While a sound economy and hurricane rebuilding hold promise for prepainted coil sales, excess supply and excessive competition threaten to tarnish 2006.

By Myra Pinkham,
Contributing Editor

After experiencing a roller-coaster year in 2005, North American coil coaters are hoping for a better 2006, now that inventories are more in line with demand. Much depends on how much prepainted metal is imported, however, and if there is any additional consolidation or rationalization of capacity in this generally oversupplied marketplace.

“Overall demand has been good, about the same as a year ago,” says Richard F. Klein, president of Metal Coaters LP, Houston. “The early part of the year was down, but it has come back. Some was due to increased inventories, some to imports, some to sluggishness in construction products. But business started to pick up in late summer.”

Demand for coated coils was down about 7 percent, on a square footage basis, in the first half of 2005 vs. the first half of 2004, with prepainted steel showing more weakness than aluminum, says John Mitchell, president of the National Coil Coaters Association and manager of marketing and business development for Nichols Aluminum, Lincolnshire, Ill. He notes however, that 2004 was an exceptionally good year, up 20 percent from 2003.

Looking forward, most observers are cautiously optimistic about 2006, especially if the rebuilding of the hurricane-ravaged Gulf Coast takes off in the first quarter, when the market usually sees seasonal weakness, says James Lockey, senior director of sales and marketing for Centria Coating Services, Pittsburgh. “But the big question will be how much painted steel comes to our shores,” he adds.

Though coil coating is a relatively mature market, demand for prepainted steel and aluminum has grown steadily among OEMs because of its cost and environmental advantages, says analyst Christopher Plummer, managing director for Metal Strategies Inc., West Chester, Pa. A properly designed coil coating line can apply a high-quality finish on a large amount of metal in a very short time without releasing harmful compounds into the atmosphere. “It is easier to paint metal in a controlled environment,” Plummer says, noting that for an end-user to benefit from an investment in a captive prepaint facility, he must run at a high operating rate.

New environmental air-quality and solid waste regulations have definitely pushed the prepaint trend, says John Wasz, executive vice president of Aleris International Inc. and president of Aleris Rolled Products, Beachwood, Ohio. For many OEMs, it makes more sense to stamp and form a product from prepainted metal than to create the product and paint it later, generating solvent emissions and overspray that are environmental liabilities. “We are seeing more and more opportunities for prepaint,” Wasz adds. “It can be used for almost anything that ends up being a coated, finished part.”

Most coil-coated metal—both steel and aluminum— finds its way into building and construction applications. In fact, they account for about two thirds of the total market. Housing remains a surprisingly strong component of the economy, though many experts predict a slowdown in residential construction in 2006, which could affect demand for prepainted building materials.

While new housing starts might be slowing, rehab activity is still solid. Coupled with the rebuilding of the Gulf area—which is expected to gain traction in the second quarter—the outlook for demand is positive, Wasz says.

Metal roofing, both for residential and commercial applications, is expected to remain strong. Tom Black, executive director of the Metal Roofing Alliance, Belfair, Wash., notes that while overall roofing has seen 1 to 2 percent annual growth, demand for metal residential and steep-slope roofing has experienced double-digit growth for the last 10 years. More than 80 percent of metal roofing material—most of which is steel—is prepainted, he says.

Metal roofing, though more expensive than traditional materials, offers durability that appeals to many people investing in their homes. “Metal roofs last as long as the structure lasts,” Black says.

Metal roofs have become more aesthetically pleasing, thanks in part to new modular products that look like traditional roofing materials, such as slate, shingles and tile. Because they are lightweight, a new metal roof can often be put on without tearing off the old roof. Reroofing accounts for about 75 percent of the market, Black adds, which means that even if new housing construction slows, there will still be demand for metal roofing materials.

“Hurricane Katrina has helped with success for metal roofs and metal structures,” notes Robert J. McShane, president and chief executive officer of First Precision LLC, Chicago. “The bright stars have been Florida and the Gulf. They have survived better in the hurricanes.”

Engineered metal roofing products add structural integrity to the building beneath them, and have been tested in winds up to 140 miles per hour. They perform well in hurricanes unless the whole house envelope is breached, says Black. “Demand in Florida has been going through the roof,” he adds, noting that in Florida and the Gulf region the market share for metal roofing is over 10 percent vs. 5 to 7 percent nationwide.

Nichols Aluminum’s Mitchell says another plus for coil coating has been the growth of functional coatings—coatings that do more than just add color. One example is cool coatings for both steel and aluminum that reflect heat and make it cheaper to air condition buildings in the summer months. For appliances, there are fingerprint resistant and antimicrobial coatings.

Coil coaters, especially those who coat steel, should also benefit from an expected resurgence in nonresidential construction. In a slump from 2001 into last year, nonresidential “should be the strongest major growth area in the economy in 2006 with growth of over 5 percent,” says Plummer.

Demand for prepainted metal in commercial construction sectors will be magnified by shortages of competitive materials, such as concrete, notes Jeff Widenor, vice president of strategic planning and business development for Precoat Metals in St. Louis.

He expects Gulf-area rebuilding to bolster commercial as well as residential demand, though he predicts a significant lag before the storm reconstruction has a measurable effect on the prepaint market.

Other major end uses for prepainted metal, including transportation, business and consumer products, are flat to moderately declining, Plummer says.

Transportation will see a slight decline in the NAFTA automotive market offset by strength in the truck and truck trailer market, which is getting a boost from replacement purchases prompted by new environmental regulations on diesel engines for Class 8 trucks. Industry observers are optimistic that any net decline in transportation will be counterbalanced by increases in building and construction.

So, while the demand side of the prepaint outlook appears OK, the supply side continues to struggle with excess production capacity. “While our core markets will be strong, we are fighting with our competition due to overcapacity in the market,” says Dan Bullard, marketing manager for Material Sciences Corp., Elk Grove Village, Ill. Because the coil-coating market is so fragmented-with independent coil coaters, captive coil coaters and those who specialize in coating just steel or aluminum—it is hard to determine just how much overcapacity there is in the market. Also complicating matters is that coil coating tends to be a very geographic business, which means that capacity utilization varies from region to region, he adds.

“Some lines in this industry are relatively full, while others are significantly underutilized. On average, industry capacity utilization hovers between 50 and 60 percent,” Widenor says, noting that probably the most significant overcapacity is in the upper Midwest.

Several coil coaters have taken moves to rectify that situation, including Precoat Metals, which a few years ago shut its Chicago facility. Material Sciences shut down lines in Middletown, Ohio, and Chicago. Aleris, after acquiring four coating lines as part of its recent purchase of Alsco Metals Corp., Raleigh, N.C., has announced it will shut down its less-efficient line in Carson, Calif.

Meanwhile, new capacity is being brought on-stream and existing capacity is being relocated. Precoat Metals plans to open a greenfield facility in Birmingham, Ala., this year. “We saw an opportunity in a region that was undersupplied. Once it is up and running, we will be the only independent toll processor in the region,” says Widenor.

Steelscape Inc., Kalama, Wash., acquired a paint line in Fairfield, Ala., when it purchased the assets of flat-rolled steel producer Polymer Coil Coaters about a year ago. SeverCorr, a new entrant to the steel market, will be opening a captive coil coating line at its under-construction facility in Columbus, Miss.

In May, Centria added a new coating line in Ambridge, Pa., which Lockey says will allow his company to increase its market share. Centria concentrates on higher quality coatings in smaller runs, largely on aluminum and stainless substrates. Centria’s new coating line is the first phase of a two-phase upgrade, the second phase of which will be completed in February, he adds.

Steelscape expects to further increase its coil-coating capacity in April when it completes the relocation and upgrade of its Richmond, Calif., line to Shreveport, La. Renee Baker, the company’s marketing manager, says the company decided to relocate this line “because we have increased our shipments to the East Coast and most of our lines are on the West Coast.”

A few metal producers, such as Steelscape and Steel Dynamics Inc., have vertically integrated to include coated coil among their product offerings, says Tommy Scruggs, prepaint product manager for Steel Dynamics Inc., Fort Wayne, Ind. “The move [to paint coils SDI produces] has been good for customers,” he says. “It takes a lot of inventory out of the supply chain and results in shorter cycle times.”

Baker adds that it simplifies business for customers, who receive a single bill for both the steel coil and the paint. “Our customers only have one supplier to deal with,” she says.

Material Sciences’ Bullard estimates the coil-coating market currently has up to 25 percent overcapacity. Mitchell says most of that overcapacity is on the steel side. He maintains no new aluminum lines are coming on-stream in North America and that most are currently running close to capacity.

Despite the general overcapacity, there has been little rationalization, says McShane. Rather, certain lines have gained new life under new ownership. In addition to the Steelscape/Polymer and Aleris/Alsco acquisitions, he notes that ArvinMeritor Inc., Troy, Mich., has sold its Roll Coater Inc. subsidiary to private equity firm Willis Stein & Partners.

The excess capacity adds to excessive competition and hurts everyone, observers agree. “There are too many players out there, and that has been a problem. It is too fragmented to be a disciplined market,” Plummer says. Bullard adds there are constant rumors of consolidation and rationalization, “but we have yet to see the trigger pulled. There is definitely a need. We are competing on price now.”

The price competition compounds the cost pressures that coil coaters are experiencing. “The cost side has been very challenging, especially for energy and chemicals,” Lockey says. “Chemicals are a big part of our costs, and they have gone up because many of the coatings we use are petroleum based. Coating suppliers have been impacted by raw material costs and they are passing that on to us.” Likewise, coil coater profitability has been hit by high prices for natural gas, which is used in the paint-curing process.

Coil coaters say they have resisted passing these increased costs on to their customers, but are now reaching a point where they have little choice. “We are close to treading water,” Widenor says. “We have absorbed as much as we can by increasing our efficiency and productivity. With the spikes that everyone has seen, we have reached the point that we need to pass it on. We are trying to do it in the most palatable way we can. Our customers have been very understanding. They are faced with similar cost issues.”

There is also growing concern about the impact of imports on domestic capacity and pricing, especially on the steel end. “Imports take demand away from the domestic coil-coating industry when overseas producers bring in prepainted steel,” says Metal Coaters’ Klein.

Following a surge late in 2004 and early in 2005, it appeared that prepaint imports had leveled off. Many anticipate they will pick up again in 2006. “Steel prices have come up from their lows and the market is once again attractive to imports,” Baker explains.

“It is a constant ebb and flow,” says Scruggs, corroborating the increased threat of imports this year, especially from Korea and Taiwan. “Even without imports, there is oversupply in the market,” he emphasized.

Rising import levels and further oversupply promises continued pressure on coil coaters’ profitability in 2006, especially among those who finish steel.
While this year may be better than last, Klein predicts, “it won’t be an outstanding year in any shape or form.”

“There will continue to be pressures on margins,” Lockey agrees, “but hopefully there will be some stabilization of cost.”

There seems to be more optimism on the aluminum side of the business. “We are bullish about 2006,” says Wasz at Aleris, especially since the inventory buildup that held back orders last year is largely worked down. “We have already seen some improved order activity and that should continue to pick up.”