CHICAGO The fragmented steel service center industry
must consolidate further to combat overcapacity issues, which
dilute the sectors purchasing power, industry executives
said this week.
We are going to wake up and see the overcapacity,
Jeremy Flack, chief executive of Cleveland-based service center
Flack Steel Ltd., said March 12 at Platts 9th Annual
Steel Markets North America Conference in Chicago.
According to Flack, there are too many points of sale and too
low barriers to entry. As a result, distributors are
struggling for relevance with mills and appear to be
creating little economic value.
Sanford Sandy Simon, former vice president of
Pacesetter Steel Service Inc. and now a consultant at Sandy
Simon & Associates, Marietta, Ga., agreed that the market
remains highly fragmented.
(Fifty) service center operators control only 25 percent
of the market, he said, noting that only 12 of the top 50
distributors have sales in excess of $1 billion.
The market is inefficient. It has to consolidate,
In February, Los Angeles-based Reliance Steel & Aluminum
Co. announced a planned purchase of competitor Metals USA
Holdings Corp. (
amm.com, Feb. 6
), marking the latest in a string
of buys, but those deals havent been enough to correct
the overcapacity problem, Flack said.
Reliances series of acquisitions has not
consolidated the industry. They only consolidated cash
flow and left everything else in place, he said.
With mills having so many customers to choose from, service
centers have little pricing power in the steel supply chain,
Inventories are the only thing they really control,
said Simon. They do all the things an original equipment
manufacturer (OEM) doesnt want to do, saving the
OEM money. And they take on the bulk of the risks with
inventory in any business model, even under contract pricing
and quantities. They no longer negotiate the buy, and
giving up that control helped squeeze margins. If they are
lucky, they can net $30 a ton, he said.
Seven thousand nine hundred fifty service centers will be
in a red ocean (of losses) if all they offer is price
competition, Simon added.
Flack agreed, noting that service centers are always
waiting for prices to rise to save us. It hasnt
happened. That is sucking earnings out of the
Flack and Simon both added service centers have to support
their customers businesses by being highly responsive and
by developing specialized knowledge and strength in certain
niches to offset price competition.