Printer Friendly

Steel service center assessment - problems and opportunities.

In an annual "state-of-the-industry" address, Andrew G Sharkey, president of the Steel Service Center Institute, Cleveland, OH, recently assessed the industry. He characterized it as one facing problems no different than those faced by other segments of US industry, but with unique opportunities.

According to Sharkey, the general economy showed a strong performance last year with GNP up 6.7 percent and a relatively low rate of inflation at about 4 percent. In the face of this, the service center business is on a wide roller coaster ride, with a record high and low occuring within a 24-month period between 1982 and 1984. This has created uncertainty, making planning difficult. Moreover, low inflation--or deflation--means a decline in inflation-hedging assets, plus a sharp drop in the price structure. In a business where inventory appreciation historically is a sure bet, deflation creates a problem.

This is aggravated by a strong dollar that increasingly is attractive to foreign investors. A strong dollar leads to cheap imports. In the past four years, the dollar gained over 50 percent against the average of other major currencies, translating as a 50-percent tax on US exports and a 50-percent subsidy for imports. "The single most important thing that has transformed the steel industry is the currency issue." says Sharkey. "The price at which foreign producers can sell in this market and not be dumping is strictly currency related."

Another factor is the trade deficit. In 1984 it was $113 billion, double 1983's $61 billion. "Low inflation, cheap imports, a strong dollar, and a large trade deficit are all things that we must live with. Service centers with a plan to make money will fare well in spite of these conditions," observes Sharkey.

In addition to general economic conditions, service centers are challenged by what is happening to their suppliers--the mills. Massive restructuring and down-sizing are occurring--a dismantling of an industry that built capacity for a world market that no longer exists.

He lists three major aspects of down-sizing and restructuring that have implications for service centers:

* A continuing pattern of mergers and acquisitions.

* More companies going under, then surfacing as reconstituted competitors (use of Chapter 11 allows reorganization on a lower cost basis).

* Further evolution in technological development and an all-out drive for minimills to get into the flat-rolled business. (For more information on minimills, see Dec '84, Metalworking Economics.)

Moreover, as more domestic mills move away from primary production, a fragmented market will become even more fragmented, and domestic suppliers will produce smaller annual tonnages.

Such changes make it tough for service centers because they are facing schizophrenic market strategies. Mills move in and out of products as they seek niches. Another factor impacting domestic supply is that general deflation, a strong dollar, cheap imports, and steel users struggling to survive in a world market combine to create a new set of "revenue realities." Sharkey remarks, "Sadly, the significant productivity increases (cost reductions) achieved by most domestic mills last year are offset by even bigger declines in transaction prices (revenues). This means that suppliers of some products are no longer competitive. While most mills are moving quickly, the path to survival will be in cost reduction rather than revenue growth."

He also points out that relationships between mills and service centers are deteriorating. Changes are also taking place between service centers and their customers. Large service center accounts are diminishing, and those remaining don't buy like they used to. Steel intensity (steel consumption in tons divided by real GNP) is declining and imports of steel products are causing the loss of important customers.

Sharkey also faults the "bid and buy" process introduced by General Motors as rippling throughout the metalworking community. "We see more long-term contracts with a smaller numbers of service center suppliers. Companies that dealt with 15 or 20 service centers in the past, are now dealing with only three or four," says Sharkey.

Service centers are also forced to make more capital investments as quality standards tighten and the need for more expensive, closer tolerance processing equipment becomes mandatory. Further, customer demands for frequent deliveries, custom packaging, etc, are leading to rising costs that, in many cases, can't be recovered.

According to Sharkey, a survey of major service centers reveals the following trends:

* Dramatic consolidation. Eighty percent of the business done by service centers companies will be done by companies grossing $20 million or more by 1990. Fewer companies will be doing more volume. And mergers and consolidations of service centers will continue.

* More specialization, especially in flat-rolled, tubing, and large beam products.

* More foreign penetration. By 1990, between 15 and 20 percent of steel service center business will be by foreign mills and foreign trading companies. Worldwide economic conditions are driving foreign investors into the US market.

* Service center overcapacity. There is too much square footage, processing equipment, and inventory for a shrinking market situation.

Sharkey maintains that the industry shares these same problems with at least 75 percent of the wholesale-distribution commodity businesses in this country.

His assessment of the service center industry concludes with a listing of opportunities and accomplishments. For example, 1984 was a record year; 21.2-million tons were shipped. a 3-to-4-percent increase is expected this year, to about 22-million tons. Also, the industry enjoyed a record market share of 31 percent of carbon industrial steel products, as well as the second best return-on-sales (after tax) since 1974.
COPYRIGHT 1985 Nelson Publishing
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1985 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Publication:Tooling & Production
Date:Mar 1, 1985
Previous Article:The incredible shrinking cutting-tool market.
Next Article:Cut a hole in a part; cut a part from the hole... that's what one job shop operator is doing using a novel hole cutter that gives him more slugs than...

Related Articles
Service centers: strength in steel.
Clean steel technology.
Bethlehem Steel uses intelligent T1 ESF CSUs to build strong network.
Coke ovens over computers.
Steel founders grapple with customer perceptions.
15 minutes with ... Jose Antonio Gomez Urquiza.
Keep U.S. steel industry competitive, Bush urged. (Presstime Notes).
Rising steel prices cause contract woes.

Terms of use | Copyright © 2016 Farlex, Inc. | Feedback | For webmasters