we are financially secure," he said, noting that Lyon Conklin is owned by Newport News, Va.-based plumbing giant Ferguson Enterprises Inc., which in turn is owned by Wolseley Finance.

The southern supplier said his customer base had been equally split between residential and nonresidential, but has shifted to become more heavily weighted on the commercial side. "But there seems to be a light pickup in housing starts. Right now I think the first half of the year is going to be down and the second half I am hoping to be up only slightly," he said. "Last year we were involved in a lot of churches, but that construction has dried up, possibly because of fewer contributions. And a lot of projects have been shelved or stopped because they couldn't get a loan. There is some hospital and school work out there, but there are no strip shopping centers and very few private enterprises."

He noted that some of his HVAC customers had literally been sent home from a job site because a project was halted without notice. "Someone got on a bullhorn and told the contractors to go home," he said.

The southern supplier, who buys coated coil and sheet products, is concerned that current steel selling prices aren't sustainable. "I don't believe the hype around the iron ore increases will last because there is volatility in the market and there is no demand," he said. "I am buying very carefully and much closer to the vest. I am also trying to increase our turns. We have good resources, but why would you want to carry big inventory? And I don't want to buy a lot while it is on the way up because you can't guarantee the price will stay high in the third quarter."

Boggs agreed, saying that his company is keeping its inventory levels low and has reduced its stock on hand by two months compared with the levels maintained before the recession. "We are trying to be very lean. In 2008, we got hurt pretty bad when steel prices were going up every month. I don't want this to happen again. On HVAC, the demand is still not there and I am very fearful that price increases cannot be supported over the long haul," he said.

Lyon Conklin purchases 95 percent of its galvanized coil from The Techs, a Pittsburgh-based division of Steel Dynamics Inc., Fort Wayne, Ind., with the rest coming from service centers. The company had toyed with the notion of cutting its own coil, but decided this wouldn't be a cost-efficient move.

When the residential construction market does rebound, builders will have no trouble ramping up to meet demand. "The bigger builders have land and can move in and build very quickly, but there still seems to be a lot of houses for sale," Boggs said. "We haven't been able to measure any stimulus benefit. Being close to Washington D.C., there's got to be some because of all the government and military work. There should be some work, but not yet. There is not a job I know of that we can say 'this is stimulus money.' And there is not one service contractor that can say the stimulus program is benefiting them yet."

As for a recovery, he is betting it is two years away. "I think it will be 2012 before we see real growth, but I do believe there is a great deal of pent-up demand. When people get jobs, I think the economy will really take off. If you are worried about losing your job, you are not going to go out and spend. You are going to make do with what you have and patch it or do without," Boggs said. LISA GORDON


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