Credit availability remains tight and more deals than ever are cash-and-carry. Acquisitions need to be as close to no-risk as possible and growth needs to be held closer to a realistic overall economic approach. And service centers' optimism is curbed by their need to avoid speculation on prices and volumes.
The upcoming year, service center operators say, won't bring them back to pre-recession sales and earnings, but it will be incrementally stronger than 2010 and propel them more than halfway out of the crushing contraction of 2009.
Service centers learned fast how to cut inventory, keep it trimmed, and conserve cash—especially because banks were particularly unfriendly to the industrial community at large—and are already using that cash to control their destinies.
A.M. Castle & Co., Russel Metals Inc. and Olympic Steel Inc. all forecast that market conditions and demand for their products will improve significantly throughout the new year, although unevenness is likely to persist due to seasonal factors, the monthly rise and fall of scrap pricing and the short-term visibility offered by their customers.
In their never-ending battle to protect inventory values, service center leaders expect to avoid speculating on price or volume, but they will invest cash—and even incur a modest amount of debt—for expansion, whether through acquisitions or in building new facilities. For companies that are perennially looking for growth, they will seek ways to expand their footprint, widen their product lines or add services.
On the acquisition front, however, the process has moved somewhat slowly. "We have a couple of targets we looked at, but we haven't come to any price agreements," Russel Metals president and chief executive officer Brian Hedges told shareholders late in 2010. "It's not whether they (sellers) will get six times or seven times earnings, but (a question of) what is normalized Ebit (earnings before interest and taxes). The valuation gap has narrowed, but what we'll pay has narrowed, too. If a smaller company went from $10 million to $20 million and then back to $8 million in profits, those are the numbers you're dealing with. What's normalized? The $10 million or the $8 million?" Hedges cited one company that was sold to someone else willing to pay more. "The gap was huge between what the seller wanted and what Russel wanted to pay," he said. "You can take a good asset and turn it into a bad asset by paying too much for it."
Michael D. Siegal, chairman and chief executive officer of Olympic Steel, Franklin Park, Ill., suggested that buyers may have to be patient or move on to Plan B. "In the M&A market, there are a lot of buyers," he said. Public companies like Reliance Steel & Aluminum Co. and Metals USA Inc. and private companies like Ryerson Inc. and Esmark Steel Group "have come out and said they're looking for acquisitions. Obviously we're not seeing a very robust announcement of M&A activity, so you would assume of the seller that their valuation expectations might be a little bit too high.
"In the interim, we have the responsibility to continue to grow, so we're not necessarily going to wait for the market for M&A; we're going to continue to add the footprint to service our customers as they grow," Siegal said in announcing a $25-million investment to build a new temper mill and cut-to-length facility at U.S. Steel Corp.'s Gary (Ind.) Works.
Ryerson, which has long been active in Mexico, still sees the Mexican market as a growth region. It opened a new metals warehouse in El Paso, Texas, during the fourth quarter to serve the El Paso/Juarez area, selling carbon steel, stainless steel and aluminum products. Ryerson also operates service centers in Mexicali and Nogales and will soon open a third location in Monterrey.
Esmark Inc. continued its buying streak in the fourth quarter, acquiring Kelco Metals Inc., Schaumburg, Ill. Esmark had already purchased the assets of Century Steel and Sun Steel, Chicago Heights, Ill., in one deal and the assets of Independent Steel, Cleveland, in another. Esmark's stated goal was to achieve 2010 revenues of $300 million.
Smaller companies may not have the same growth opportunities as mid-size and larger competitors in the new year. Although economists keep saying that credit availability has eased, it's clearly far from the same level as before the global economic meltdown.
"We have customers that have no banking relationships any more so they are hoarding cash," the vice president of a Midwest steel bar distributor said. "I had a customer with $20,000 cash in his pocket. He had no line of credit, just a checking account. This tool supplier, in business 50 years, pays his bills and has a backlog of work, but no banker wants to touch him. He is a good credit risk, but not in today's economy. He hasn't hired anybody or bought equipment, although he would like to. Eventually there will be banks banging on his door. (Meanwhile), we are his bank. We have credit insurance."
A third executive, who operates a flat-rolled service center in Indiana, said that credit is tighter, but not impossible to obtain. "If you used to get 80 percent of your inventory value in an asset-backed loan, now you get 50 percent, and if you used to get a line of credit totaling 65 percent of your accounts receivable, now it's 40 or 45 percent."
Service center leaders almost universally project that 2011 business levels will be an improvement over 2010, even though some saw double-digit revenue growth—in a broad spectrum from 10 to 50 percent—from extremely low levels of activity in 2009. But demand for products will vary widely, depending on the end-user market strength.
"(With energy) projects now in the works, we'll be able to fill our capacity. We think we'll be full up by 2012, even into the back half of 2011," Hedges said of Russel's tubing business. But for flat-rolled products, "if we wanted to buy more the mills would find some material to ship to us. We can get steel. If you have a PO (purchase order), they'll definitely talk to you," said Hedges, who doesn't believe idled blast furnaces or other production curtailments might point to a potential short supply situation, even if demand improved quickly.
David Wolfort, president and chief operating officer of Olympic Steel, projected an "improving pricing market for (flat-rolled) steel in 2011. We see the consistency and we see some strength going into 2011 fostered by a return of scrap pricing in November, production turn-down, weakness in the dollar, less imports and so forth."
For carbon and alloy bar products, "the mills are seeing strong order books and most of the key bar markets are also forecasting better results into 2011. Stainless bar has not been as strong, but there are pockets within the specialty grades where lead times are extending as well," said Michael Goldberg, president and chief executive officer of A.M. Castle.
"The market remains highly competitive, particularly in aerospace, where aluminum heat-treated plate is still in oversupply and will likely remain so for at least the first half of 2011," he said. "In general, customers remain cautiously optimistic. Few customers are predicting rapid or significant mid-term growth, but most expect 2011 to be better than 2010. Destocking has ended, except in aerospace, but most customers continue to purchase only to fill immediate needs and are not hedging for the future .?.?. customer (metal) inventories seem to be back in balance."
Goldberg foresees continuing steel demand improvement from the heavy equipment market, especially for mining and heavy truck applications, and semi-conductor manufacturing.
Like Russel, Castle projects stronger demand from North American oil and gas fields. "Customer sentiment continues to be very positive and business activity is the strongest it has been since early 2009. Lead times have expanded for many products and prices have risen slightly, with more significant price increases expected in 2011," Goldberg said. "Aluminum continues to be over-inventoried, and industry sources expect destocking to continue into next year. As a result, the market is extremely competitive and gross margin recovery to historical levels will continue to be a challenge for the near term. Aerospace demand for non-aluminum products—nickel, titanium and alloy—is strong, and the supply chain appears to be in good shape."
Steel executives also foresee prospects brightening for their distribution customers. "Most service centers are seeing marginal improvement and feel good about their business, and obviously that makes us feel very good about the future, although all of us would like to see demand increase at a higher rate of speed," said Keith Busse, chairman and chief executive officer of Steel Dynamics Inc. CORINNA PETRY