The foreseeable future will bring economic expansion. According to Natixis Commodity Markets Ltd.’s First Quarter 2011 Metals Review, "In the United States, GDP grew 3.2 percent in the final quarter of last year. The economy should experience further expansion in 2011 as the tax and spending deal passed in December stimulates demand and the labor market picks up, creating a self-sustaining expansion."
Numbers already are reflecting growth. On Feb. 17, Reliance Steel & Aluminum Co. reported its 2010 fourth quarter and year-end financial results. The company’s tons sold were up 6 percent for the year, and the average price per ton sold was up 12 percent compared with 2009.
"Our strongest markets in 2010 were in energy, oil and gas; semiconductor and electronics; aerospace; agriculture; and our toll-processing business, which is primarily related to the auto and appliance industries," David H. Hannah, chairman and CEO, noted in a press release. "Non-residential construction was our most difficult area last year."
Along with strength in key markets, Hannah commented in the results that he expects pricing to remain strong - at least through the 2011 first quarter. He pointed out rapid price increases can change customers’ buying patterns and make it difficult to determine end-use demand.
"The commodity price of steel has been increasing for four months," says Fritz Prine, CFO, Westfield Steel, Westfield, Ind. "The increase is mainly driven by supply costs (scrap and energy) and not demand driven. Demand is weak in general but stronger in certain segments like flat-rolled. Because of the overall perception of our customers that the economy is still weak, seeing steel prices increase is difficult.
"Now that most of the excess steel is out of the distribution channel, mills are allocating again," he continues. "This means that service centers have to order on rolling schedules that are six to eight weeks apart. We have to hold more inventory in a rising environment. If real demand does not actually increase, then steel prices will go flat or decrease in early summer. If that should happen, no one wants to be left holding high-priced inventory."
Adjusting to demand
Until the market steadies, Josh Spoores, chief analyst for Steel Reality, says the biggest challenge for service centers will be adjusting to manufacturing demand. "New orders of manufactured goods and machinery over the past three months have averaged 17 percent higher than the same months of the prior year. As demand for steel increases, service centers will need to be focused on managing inventories, credit levels and capacity in order to meet this demand and growth while limiting the overall level of risk placed on their business.
"These concerns haven’t necessarily changed from a year ago, though prices in 2011 so far have moved by a much larger degree than in 2010," he continues. "The increase in prices and persistent volatility create higher levels of risk."
Although Jay Kessler, general manager, Brown-Strauss Steel, Denver, Colo., says business is definitely better, "the challenge is how long before there is consistency in business. We have seen some spikes in the market due to increased prices from the mills, but it doesn’t really sustain itself. Certainly, it’s improved, but it hasn’t leveled off and run at a steady pace."
Without consistency, it becomes harder for service centers to forecast inventory needs - especially when prices are all over the map. Ryan Letz, executive vice president, Willbanks Metals, Fort Worth, Texas, says his company’s biggest challenge is pricing and knowing when (or if) the market might start to head south. "That’s the biggest concern that we have, just our inventory and staying as lean as possible. It’s all about buying at the right time," he says.
"The biggest question I’m asking, not of my suppliers but of other service centers, is when’s the peak and what price do you think it’s going to be at? I’m really trying to get a feel for what’s going on," Letz continues. "I believe that service centers thought this increase in price wouldn’t be as strong as it has been, and because of mill shut downs and mothballed capacity, there isn’t enough material to keep up with increasing demand. 2008 had its reasons for giving us increases; 2011 has others. We are in the inventory business and the last thing we want is to be over inventoried when prices collapse."
Keeping inventories stocked with desired items will be a challenge for service centers in 2011, says Brad Hite, general manager, Stainless Sales Corp., Chicago. He says factors like "rising nickel prices earlier this year" have led to requests from his customers to convert orders from 304 to 201 stainless.
"Maintaining sufficient inventory in a volatile commodity market while maintaining consistent cash flow is crucial," says Cullen Kline, sales and marketing manager, Ampco Metal Inc., Arlington Heights, Ill.
Ampco is taking steps to ensure competitiveness by "focusing on our strengths by maintaining product integrity. Ampco Metals has a worldwide reputation for quality, and ensuring consistent and cost-effective inventory is critical to sustaining customer loyalty," Kline says.
Dave Brenneman, executive vice president, sales, for McNichols Co., Tampa, Fla., concurs that balancing inventory will be at the top of his list of concerns. "A few challenges I see are staffing and training as service centers augment sales forces; in the atmosphere of rising costs, balancing inventory just ahead of expected demand, understanding that what cycles up will eventually cycle down; and the overarching challenge to businesses’ longer-term planning because of the ominous and unclear leadership from our country’s legislative and executive branches."
"Service centers will be faced with the continued pressures of just-in-time inventory needs as the push-back of inventory continues to work its way up the chain," says Frank Bergren, vice president, Metal Partners Rebar, Naperville, Ill. "The volatility of price fluctuations will continue until we see a consistent level of improvement."
One step ahead of the market
As optimism increases, so does buying, which means service centers will need to stay on top of customer requests.
Letz says two to three months ago, his customers were confident that the uptick "was not going to stick. And they would buy just a little bit of material. When they finally figured out that the recovery had some legs under it, and it is going to continue to go up, that’s when they started buying heavier. ... The smart buyers are buying further out, which I haven’t seen as much. People are trying to secure their tons further out, and then the other guys are having to be reactive, which doesn’t bode well for their costs."
"We are seeing our customers’ buying patterns evolve from cautious to optimistic," Kline notes. "Where previously they would purchase two-weeks supply, now they are committing to long-term blanket orders as their cash flow position improves."
Until all customers have returned to higher buying levels, staying in front of demand requires hands-on management and constant evaluation.
"We are working closely with our customers to make sure we understand their needs and have the appropriate levels of rebar in our inventory at all times to supply those needs," Bergren says.
"Obviously, since 2008, there’s a cautiousness about what we do," Kessler says. "We re-evaluate our forecasts more frequently, meaning that where we used to run with things for a quarter at a time, we now look at it probably every two to three weeks to make sure we stay ahead of the market, whether it’s up or down. We’re trying to stay in the mode where we’re recognizing what the market’s demanding. If demand is slowing down, then we’re going to trim back on purchasing."
Letz says although he manages his company along with his father and brother, "we don’t even do half the buying. There’s a lot of buying that we give to other people in our organization, but we are being forced to be in very good tune with each market. The good news is demand is increasing. It appears to be increasing every month."
At the end of the day, being able to fulfill customers’ needs keeps them coming back. "We’ve always believed in stocking a good level of inventory," Kessler says. "We hedge toward the market improving rather than the market going down, so we always have inventory on hand. We have seven locations to serve the market, so if we don’t have it in stock at one location, we have the ability to bring it in from one of our other locations to support our customers’ levels of business.
"Customers need material sooner because they don’t have a backlog," he continues. "For the majority of customers, when they get a job, they need the steel because they don’t have any steel in their shop. For many years, customers carried a backlog of three to six months - some up to a year. They could wait for material to come in from the mill or to come in from us. Right now, it’s kind of like the squeaky wheel gets the grease: We have the inventory; we get the order."
As cash and credit become more liquid, companies are beginning to invest in their businesses as well as scour the market for possible acquisitions.
Willbanks Metals, Fort Worth, Texas, recently opened a retail/long products distribution facility to answer its customers’ demands for same-day availability. In addition, the company is expanding and upgrading its capabilities with a Bradbury leveling line and a new plate roll. Ryan Letz, executive vice president, Willbanks Metals, says, adding the equipment made sense both from a capacity and a quality perspective. "We are really focused on our customers, and we want to give them the best quality possible."
McNichols Co., Tampa, Fla., also is upgrading its services by "introducing significant technology in phone systems, CRM, Internet and logistics that are providing improved service levels customized to our different customer segments with consolidated sales offices, with an end result of best value with the best variety and service," says Dave Brenneman, executive vice president, sales.
"We’re trying to position ourselves to be stronger and broader in the market and more visible to our customers," notes Jay Kessler, general manager, Brown-Strauss Steel, Denver, Colo. As a result, Brown-Strauss has added another salesperson to help handle the Northern California market and added more personnel to its Kansas City office.
In addition, the company is broadening its market base. "Obviously, solar is a big business in today’s economy from all aspects, not just steel," Kessler continues. "We’re trying to look into that further to see where we can change our business to follow that into the market and supply steel for that need. The wind industry is also big. They’re building a new facility up in Cheyenne, Wyo. We won’t be supplying steel for the wind turbines, but we may be supplying steel for the buildings."
Sometimes, the best way to expand business is through mergers and acquisitions. Big-time acquisitions ramped up at the end of 2010 and continued into 2011. Among others, Reliance Steel & Aluminum acquired Lampros Steel Plate Distribution LLC in December, Klöckner and Co. announced its intent to acquire Macsteel Service Centers USA in January and Metals USA Holdings Corp. completed its acquisition of the Richardson Trident Co. in March.
"Horizontal and vertical consolidation continues to make sense as consumers demand more value and the efficiencies of shared overhead can directly increment that value," Brenneman says.
"The bankers and investors I’m speaking with are focusing more on activity in the service center space across all levels," says Josh Spoores, chief analyst for Steel Reality. "Some small locations are being bought by larger service centers, some medium-sized service centers are merging and there are more acquisitions in the top 10 service centers."
"Brown-Strauss is always looking for opportunities," says Kessler. "We’re definitely in acquisition mode if the right opportunity presents itself. We’re in a good cash position and we look at that market as an opportunity." MM