Keeping order Keeping order

BUSINESS is seen as being very robust for US companies that provide steel-related processing and first stage fabrication services for various end-use markets, even as they face certain challenges.

However, fear of an economic downturn – even a recession – is adding a measure of uncertainty, with a tight labour market and long lead times for new equipment affecting what both service centres and independent toll processors are able to accomplish. Also, companies are being impacted by regional shifts of steel demand.

Overall, steel processing dynamics haven’t been changing all that much, Eduardo Gonzalez, president and chief executive officer of Ferragon Corp., said, explaining the processors continue to fulfil a need when their customers can’t justify having processing equipment in-house, which involves not only buying and installing equipment, but having enough trained people to operate it efficiently.

That said, over the past few years certain factors have impacted both purchases of steel processing equipment and companies involved in processing steel. Dean Linders, vice president of marketing and sales for coil processing equipment maker Red Bud Industries, observed that for a period of time at the height of the Covid pandemic, companies that were unsure what the future would hold held back from buying processing equipment. However, within six months or so, that changed.

Linders said that even with the talk of a potential recession, toll processors, steel service centres and even some mills and large OEMs, have been placing orders for processing equipment at a record pace and continue to do so. As result, Linders stated that the past two years have been

Red Bud’s best years ever – as much as 50% better than its previous record year – and that US processing equipment lead times are quite extended, generally out 18 months or longer.

Similarly, the processing industry has been very strong – or at least above average – since it came out of Covid. In fact, Tim Bilkey, president of Voss Steel, said that it is getting an additional push due to an easing of the semiconductor chip shortage and certain other supply chain issues, enabling North American auto production to pick up again, although it has yet to return to full forecasted values.

“For the most part, that has kept the US processing community busy, although we could be busier,” Bilkey said, noting that they are as busy as they are capable of being right now with its current staffing levels. “It is a fine line,” he explained. “While we would like to take on more volumes of work, we want to make sure it is a reasonable working environment.”

It is somewhat cloudy as far as how much of US steel processing demand is being met by independent toll processors and how much is being met by US steel service centres, who buy and distribute steel as well as offering various value-added services, and how much the ratio has been changing, said Josh Spoores, principal steel analyst for CRU.

He explained that while more service centres are going downstream, or further downstream than they had been in the past, not all service centres are doing so. Many of those that are doing so are companies that had already been going downstream, providing more valueadded services to be more profitable and competitive, seeing it as an opportunity to grow and to lock in certain customers looking for such services.

Overall, US steel service centres are doing well this year, helped by the recently elevated prices, Michael Barnett, president of Grand Steel and chairman of the Association of Metals Processors & Distributors (AMPD) said, although with concerns of a potential recession, steel pricing arrows seem to be pointing slightly lower for later this year. That, he said, is translating into a slight decline in service centre activity. “But it isn’t that demand is falling off of a cliff,” he noted. “While things have slowed down a little, there is still good activity going through the system. In fact, Philip Gibbs, a senior metals equity analyst for KeyBanc Capital Markets, said that the latest data from the Metals Service Centre Institute (MSCI) indicates that service centre steel shipments were up 5% yearover-year during the first quarter of this year, although it could be dicier as the year goes on given the amount of demand that got pulled forward early this year.

But that doesn’t necessarily translate into the value-added services that service centres offer given that, as Bob Weidner, MSCI’s president, points out, US steel service centre business fits into three basic buckets – pure steel distribution (buying, stocking and shipping steel); simple processing (such as slitting, cut-to-length, etc.); and adding three or more sophisticated value-added processes.

“Every service centre has their own niche as to what they want to do,” Weidner said, noting that while it has been, and continues to be, a conscious business strategy for certain service centres to move up the value-added chain and to make investments in technology, equipment, and people to do so, that isn’t the case for all service centres.

It is generally perceived that some of the larger, publicly owned service centres have been the most aggressive moving in this direction. For example, Gibbs stated that over 50% of Reliance Steel & Aluminum Co. (RSAC) shipments include some type of value-added processing, and that the percentage increases every year. In fact, during its first quarter earnings conference call, Karla Lewis, its president and chief executive officer, noted that the capital expenditures that RSAC will be making this year will largely be for cutting-edge equipment to expand the company’s valueadded processing capabilities.

Some small-to-medium-sized service centres are doing this as well, CRU’s Spoores said, explaining, “It is a way for smaller companies to be more competitive. They can’t buy steel as cheap as larger companies, but offering value added services gives them more of a competitive advantage.”

This is a continuation, and possibly an acceleration, of a long-term trend for certain services to get involved with value added services, even some fabrication services, Mike Lerman, president of Steel Warehouse, said. Lerman added this is partly due to the fear of being seen as competing with their customers being less of an issue than it was in the past, especially if the customer and the service centre have a trusting, long-term relationship.

It isn’t, however, that there is a big slope in the curve in steel distributors going further downstream, one service centre executive, said, maintaining that it has been generally moving at somewhat of a measured pace, particularly for small-and medium-sized regional service centres. In fact, Ferragon’s Gonzalez said he doesn’t believe that there has been much change in how much steel processing is being done by service centres versus independent toll processors. Voss’ Bilkey declared that toll processors don’t have to lose as much sleep over changes in steel processing, especially when it comes to its mill direct business.

But in general – whether by service centres or toll processors – investments in processing and fabrication equipment aren’t being adversely affected by the potential economic downturn, Barnett said, given that companies are not so much making investments based upon current economic conditions but to set themselves up for future opportunities. This, he said, is especially the case given that many of these processing upgrade projects have at least a two-year lead time.

One big reason for investments, whether by toll processors or service centres, is due to pent-up demand for equipment, Red Bud’s Linders said, as some projects that were halted during the pandemic are now starting to come back to life. As a result, companies believe that the time is now right to invest in new processing technology.

The willingness to make such investments, however, varies company by company, depending upon the appetite the company has for risk, Marc Lerman, Steel Warehouse’s chief commercial officer, pointed out. However, more companies see an advantage, especially as equipment technology advances. “We are always looking for ways to do things better and there is no question that new equipment has more capabilities than older equipment.”

The regional shift of the steel industry from the Midwest to the South has also had an impact upon the need for investment, Barnett said, noting that in the South there is high demand for heavier gauge processing for oil country tubular goods, as well as to have the ability to process high strength steels for the automotive market.

In fact, Gonzalez said that one big evolutionary change behind this push for investment are the challenges related to the development of new advanced high strength (AHSS) and ultra-high strength

(UHSS) steels. These, he said, have prompted companies to add heat treating lines. In fact, he said, the heat-treating line that Ferragon recently added to its HyCAL operation in Gibraltar, Mich. is not just the company’s largest investment ever, but is the largest heat treat line in the US and the only one that quenches with hydrogen. But the push toward more AHSS has even more implications for process equipment investment than just heattreating lines. Bilkey pointed out that AHSS itself has certain mechanical properties that makes it hard, if not impossible, to be processed using some older processing equipment.

Another big change is a move toward more automation. Linders said that in the past there hadn’t been as much of a push for automated equipment in North America, partly because of the cost. But, largely out of necessity, that has changed. Not only do companies now have the money to invest, but they need to do so due to the tight labour market. “The new machines on the market have cutting edge technologies designed to reduce personnel requirements while maintaining or increasing the level of throughput that companies are accustomed to,” he explained. Some companies are also investing in some robotics in light of their labour issues, Spoores noted, both to do certain types of processing and to aid in logistics.

But perhaps the biggest challenge that processors are facing is geographical changes in the markets that processors serve, Gonzalez said. “If you have bricks and mortar operations and your market or your steel suppliers move, it is difficult to keep up with what will be happening next,” he explained. “Having to rationalize moving your assets or starting up new ones is a tough challenge.”

While it might not be another record year, Linders said that this year, both service centres and independent toll processors will be continuing to invest in processing equipment, with their customers continuing to look for them to provide various valueadded services. Gibbs agreed that that is the case even with the talk of a potential economic downturn. “They are making investments with one eye on the future, trying to grow their business and managing the needs of their customers with the things they need to be more efficient and competitive,” he said, adding that they currently have enough cash on hand to do so. �