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Metal distributors' outlook brighter for ’13 but optimism tempered

Keywords: Tags  service centers, metal distributors, Reliance Steel & Aluminum, David H. Hannah, Grand Steel Products, Jim Barnett, steel shipments, Corinna Petry

Service centers are upbeat on the coming year, but have tempered the enthusiasm they expressed a year ago about the metals demand picture, saying they won’t get fooled again.

The expectation for 2013 orders and shipments is improved from 2012, but the past year devolved into a bit of a disappointment--especially the second half--with the exception of some bright spots in the fourth quarter, distributors told AMM.

“Overall, real demand represented a solid improvement over 2011,” David H. Hannah, chairman and chief executive officer of Los Angeles-based Reliance Steel & Aluminum Co., said during Goldman Sachs Group Inc.’s annual metals and mining conference in late November. “But growth slowed, metals prices declined due to supply rather than demand issues, imports were plentiful and domestic overcapacity persisted.”

The hope of a revival in nonresidential construction has been dashed frequently. “Nonresidential is a huge catalyst and we’re waiting for it. If we got back to 2006 levels, we would add 25 to 30 percent more tons and we’d be approaching $11 billion in revenue,” Hannah said. “We would be more bullish, but we were fooled in both 2011 and 2012. Those years started out strong (for nonresidential construction) and then lost steam.”

On the other hand, an uptick in housing starts bodes well for a lagging improvement in commercial construction activity. “We are hearing ... some businesses are more involved in building products and building systems. To hear them say anything positive is something new,” he said.

The operator of several East Coast warehouses said 2012 didn’t meet expectations due to election year uncertainty, a slow-growth U.S. economy, easing growth in China and a recession in Europe, all of which meant spotty demand. The coming year “will be the year we thought 2012 was going to be,” he said. “The (Hurricane Sandy) disaster on the East Coast will have a positive effect” because people have to replace cars and appliances.

“A lot of our customers are still holding (business prospects) close to the vest, but others do expect a pretty good first quarter,” said Jim Barnett, president of Wixom, Mich.-based Grand Steel Products Inc., noting that they have begun placing advance material orders.

“We had savvy customers asking us (in late November) to quote for the first quarter, which doesn’t typically take place until mid-December,” he said. “Order rates were up and backlog going into December was fairly robust,” and the momentum is expected to continue into the first quarter.

The time for uncertainty should soon be over, according to a source at a southern distributor, who doesn’t buy the argument that companies should wait to invest in plant, equipment and technology until tax and regulatory policies are crystal clear. “Business has the ability to adapt to a new tax or regulatory environment. When taxes were high and regulations were strict, that didn’t stop people. That doesn’t have a bearing on whether I hire. I hire because I need somebody,” he said. “If Congress can’t work together and with the President, business will still find a way.”

A source at a Great Plains ferrous and nonferrous metals processor said the aerospace industry began placing 2013 orders in late October. “The biggest dollars (we make will be) supported by commercial jet engines, where there is a 6- to 8-percent increase projected (for 2013) and a full order book for several years to come.”

A Mississippi Valley carbon steel sheet distributor executive doesn’t expect any great improvement in 2013 volumes, but does believe demand is steady because many customers locked in tons and pricing six months forward. Even so, he won’t place all those orders with mills immediately. He and others cited four-week lead times for hot-rolled coil and five-week lead times for cold-rolled coil as sufficient reason to hold back.

A source at an upper Great Lakes distributor of cold-rolled and coated sheet expects another improvement in vehicle output and, when their orders start releasing, “we will buy more (steel).” Outside of the auto industry, some customers are slow, he noted.

“I don’t look toward a great construction period. Things are not going to be booming,” said a service center owner who sells plate, sheet and bar for construction applications. Those markets are “just so-so. There are a few (construction) jobs going around,” but demand was weakened by “all the negative news coming out of Washington.”

A northern Illinois flat-rolled service center executive said a major distraction in 2013 will be the cost side of the equation. “On health insurance renewals, we are expecting an 18.9-percent increase this year and a 40-percent increase for 2014,” he said. “The government refuses to stop spending and has to increase revenue, so there has to be an incremental tax increase somewhere that will affect everyone.” On the sell side, “forecasting is nonexistent. ‘Oh, here’s my inquiry. Are you the cheapest? I needed it yesterday’ ” is the attitude among many customers, he said.

The northern Illinois service center executive was among several distributors who complained about excess steelmaking capacity and wished some mills would cut production, not just for “maintenance or labor issues or a natural catastrophe.”

One bright spot is energy, he said, especially if the federal government grants the licenses needed to tap domestic reserves and exploit newly discovered oil and gas fields. He was among several market participants who cited long-term sustainable infrastructure spending as a sound arena to spur metals demand.

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