Big Troubles
For Big Three
Vex Processors

Despite fears about the future of domestic automakers, and consolidating steel mills, toll processing executives expect 2006 to be another solid year.

By Dan Markham,
Senior Editor

The continuing struggles of General Motors, Ford and Chrysler would seem to be a source of monumental worry for toll processing, an industry linked with automotive. But toll processors are instead upbeat, welcoming a potential change in their business relationship with the Big Three.

Barring a disastrous bankruptcy filing, toll processors envision a new, more cooperative attitude emerging from domestic automakers following their inevitable restructuring.

In November, GM announced it would be closing nine assembly, stamping and powertrain facilities in North America, plus three service and parts operations, by the end of 2006. Ford followed that in January with news it plans to close 14 plants and cut up to 30,000 jobs.

“The big roll of the dice is what happens to GM. There’s a lot of fear GM might tip over,” says Bob McShane, president of First Precision LLC, Chicago.
Worries about GM’s future accelerated last month when the automaker announced losses of $4.8 billion for the fourth quarter and $8.6 billion for the year.

“The economic implications of a Ford or GM going bankrupt are unfathomable,” says Jerome M. Hack, president of Dearborn Steel, Dearborn, Mich. “That’s not to say the market wouldn’t recover and continue on. But there’s still a lot of room for them to get back on solid footing financially.”

Any changes the Big Three and their parts suppliers make in business practices to regain competitiveness will be welcomed by toll processors. Industry leaders say the traditional domestic automakers could learn a lot from the “New Domestics” when it comes to building relationships.

“A lot of toll processors have shifted away from going to Detroit and bowing down to the god of GM, and have gone to Honda, Toyota, Hyundai and some of the others. They’ve found that while negotiations have been tough, when they get a contract with a Toyota, they’re very loyal,” McShane says.

Doug Bernd, vice president of outside processing for Mi-Tech Steel, Louisville, Ky., says the New Domestics are committed to making the relationship work for all parties. “There is little comparison between the New Domestics and the traditional domestic automotive producers. The New Domestics’ involvement is at a high level all the time. They are willing to share things with the supply chain that are essential to making it efficient,” Bernd says.

For those who have become frustrated in their relations with the Big Three in recent years, the conditions facing GM and Ford present some hope for the future, as the automakers will be forced to adjust their operations to compete both locally and globally.

“The Big Three have financial issues that will continue to make the processors’ position very important in the supply chain,” says Bernd. “They’re not going to want to carry any inventory. The requirements for just-in-time delivery and quality processing are still going to be there, and probably heightened to some degree.”

Mill consolidation’s not over
Last month’s hostile takeover attempt of Arcelor by Mittal Steel, which would combine the world’s two largest steel producers, has heightened the toll processing market’s uncertainty about the ultimate effects of mill consolidation.
“One of the biggest issues during 2006 will be Mittal Steel and how they decide to manage outside processing activities. They are now the 400-pound gorilla in the room,” says McShane.

Toll processors have been relatively unharmed by the dramatic steel industry consolidation of the past several years. While dozens of mills’ names have changed as they’ve been integrated into the operations of Mittal, Nucor, Steel Dynamics, U.S. Steel, and other acquirers, the volume of steel that has required processing has grown with the strong economy. Indeed, toll processors have experienced a string of successful years, despite the upheaval of their mill client base.

Nevertheless, many toll processing executives would prefer to be less mill-reliant. Though the mills remain the toll processors’ primary customers, many are seeking more business among end-users and service centers .

“Up until 1995, most of the toll processors’ sales and marketing efforts were spent on the doorsteps of the primary aluminum and steel producers,” McShane says. “With the consolidation, it became a very different marketplace. There has been a shift in marketing focus from being completely dedicated to the primary producer to that of the end-user.”

“I’m trying not to be as dependent on the mill product. I don’t want to be in a position of ‘you go the way the mill goes,’” says John Stroud, plant manager at Arlington Metals, Franklin Park, Ill. Similarly, Stroud wants to diversify his end-user customer base. “We need to see if there are some guys we can get who aren’t tied to the automotive market, so if they do dip we don’t get hammered.”

While consolidation among the steel producers has been under way for years, the toll processing world has lagged behind. But a similar shrinkage is inevitable, Bernd says. “Obviously, in the past there were too many steel producers. Likewise, in many respects, there are too many processors.”

Stroud expects “the little guys” to be squeezed out in the future. Smaller processors will go out of business or be gobbled up by larger companies looking for a type of processing line or location, he says.

McShane believes smaller processors can survive an industry shakeout by marketing their expertise as a one-stop shop. “Many of the strong and entrepreneurial toll processors have added equipment and capability to make themselves more valuable, be it cut-to-length or cleaning or tension leveling. Putting it all under one roof and being able to do more in one location is important. Anytime you put steel on rubber wheels, it costs money,” he adds.

Transportation’s troubling
The strong economy and consolidation of the trucking industry over the past few years has challenged toll processors to meet customer delivery requirements. “Transportation has been a hot topic at every one of our Outside Processors Council meetings,” says Stroud, the current president of the OPC.

Besides the increasing costs associated with higher fuel prices, the availability of trucks frustrates executives. “It used to be you could call at five o’clock on a Friday and a truck would be there at six,” McShane says. Today the process takes days or weeks, not hours.

To Bernd, the crux of the transportation issue is customers’ failure to keep toll processors apprised of incoming deliveries until the last minute. Such surprises lead to inefficient scheduling of jobs on processing lines and late shipments to the end-user.

The situation is worsened by the short supply of drivers willing to handle steel deliveries, which require a lot of manual chaining and tarping, followed by untarping and unchaining. “If I could go drive for somebody that didn’t require me to do all that manual work, and make the same money, why wouldn’t I?” Stroud asks rhetorically.

Most toll processors, particularly those not dependent on automotive business, are looking forward to another strong year in 2006.

“I don’t really see any downside to the growth of processing,” Bernd says. The more supply chain partners can improve communication and information-sharing, he adds, the more efficient and profitable they will be.

Chicago-based Feralloy’s automotive work is done in Mexico, where its platforms are all holding steady, says Executive Vice President Roger Sippey. Most of Feralloy’s toll processing is related to the capital goods market, which is in good shape. “We have a very good outlook for 2006. The mills we’re aligned with are going strong,” Sippey says.

Similarly, Main Steel Polishing Co., Tinton Falls, N.J., primarily processes aluminum and stainless steel for appliance makers. Company President George Bogan says his market is on the verge of bucking a trend.

“Typically, for the aluminum and stainless steel trade, we see it go through a five-year cycle—four up and one down. If 2006 is as good as it’s been forecast, we’ll be stretching that four-year cycle an extra year.”