Most service center executives feel like winners today, coming off a record year for industry revenues in 2004. For some, though, it’s an unsatisfying victory, like notching a win against a team that has to forfeit.
Some companies more than doubled their revenues last year—not because their hard work doubled the number of customers or the tons they shipped, but simply because the price of metal increased so dramatically.

To cite just one example, Reliance Steel & Aluminum sold 4.3 percent more tons in 2004, yet recorded its most profitable year ever with a 400 percent jump in earnings. “While we don’t expect the benefit of rapidly rising prices like in 2004, we do expect 2005 to be another outstanding year when compared to other years,” said Reliance CEO Dave Hannah.

In other words, he expects 2005 to be a good year, but not a great year like 2004, largely because steel prices are trending downward with the price of scrap. Hot-band reportedly was selling in the $600 per ton range recently, down from last year’s high near $750 per ton.

Service centers have little influence over the price of global commodities like steel and aluminum. Thus, the big gains of last year give many executives a renewed sense of their vulnerability to a negative price swing. What the price gods gaveth in 2004, they could easily taketh away in 2006 or beyond.

To their credit, many service centers are investing their newfound prosperity in acquisitions that will give them a position of strength, if (or when) metals prices return to historical levels:

• Reliance agreed to buy Chapel Steel Corp., a Pennsylvania distributor of carbon and alloy steel plate;
  
• Macsteel Service Centers USA Inc. acquired Alpha Steel, which distributes hot-rolled coil, structural steel and other products in the Midwest;
  
• Copper and Brass Sales purchased Metalfast Services, giving it a strong entry into architectural metals and the booming Las Vegas market. Copper and Brass also purchased Slitco Metal Processing and Sales in Illinois, expanding its capabilities in light-gauge and narrow-width slitting of red metals.
  
• Esmark Inc. purchased Ohio-based Miami Valley Steel Services Inc., making Esmark one of the largest flat-roll buyers in the U.S.;
  
• O’Neal Steel purchased Leeco Steel Products Inc. near Chicago in a strategic move to enhance its presence in the market for specialized grades of high-strength steel and alloy plate;
  
• Meanwhile, Ryerson Tull, the industry’s largest service center company, is still working to integrate its earlier acquisition of Integris Metals. When the process is complete, the distributor historically known as a carbon steel giant will be a very different competitor, one that derives half its sales from stainless steel and aluminum.
  

The market is a very uncertain place right now. The economy is sending mixed signals, with healthy GDP numbers offset by disappointing job growth, especially in the manufacturing sector. Service center shipments of steel products have declined nearly 5 percent year-to-date, though aluminum shipments are up 7 percent. Inventories of both steel and aluminum remain high compared with this time last year, which suggests some weakness in demand.

Feeding off both today’s prosperity and its uncertainty, M&A activity is likely to continue in the service center sector as companies prepare for the day when the competition shows up at full strength.