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Potential slowdown may not hurt steel service centers

Keywords: Tags  steel service centers, metal distribution, Metals USA Holdings Corp., Lourenco Goncalves, MSCI, Corinna Petry

It’s a case of good news/bad news for steel service centers right now. The good news is that distributors experienced a healthy first quarter, with shipments growing 6.3 percent over the same period in 2011. The bad news is that many service centers have seen a slight softening during the second quarter.

“We continue to see good demand in the vast majority of sectors, and pretty much everywhere throughout the country,” Metals USA Holdings Corp. chairman, president and chief executive officer Lourenco Goncalves said during the company’s quarterly earnings conference call in April. “We don’t see mills interested in raising prices, and we expect prices to be range-bound during the second quarter.”

U.S. and Canadian distributors shipped 16.93 million tons of steel products in the first four months of 2012, up 6.1 percent from 15.95 million tons in the same period last year, according to the Metals Service Center Institute (MSCI). But April shipments of 4.07 million tons were down 7 percent from 4.38 million tons the previous month.

“Our March shipments were strong, but bookings are a better story of what’s going to happen,” a source at a Michigan flat-rolled distributor said. “They’re definitely slower, and that includes the automotive segment. I don’t think there’s as much optimism. The price of steel was raised to $700 (per ton), then to $720, but we’re in for a flat market. They might wallow for a while.”

Many buyers—even those who need to replace inventories—haven’t been easily enticed into placing orders, despite some mills offering to roll minimum quantities at around $10 below list price.

“The first quarter was a little better than last year, but it ended with a bit of a sputter,” a source at an Illinois sheet distributor said. “Everybody’s still on the fence with where pricing is going. Did (announced hikes) stop the drop? Quoted prices are up from the mills, but closed deals aren’t that drastically changed.” Producers “are getting $700 or close to it, but in spots, with open schedules, they’re making a few deals.”

The Illinois source was one of several to say that they’ve been quoted lead times of three to five weeks, but material is arriving sooner than that. “The competition (at the distribution level) is not raising prices as you would think they should, with two published increases and a third on its way,” he said, citing chatter about price increases reportedly coming from mini-mills. “People are going as lean as possible.”

One large Gulf Coast operator called March “a scorcher, the best month in two years,” and said he was on track to surpass that in April. He cited the continued strength of the natural gas sector, noting that the effect of prices at $2 per million British thermal units “hasn’t rippled through the supply chain.” There’s still “a lot of pipe in the import yards, and a “normal amount” is still scheduled to come in, he said. Although margins aren’t good, “we feel pretty good about the second quarter.”

An executive at a national long products distributor also said he saw a slight slowing in April. “It’s nothing to panic about, but it’s not as good as March on a daily shipment basis,” he said.

Peers he met with in April also told him they were seeing softer bookings in the United States and Canada. “I was surprised by the hollow structural section (HSS) price increase,” he said, referring to hikes announced by HSS mills (AMM, April 17). “Demand does not justify it at all.”

One corporate example of the market strength in the first quarter was Fort Lauderdale, Fla.-based Metals USA, which saw net income jump 31.5 percent on a pickup in demand. “Demand improved across most sectors we serve—particularly automotive, aerospace, and oil and gas field services,” Goncalves said. He forecast higher profits for Metals USA in the second quarter because its pricing—much of it on committed volume—is based on a lagging index, and first-quarter price increases will be realized in the second quarter.

Asked about the ability to get material quickly, Goncalves said that mill lead times “don’t really translate the entire story. In our committed high-value-added business, we normally deal with one or two suppliers.” In other words, Metals USA’s negotiated lead times don’t enter the wider pool of commodity rollings. Lead times quoted to the larger purchasing pool are “more of a reference of overall order books,” Goncalves said. “We don’t play the game of delayed buying. We keep our (inventory) in good shape to take care of business. We don’t speculate.”

Of the wide range of commercial and industrial sectors that Metals USA supplies, only construction continues to be weak. “Do I see more bidding activity? Yes. Do we see more beams being purchased? Not yet. Is it coming later in the year? We haven’t seen any evidence of that yet,” Goncalves said, describing the situation as “more of the same, staying around the bottom.”

Despite the lagging construction sector, Goncalves said he believes the U.S. economy is performing better than is reported. “We need more confidence,” he said. “Manufacturing is driving the recovery. That is our reality. We basically touch everything everywhere in the country. Construction is the only negative.”

The pipeline for acquisitions in the distribution market continues to be strong, he said, adding that the company is in talks with several “hot” sellers. Cautioning that “it doesn’t mean the deals will close,” Goncalves praised business owners for being more willing to engage and for being realistic about price expectations.

Goncalves cited the Gregor Technologies LLC acquisition (AMM, March 12) as an example. “We were able to come to a closing on a real quality company,” he said. “We have more to come for the balance of the year.”

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