CHICAGO Timken Co. will
be able to operate profitably in a weak demand environment and
with relatively low capacity utilization by investing in new
equipment that both increases efficiency and raises the quality
of its steel bar products, the company says.
Canton, Ohio-based Timken
maintained a double-digit steel operating margin during the
first quarter despite a 55-percent capacity utilization rate
and lead times of less than 12 weeks, president and chief
executive officer James W. Griffith said during an April 24
Steel sales this year will
decline 7 to 12 percent compared with 2012 levels, executive
vice president of finance Glenn A. Eisenberg projected. Raw
material surcharges will also decline.
"From a volume standpoint, we
have limited visibility to the order book," Richard G. Kyle,
group president for the aerospace and steel divisions, said.
However, he expects second- and third-quarter order activity
will improve modestly from the first quarter.
Aside from decent automotive
sector demand, no end markets "really stand out," although they
are generally expected to improve going forward, Kyle and
Another headwind for steel is
inventory adjustments at major customers, such as Caterpillar
Inc. "Doug (Oberhelman, Caterpillar Inc.s chairman and
chief executive officer) was really clear about what
theyre doing," Griffith said, adding that the same
adjustments are occurring throughout the oil and gas
Steels profit performance,
however, "reflects the new flexible cost structure weve
put in place. Add to that the impact of capital programs coming
on, and were pretty comfortable with our ability to
operate at those kinds of levels," he said.
This is the result "of a
years-long effort to shift focus away from a high utilization
model and selling capacity (and instead focus on) attractive
markets and product and application differentiation," Kyle
said. "We can sustain good margins running at a relatively low
utilization rate. And as demand for (steel) products picks up,
that would further improve (profitability)."
Although customers are "paying
significantly less for a ton of steel today" than during 2012,
based on the surcharge mechanism, "with the focus on
applications and differentiation, the base price has
essentially held through this year," he added.
As the companys new
caster, new forge and other capital projects ramp up, benefits
should start multiplying next year in terms of reducing costs
and being able to demand a premium for Timkens steel
quality, Kyle said.
Once Timkens steel assets
get up to 70 percent of capacity, "it allows us to have
industry-leading availability and on-time delivery, which then
supports the premium pricing that we have in the marketplace,"
Having a 70-percent capacity
utilization rate as a goal is "a real shift for us. Its a
shift for the industry and it is fundamental to (our) earnings
model," he added.