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Service centers also struggled through a rough 2015

Jan 06, 2016 | 02:04 PM | Fastmarkets AMM staff

Service centers can still survive, thrive in rocky world of steel as a tough year just drew to a close, industry sources said, but business is evolving.

“The traditional model is very challenged, I suspect it’s due for a revisit. I think innovation is imperative,” Brian D. Robbins, chief executive officer of Perry, Ohio-based MidWest Materials Inc. and president of the Association of Steel Distributors, told AMM. However, “models don’t change overnight” and there is “still plenty of stability in the distribution chain.”

While some service centers are looking to provide more value-added services to offset the steel pricing rut, others are sticking to what they know best: controlling their inventory and working with customers.

“In the old days people were speculating on the inventory a little bit, but lately that has slowed down. Centers need to maintain inventory discipline and keep open communication with both suppliers and customers,” Robbins said. While it might have been a good idea to stock different kinds of material, these days it’s best to determine what material turns the most in order to mitigate inventory losses, he added.

This view is supported by other service centers. “The old model—of us buying stock just to have it and waiting for a buyer—is going to be gone. The new model is just-in-time supplying. ... I’d rather pay more when I buy it and only when I can guarantee that there is a buyer,” a Midwest distributor source said.

“We do miss the stray call from someone we’ve never worked with, but now if their old supplier doesn’t have (the product) why would we?” he asked.

Service center steel shipments fell sharply in October vs. a year earlier as customers remained hesitant to buy with prices in freefall, although high inventories have finally begun to taper off.

“Demand is not stellar at all and it’s because people are just not making the buys that they used to do,” a Midwest distributor source said. “Some people are just sitting it out on the sidelines.”

A southwestern distributor source said customers have a bleak perspective on the market, despite moves by domestic steelmakers to curb high imports and distributors’ moves to trim inventories.

These views came after U.S. service centers shipped 3.36 million tons of steel products in October, up 3.2 percent from 3.26 million tons in September but down 14 percent—the biggest year-over-year drop this year—from 3.91 million tons a year earlier, according to the latest data from the Metals Service Center Institute (MSCI).

Market sources said service centers are aggressively selling inventory to pare stocks before the end of the year.

Inventories stood at 8.92 million tons (2.7 months’ supply at current shipping rates) at the end of October, down nearly 3 percent from 9.19 million tons (2.8 months’ supply) a month earlier and 4.2 percent below 9.31 million tons (2.4 months’ supply) a year earlier.

“October’s MSCI data provided little cause for optimism regarding current demand trends aside from the marginal (month-on-month) volume improvement, though it indicates the supply side of the market is again moving in the right direction,” Martin Englert, an analyst at New York-based Jefferies LLC, said in a Nov. 16 research note. Carbon plate saw the biggest year-on-year shipment decline last month, he noted. Many service centers have had to deal with high inventories this year and have resorted to prolonged destocking programs, particularly for oil and gas-related items, sources said. 

Most service centers are surviving the downturn “unless they have unruly debt burdens or overexposure to oil and gas,” Philip Gibbs, vice president and equity research analyst at KeyBanc Capital Markets Inc. in Cleveland, told AMM via e-mail. “(The) good news relative to 2008, early 2009 is that inventory is turning. There is velocity, which helps to offset the dramatic pricing declines.”

However, he believes the service center industry still needs more consolidation, echoing views of other analysts that have gone so far as to say that the distributor model needs to change in commodities like stainless. Some service centers have found the price drops tough this year, with a number forced to file for creditor protection.

In order to offset slumping energy markets, distributors like Reliance Steel & Aluminum Co., Los Angeles, and Ryerson Inc., Chicago, are expanding offers to growing end-markets such as aerospace and automotive. Reliance executives have said that toll processing for the automotive industry is a strong growth area.

But while toll processing doesn’t involve warehousing steel and companies are mainly shielded from price fluctuations, Robbins said that moving up the value chain isn’t good for all distributors because it involves the “same amount of work for a lot less.”

Despite the tough environment, service centers can improve their business by continuing to innovate—for example, by adding new processes and products and even considering new recruitment methods, MSCI president and chief executive officer Robert Weidner III said. 

The outlook for stainless steel shipments remained bleak as distributors have resigned themselves to meager demand, weak commodity prices and falling surcharges, with no reprieve likely until the new year.

“It doesn’t look promising. We didn’t expect much for the balance of the year and the data is verifying it. We have had some increased activity in October but it will not be enough to make a big difference. We expect nothing out of November and December,” one stainless distributor told AMM.

Recent data from the Metal Service Centers Institute had suggested there could be a bright spot on the horizon as stainless steel shipments among U.S. distributors increased in September vs. August, but overall shipments remained below 2014 levels.

While this might suggest the industry is seeing robust turnover, one industry executive said distributors might just be stocking less material.

“Many distribution customers say they are operating at low inventory levels to minimize exposure to falling nickel prices,” Allegheny Technologies Inc. chairman, president and chief executive officer Richard Harshman said.


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