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Fiscal look at miners, steelmakers and service centers

Keywords: Tags  Service center industry, retail market, earnings, Thomas C. Graham


The service center industry is the retail distribution arm serving the steel manufacturing companies. Service centers generally account for 25 percent (plus or minus) of domestic mill shipments, so they fill an important role in the overall marketing of steel products. These centers are independent businesses, usually not related to the steel companies by ownership or otherwise. Imported steel frequently enters the country through the service center channel.

When we refer to the “service center industry,” it must be recognized that the group of businesses are not homogeneous. There are very large, public companies; there are very small, family owned companies; there are service centers that are associated with a manufacturing enterprise; there are service centers specializing in products in addition to steel; and there are service centers that are the American arm of a foreign company. They are mostly union-free, and in recent years have gradually taken on additional “value-added” functions that once were the purview of the mills.

Since they are exposed to the retail market, it isn’t surprising that the commercial officers from the mills are interested in service centers’ judgment of market strength. When the mills do make a price increase announcement, the service center segment has a role to play--and they are generally supportive. However, if you read the AMM daily newspaper you would have another impression. Uniformly, predictably, anonymous service center executives are quoted thus: “This will not stick--bad timing,” “There is no strength in the market,” etc. If the mills took such comments seriously, the price would never change in an upward direction. AMM might want to re-examine its Rolodex to see whether the executives being quoted have buying, selling or general management duties in their respective service centers. Even more radically, it might want to consider abandoning the practice of anonymous quotes.

Having described the wide variety of service centers in the sector, the ones chosen in the table below are as “pure” service center functions as possible. The purpose of the table is to conveniently compare results of the iron ore, steel production and service center sectors in North America. When comparing the trailing 12 months earnings before interest, taxes, depreciation and amortization (Ebitda)-to-sales ratio of these three different groups of enterprises, it is appropriate to keep some other variables in mind: 1) Twelve months isn’t forever--all three suffer different volatility; and 2) Which group generates Ebitda with less capital?


Rankings of steel, service center and natural resource companies

As mentioned above, these tables present steelmaker, service center and natural resource companies’ earnings before interest, taxes, depreciation and amortization (Ebitda)/sales ratios. The distributors highlighted in the table are as “pure” service center functions as possible.

The purpose of the tables is to conveniently compare results of the iron ore, steel production and service center sectors in North America. Some companies improved their results in the second quarter vs. the first three months of 2013.

Thomas C. Graham is a founding member of T.C. Graham Associates. He is a former chairman and chief executive officer of AK Steel Corp., president and chief executive officer of Armco Steel Co. LP, chairman and chief executive officer of Washington Steel Co., president of the U.S. Steel Group of USX Corp. and president and chief executive officer of Jones & Laughlin Steel Co. His column appears monthly. He invites readers’ comments and can be contacted at tom.graham@tcgrahamassociates.com.


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