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Optima seeks captive supply from KES

Keywords: Tags  Optima Specialty Steel, Kevin Stevick, Kentucky Electric Steel, SBQ, Michigan Seamless, Niagara LaSalle, cold-finished bar, seamless tube Michael Cowden

CHICAGO — Optima Specialty Steel Inc.’s planned acquisition of Kentucky Electric Steel LLC (KES) should give the company better control over its supply chain as it tweaks the Ashland, Ky., facility to add special bar quality (SBQ) round capacity to the mill’s capabilities, the company’s top executive said.

SBQ rounds are used as feedstock for both the seamless tubular products manufactured by Michigan Seamless Tube LLC and the cold-finished bar products made by Niagara LaSalle Corp., the two companies that were brought together to form Optima Specialty Steel, company president and chief executive officer Kevin Stevick told AMM in an exclusive interview following the announcement of the acquisition (, Nov. 20).

The certainty of having a captive SBQ supply should give Optima Specialty Steel a competitive advantage that it didn’t have when it had to go out on the open market to buy feedstock for Niagara LaSalle—the biggest single customer of KES—and Michigan Seamless, Stevick said, noting that Optima combined the two companies in part to more efficiently purchase SBQ bar.

"This time last year, some of the SBQ lead times were 14 to 18 weeks, and up to 12 months for some sizes. By having (KES) in house, we’ll have a lot more flexibility and a lot more opportunity to be more responsive to the marketplace," Stevick said.

While backward integrating into SBQ represents a significant move for Optima Specialty Steel, the planned changes at KES are unlikely to have a big impact on the wider SBQ market, Stevick said. Optima plans to invest "single-digit millions" to produce 3- to 4-inch-diameter bar from KES, largely for internal consumption at Optima, he said.

Capacity will probably be in a range of 50,000 to 75,000 tons per year, a "very small pebble" in an SBQ market where other mills are adding millions of tons of capacity, and Optima will still have to source some SBQ externally. "You just can’t get there (SBQ self-sufficiency) from here. It’s not a very large mill, and it’s a specialty focused flats mill," Stevick said.

In theory, Optima could invest tens of millions of dollars to produce bigger bars, but that "is not in our plans at all," he said.

Optima Specialty Steel will continue to make and supply SBQ flats and merchant bar quality flats to KES customers, and will even look to expand those businesses, Stevick said.

Steel service centers buy the entire range of Optima products, from cold-finished bar and seamless tube to hot-rolled and cold-drawn flats, he noted. "What we want to be able to do is bundle things for them and have a single point of contact to make the business easier to handle from a customer standpoint."

Optima Specialty Steel plans to keep KES management in place. "We view KES as a very successful company," Stevick said. The same holds true for the company’s unionized workers. "They (KES) have had good relations with the union work force since reopening the mill in 2003, and we don’t anticipate any change in that."

The biggest question and potential challenge for Optima and KES is perhaps the uncertainty of the steel market heading into 2013, Stevick said.

The company has seen a slowdown across almost all of its markets, with the exception of automotive, since July and August. The presidential election, the fiscal cliff and the economic crisis in Europe hurt the steel sector in the third quarter, and most customers expect a continued lull in the fourth quarter, Stevick said. There will probably be a "nice rebound" in the first half of 2013, but that is typical of the seasonality of the steel industry, he said.

"Most customers are telling us that they don’t expect anything to be gangbusters in 2013," Stevick said. "But I don’t think anyone is expecting it to be worse than 2012." If anything, 2013 could bring a modest improvement, he said.

Optima Specialty Steel began to think of acquiring KES last summer as it mulled other opportunities, including the possibility of building its own mill, Stevick said. But then Los Angeles-based investment bank Houlihan Lokey Inc. contacted the company about KES. "We liked the business the more we looked into it," he said, noting that the management team and the products it made all seemed like a good fit with Optima Specialty Steel.

Stevick hinted that Optima isn’t out of the acquisition hunt. "We’re always looking, always talking to folks. Any cold-finished bar business, any seamless tube business or any end-processor that would use SBQ as the raw material is something that we would want to take a look at," he said.

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