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Distributors rewarded for staying nimble during downturn

Keywords: Tags  North American metal shipments, service center shipments, service center outlook, steel buyers, Institute for Supply Management, Corinna Petry

Being agile is important in any business, but agility has been the watchword that many say has gotten service centers through the challenges of recent downtimes and set them up for success when the economic climate is stronger.

Whether it was through inventory control, managing credit, expanding via acquisition, or looking for new efficiencies and practices, service centers pursued various paths to weather the rough economic environment. Now, many believe, it’s paying off.

“Everything seems to be OK,” said the president of a Midwest service center that specializes in coated coil product. “We’re still busy with automotive and appliance contracts.” Spot prices rose $30 to $40 per ton in January from the previous month, a sign that business was picking up at the start of the year. “Customers still don’t know what they need; they just call us and say, ‘We need more.’ But business is a little more stable. Some of our customers are even buying beyond the first quarter, so we have positioned ourselves (to meet that demand).”

He expects a traditional first quarter, but “I’m a little more confident now than in the previous six months,” adding that mill price increases look to continue. “Lead times have moved out at several mills, so there is more strength there. We are able to get what we need, but we must plan accordingly.”

At the start of the economic downturn, 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 now using those savings to control their destinies.

In their never-ending battle to protect inventory values, service center executives try to avoid speculating on price or volume, but they will invest cash—and even incur a modest amount of debt—for expansion, whether through acquisition or building new facilities. For companies looking to grow, that means seeking ways to expand their footprint, widen their product lines or add services.

Steel-buying members of the Institute for Supply Management (ISM) whittled down inventories at the end of 2011, and none of those surveyed by ISM’s Steel Buyers Forum in January said they planned to increase steel stocks over the next six months compared with 8.3 percent who said the previous month that they planned to buy more.

“We have all been under a microscope with the financial people at year-end. We watch and keep inventory low,” the purchasing vice president at a Mississippi Valley flat-rolled distributor said.

Nearly 92 percent of January’s survey respondents said they expected incoming orders and backlogs to stay flat or rise over the next three months, a significant increase from the 75 percent who offered the same forecast in December.

A similar attitude was prevalent among aluminum distributors. With demand expectations on the rise, some service centers would like to stock up on material to get ahead, but most keep in mind the lessons learned in 2008 and continue to play it safe.

“Nobody’s speculating. Nobody has inventory—they buy to their job,” a distributor said, noting that he keeps about two to three months’ supply in stock. “I know the price is going up, but we don’t like to speculate on the markets.”

Another distributor echoed that sentiment. “I don’t think in the distribution market today there’s anybody that wants to try, in any large form, to out-think ingot pricing,” he said. “I know people that are talking about increasing inventories, but we’re reaching the price levels where people got burned before.”

Distributors’ hesitancy to build inventories comes despite steady order entry and announced price increases, which traditionally prompt buying as purchasers try to buy ahead of the hikes.

A source at one Great Lakes flat-rolled steel distributor said he understood the motive behind mills’ push to raise prices, but he wasn’t coming off the sidelines just yet. “The mills are accomplishing what they are trying to do; it’s an attempt to stop the (earlier) slide in pricing,” he said, noting that the uptick in scrap pricing is forcing their hand. “They have to do something.”

But while the hikes may make sense, he said, he won’t buy more material than absolutely required. “(I will) fill holes as best as I can, but I’m not running to the mill (for material). I might be able to fill by buying from someone else who’s trying to liquidate tons. I’m going to sit back and watch the merry-go-round for a while before jumping on.”

A Chicago-area steel warehouse operator agreed, noting that although his November and even December activity was strong, margins were very weak as some of the larger distributors were undercutting the market. In addition, “the whole (European) sovereign debt issue creates a pall of uncertainty. Nobody is willing to make long-term commitments,” he said.

If the demand situation starts to change dramatically, however, distributors will reconsider their buying habits. “We are keeping one eye on the mills and two eyes on our customers. If we see customer demand start to move, we will react,” a source at a national full-line distributor said.

Meanwhile, just how far sheet prices will climb in the first quarter remains to be seen. “Our feeling is that pricing will not match the seasonal first-quarter rise of past years due to added capacity and because fundamental demand is still not up to the supply that’s available,” the full-line distributor source said.

“Part of it (the price increase announcements) is encouraging, and part of it scares me,” said a source at a flat-rolled distributor in the Great Plains. “I think demand will be pretty good in the first quarter. We have been filling inventory pretty heavily. We are in good shape.”

Just last summer, steel inventories reached unprecedented lows, with 100 percent of surveyed buyers holding two months of stock or less throughout June and July, according to the ISM.

While inventories have been suppressed, service center mergers and acquisitions have been on the rise in North America, with more than two dozen deals taking place in the past two years, according to an AMM analysis.

Some of the usual players were active in both 2010 and 2011, including McJunkin Red Man Corp., Metals USA Inc., Namasco Corp., Reliance Steel & Aluminum Co., Ryerson Inc., Samuel, Son & Co. and Worthington Industries Inc. But last year’s transactions were potential game-changers compared with 2010.

One example was Roswell, Ga.-based Namasco’s $918-million acquisition of Macsteel Service Centers USA Inc. of Newport Beach, Calif., ranking Namasco No. 3 in the industry as measured by annual revenue, behind Los Angeles-based Reliance and Houston’s McJunkin Red Man, and pushing Chicago-based Ryerson down to the No. 4 spot.

Transactions are never just about size, however. In all but one deal in 2011, the mergers were strategic, between peers or within the same value chain, with acquirers seeking broader geographic reach—two companies obtained Australian assets for a toehold in the Pacific Rim—a broader product range or both.

Reliance purchased Spring, Texas-based Continental Alloys & Services Inc. in large part to gain exposure in the energy sector. The $415-million acquisition “aligns well with our diversification strategy, adding oil country tubular goods products, new processing capabilities and entry into new international markets,” chairman and chief executive officer David H. Hannah said. Continental Alloys is a higher-margin business than a general-line service center, he added.

Bedford Heights, Ohio-based Olympic Steel Inc.’s $160-million purchase of Chicago Tube & Iron Co., Romeoville, Ill., gets the company into pipe and tubing—products it never sold before. “While there is no product or value-added overlap, there is a beneficial overlap of key customers,” Chicago Tube president and chief operating officer Donald McNeeley said in announcing the deal.

But smaller companies might not have the same growth opportunities as mid-size and larger competitors. Although economists keep saying that credit availability has eased, it’s clearly far from where it was before the global economic meltdown.

“We have customers that have no banking relationships anymore, 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.”

An executive at 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,” he said.

Additional internal strategies are still available to distributors looking to better serve their customers.

Los Angeles-based Reliance has a business model that it argues no competitor could truly emulate. The organization appears very complex, but day-to-day operations ordinarily run like clockwork. Financial management is centralized, but a wide array of activities, from purchasing to worker safety training, are managed locally at its 200-plus locations across 38 states, Canada, Mexico, Belgium, Britain, China, Malaysia, Singapore and South Korea.

And when Marmon/Keystone LLC, one of the largest service centers in the country, landed a major deal with an important defense contractor a couple of years ago, it was thanks to the distributor’s ability to bring in a mill partner to develop a special application. The deal was something of a sensation in the industry, showing that mills and distributors can both benefit from sharing market intelligence.

Indeed, the contract jibed with thoughts laid out in a speech by Klaus Kleinfeld, chairman and chief executive officer of Alcoa Inc., in which he called on service centers to work more closely with mills on product development.

Alcoa is always in discussions with service centers, according to a company representative. “Our job is to help them grow their business, so we are always eager to learn how we can work with the distribution network and get the right information to the right people,” the representative said.

Bill Jones, past chairman of the Metals Service Center Institute and vice chairman of O’Neal Industries Inc., Birmingham, Ala., another major distributor, said that “mills have access to quite a bit of sales data through the (MSCI).”

It’s not so much industry information as overall product information: Mills are often able to gather significant amounts of information on their own.

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