Pockets of growing demand and higher pricing spur processors and distributors to invest in capital projects, acquisitions

April 2017 - The owners and executives of metal service centers and toll processors have been tossing out words like “transformation,” “acceleration,” “optimism,” “confidence” and “upward growth.” Their projections still err on the side of caution, but much less so than their forecasts of previous years. 

Companies in this sector are opening their wallets and actively pursuing acquisitions, new markets, value-added products and quality and process improvements. What’s helped foster this attitude to a great degree is price appreciation, especially for steel products, aided in large part by the containment of dumping by foreign producers in the wake of successful trade litigation by U.S. mills.

“Qualitatively, demand has improved most notably in oil and gas, while other end markets in aggregate are showing modest improvement,” Eddie Lehner, Ryerson Holding Corp. president and CEO, told investors March 13. “The better story thus far is supply-side stabilization as policy has created a playing field in which prices are better supported.”

Michael Siegal, chairman and CEO of Olympic Steel Inc., Bedford Heights, Ohio, attributes the rebound in pricing to “supply-side dynamics combined with political optimism toward the business community, continued enforcement of fair trade policies and potential infrastructure investments, corporate tax reform and job creation,” which will “directly benefit Olympic Steel and many of the markets we serve.”

Olympic’s forecast, he says, “is quite optimistic. Demand has improved in most industries. Spot sales have been particularly strong, as inventories remain lean in the supply chain. Stable raw material prices and lower levels of imported steel continued to support higher market prices.”

Olympic President David Wolfort notes that six published price increases on flat-rolled carbon steels through the end of February were absorbed by the market. 

There were three mill price increases for stainless products since October, Executive Vice President and COO Andrew Greiff adds. “We will see almost an elimination of Chinese product due to the dumping duties.” Although those tons have “been replaced by some of the other Asian countries, we do expect continued strength in the [stainless] market.”

In terms of customer projections, “Core demand is significantly higher and the bias is significantly stronger across the board,” says Wolfort. “Some of our large OEM customers are projecting out into May with some fairly robust build patterns.”

According to Siegal, the mills “seem to be liking their position. They have great confidence. The government is going to be helpful, both in business growth and a discipline around the import supply.”

At Los Angeles-based Reliance Steel & Aluminum Co., President and CEO Gregg J. Mollins anticipates “a positive pricing environment,” noting that “customer sentiment has improved and we anticipate improving demand as we move through 2017.”

Demand for products used in commercial construction projects “continues to experience steady upward growth,” Executive Vice President and COO James D. Hoffman says. Volume growth will continue during 2017 and Reliance will keep investing in processing equipment at business units “that sell into nonresidential construction. We are positioned to absorb increased volumes in our existing footprint as this end market improves.”

Setting records

The increased consumption of aluminum by automakers “has been a primary driver” behind Reliance’s capital projects at its flat-rolled toll processing operations, including at a Monterrey, Mexico, plant it opened in July 2016. 

“We expect to further increase our volume of aluminum processed in 2017, surpassing record levels in 2016,” says Hoffman.

Reliance’s Precision Strip subsidiary will open an 80,000-square-foot toll slitting operation this summer in Bowling Green, Kentucky, 30 miles from its existing Woodburn plant. “Our Kentucky facilities will support both aluminum and steel processing,” says Hoffman, adding, “We will continue to strategically add incremental capacity” at toll processing sites.

Bill Sales, executive vice president of operations at Reliance, says aluminum plate continues to find outlets as aerospace build rates rise through 2019 and order backlogs for commercial planes “remain very healthy.” In addition, “We are seeing increased activity from many of our defense customers as spending on defense ramps up.”

Although mining and agricultural equipment sales continue to languish, there has been an uptick in orders from road building equipment manufacturers, according to Hoffman.

Incremental rise

“What we are seeing from a demand standpoint is slow growth,” says Holman Head, president and COO for O’Neal Industries Inc., Birmingham, Alabama, the largest privately held metals distributor in North America.

“In the industrial economy, a lot of customers are picking up, but not at rates of 15 or 20 percent. Customer A or industry A—like construction equipment—is picking up by a couple percentage points; and material handling, a few percent; the rail industry, a few percent.” That has a cumulative effect, however, Head says. “Although each individual market is not going great guns, overall it becomes a significant improvement.”

Like his peers, Holman believes higher commodity prices will be sustainable, both due to incremental demand gains and because of the political climate, as many view the new administration as heavily favored toward manufacturing.

At Valley Iron Inc., a Fresno, California-based service center whose largest volume products are structural tubing, carbon steel flat-rolled and stainless steel shapes, President Noel Briscoe says, “Most of our mid-sized and larger construction fabricators are busy. They have work booked going forward and that covers a lot of different projects, public and private.”

In the agricultural market—Valley Iron supplies the Central Valley—“we had a good winter with a lot of snow, commodities are selling well and farmers are optimistic about investing in new equipment,” Briscoe says.

Valley Iron is currently training operators on a new high-definition plasma burning table. “We operate waterjet and plasma machines and we just finished expanding our processing building so we have room for more machines,” he says.

“I would expect a steady improvement in orders. Our market segments are optimistic. That should give us a better 2017 in tons and revenues.”

Buy what you need

Rich Merlo, president of JDM Steel Service Inc., Chicago Heights, Illinois, says his team is “excited about 2017 because our customers think this will be a better year. Our internal forecast is for a 20 percent increase in volume and I believe our revenues will be up by a significant amount.”

However, the pace of order and price improvement is uneven. “We see blips, then sideways, then up again. It’s not a steady rise.” In response, “You keep inventory close to the vest, buy what you need when you need it. No one is buying huge amounts of inventory. We got some orders in for the first half and bought for those.”

Still, he expects his purchases will be steady to rising. “My salespeople are very upbeat. Some fabricators are projecting 30 percent more business. Almost nobody is saying it will be a down year,” Merlo says.

“The optimism in the marketplace for metals of all kinds has skyrocketed compared with where it was,” remarks Keith Sabel, president of Sabel Steel in Montgomery, Alabama, which last year celebrated 160 years in business.

“Customers are in a better mood. There are green shoots in the oil patch. It hasn’t turned to actual demand yet, but there is some quoting in response to what they think is coming.” CME crude oil futures are above $50 per barrel starting in July. “If oil and gas come back, that takes a lot of steel and changes demand at the mill level.” Overall, Sabel says, “I expect slow growth, with the pace picking up as the months pass.” 

Capital returns

Ratner Steel doubled the size of its Port of Indiana warehouse last year, added a second stretcher-leveling line and “doubled our volume,” President Mark Ratner says. He predicts demand “will be stable to stronger. Customers still want short lead times, and want us to carry inventory.” As customers add value to their own products and services, “we are really bullish, invested in the future and bringing on more capacity.”

Chicago-based Ryerson was arguably the first service center to make two acquisitions in 2017. It purchased Laserflex Corp., a fabricator that performs laser fabrication and welding; and Guy Metals Inc., which processes stainless and nickel alloy products. “The acquisition of these competitively differentiated companies perfectly aligns with our transformational strategy,” Lehner told investors in mid-March.

O’Neal Industries replaces aging equipment on a regular basis, says Holman Head, and employs a dedicated software program “to help us maintain and perform preventive measures, and checking quality and tolerances.” 

In addition, “We do a lot of thermal cutting—oxyfuel and laser—and that technology changes, like fiber lasers, which are so fast and so good. We look hard at all of that. To be competitive, you have to stay with it. We intend to invest going forward.” MM