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 isnt 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 isnt
forever--all three suffer different volatility; and 2) Which
group generates Ebitda with less capital?
Rankings of steel, service center and natural
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