In 2006, barely a month went by without a splashy announcement of another major merger between industry heavyweights. Such deals among mills and service centers are creating waves in the toll processing community, as well.

The year kicked off with Reliance Steel & Aluminum Co.’s acquisition of EMJ and closed with Esmark’s winning board vote at the Wheeling-Pittsburgh shareholders meeting. In between, the world’s two largest steel companies, Mittal and Arcelor, completed a merger that changed the competitive landscape among steel producers.

All of this activity was watched intently by a smaller, yet vital, segment of the metals supply chain—toll processors. Consolidation of the metals industry is a topic of great interest to toll processing executives, who are expected to turn out in force at this month’s FMA Toll Processing 2007 Conference in Orlando, Fla., to hear remarks from Arcelor Mittal, U.S. Steel and Esmark, among other speakers.

“Every year we look across the table and see what people are talking about,” says Bob McShane, president of First Precision LLC, Chicago, and chairman of FMA’s Toll Processing Technology Council. “This [consolidation] is the big issue.”

Toll or outside processors offer processing services ranging from slitting and sawing to coil coating and polishing on a fee basis to mills, service centers and end-users. Strong merger and acquisition activity in 2006 brings back painful memories from the past decade when the metals industry suffered mass bankruptcies, robbing toll processors of many customers. For some, today’s key concern is the still-evolving giant, Arcelor Mittal, and its handling of outside processing.

“Mittal has the biggest job to do with the old LTV, old Bethlehem, old Weirton. They’ve got a gigantic challenge to meld them into a whole,” says Tom McDonald, vice president of operations at Arlington Metals, Franklin Park, Ill. “They’re trying to use legacy systems from all of these places. It’s a struggle, and it’s been a struggle for us to follow.” McDonald, along with Arlington’s Plant Manager John Stroud, will deliver a presentation on “Processing in the Consolidated Era,” at this month’s FMA conference.

Adapting to the new systems and personnel at Mittal is a significant concern for many processors, McShane agrees. “There is a lot of uneasiness because they have changed themselves internally. A lot of people who were with Bethlehem or Inland or LTV are gone. They’ve been replaced by folks who come from outside the steel industry.”

Consolidation at the service center level can also have an impact on toll processors, both in terms of the number of potential customers and the processing capabilities of the survivors, says Jody Pitts, vice president of marketing at Main Steel Polishing Co., Tinton Falls, N.J. “We’re already in a smaller marketplace, but consolidation affects us as well. If you had 100 service centers that handled stainless and aluminum and now there’s 75, some of those service centers may have picked up additional equipment,” says Pitts. “Consolidation will always affect the toll processor.”

Other executives believe the impact is limited.

“The issues today are the same as they’ve been,” says Gary Corson, toll processing manager for Olympic Steel Inc., Cleveland. “There’s a trend for us to do more with the end-user as opposed to the mills as they go through consolidation. What it does is make the processor have to work a little harder. If the mill wants to sell master coil, then the end-user has to find a processor, as opposed to the mill assigning the order to a processor.”

The shift in toll processing toward more OEM business is not necessarily a negative trend, says McDonald. Forging more relationships with OEMs protects toll processors from the ups and downs of the mills.

More significant than the changing relationships between processors and producers is the sister trend to consolidation—globalization—says Eduardo Gon­ zalez, president of Cleveland-based Ferrous Metal Processing. He believes the trade imbalance with China is the biggest threat facing tollers. Though China’s role in the steel supply chain doesn’t directly affect toll processors in North America, the Asian country’s activities are wreaking havoc on many FMP customers, he says.

“Automotive and industrial goods are still OK, but manufactured goods are gone. Anything in your home is gone, or it’s going to be gone [to China],” he says.

Gonzalez is quick to point out that some globalization, such as that promoted by NAFTA, has had a positive effect on American manufacturing. Many processors, such as Feralloy, Steel Technologies and Worthington, have found Mexico to be fertile ground for greenfield projects and joint ventures.

“Mexico to China is comparing grapes to watermelons. In Mexico, there is no exposed automotive flat-rolled production, so there’s trade back and forth. But with China, it’s one-way trade,” Gonzalez says.

One processor active in Mexico is Feralloy, which is a partner in Acero Prime, a joint venture with United States Steel Export de Mexico and Mitsui Steel Holdings Inc. Acero Prime is one of Feralloy’s five prominent joint ventures, which also include Oregon Feralloy Partners (with Oregon Steel), Feralloy Wheeling Specialty Processing Co. (with Wheeling-Pitt), Feralloy Processing Co. (with U.S. Steel) and Indiana Pickling & Processing (with Signode and Mittal).

Frank Walker, president and CEO of Chicago-based Feralloy, believes these joint ventures with prominent steel companies have insulated them against some of the issues faced by other processors. “The partners we had pre-consolidation are the same ones we have today. They’re still interested in outsourcing those processing activities that are most cost-effectively done by independents and joint ventures. I don’t see a change in interest in that area. The goal is always to be the most efficient way for the supply chain to supply the market,” he says.

The story is just developing for two other North American steel companies, SeverCorr, the new mill opening later this year in Mississippi, and Wheeling-Pitt, with Esmark’s leadership team taking the reigns.

SeverCorr, a partnership between Russia’s Severstal and former Nucor executive John Correnti, attracted two processing and distribution partners even before producing its first tons. Kenwal Steel Corp., Dearborn, Mich., and Heidtman Steel, Toledo, Ohio, are building new facilities adjacent to SeverCorr’s new plant in Columbus, Miss.

Wheeling-Pitt, in contrast, is the subject of speculation now that the mill is aligned with one of the country’s largest service center companies.

“Are they going to allow them [Wheeling-Pitt] to process with other people, or will they take it all under their wing?” McDonald asks. “What are they going to look like after they get there?”

“It’s an unfolding story, and the first chapter isn’t written,” says Walker. “If you own a steel mill, you’re probably going to push a certain amount of product through the service center chain you already own. But nobody really knows, and that’s about as honest an answer as you’re going to get.”

One upside of consolidation, processors agree, is the discipline steel mills are employing to match production with demand. Though processors don’t directly reap the benefits of the consistently higher steel prices, they do benefit from a more stable marketplace.

“Mills are taking the approach of shutting down [production] as opposed to just running and hoping things would get better. That was the mentality: tons, tons, tons out the door,” McDonald says.

In addition to their customers, a few processors have been swept up in the consolidation trend. Notable recent deals include Platinum Equity’s acquisition of PNA Group, which includes Feralloy; Reliance subsidiary Precision Strip’s purchase of Flat Rock Metal Processing, Flat Rock, Mich.; and Steel Technologies’ acquisition of Detroit’s Kasle Steel Corp., which includes a share of RSDC of Michigan.

Most executives expect further consolidation among steel processing companies, though perhaps at a slower pace.

“It’s a local business,” says FMP’s Gonzalez. “There are no buying advantages.”

Rather than a trend, McShane says, much of the activity is simply a response to specific customers. “We’ve seen some service centers dabble in toll processing and, likewise, we’ve seen processors who have gone into selling steel or aluminum. The reason for that is survival. A customer is pushing them.”

Still, all agree consolidation will continue, even if the opportunities are limited in the toll processing industry. Some companies, such as Steel Technologies and Feralloy, have indicated their desire to lead such a consolidation of the entire steel supply chain.

“We’re owned by an equity group, Platinum Equity, and their stated intent is to use the four companies they purchased in the PNA Group (Feralloy, Delta Steel, Infra-Metals and Metal Supply) as a platform for consolidation—not only in processing but in steel sales,” Walker says.

Looking forward, McDonald believes several developments will take place in the steel industry in the coming years: Foreign mills will begin selling product directly through U.S. processors; one or more larger mills will build or acquire a processing entity; and toll processing will indeed consolidate.

“It’s not going to happen as fast as everybody thinks. And anybody who is a niche player, who does something that’s unique, is probably safe,” McDonald says. “But ultimately there will be mergers.”

Capital Investment Keeps Processors Competitive

Among the many factors toll processors must manage to survive and thrive in the consolidated steel era, improving and maintaining technology is perhaps the most important.

“Every outside processors knows you have to keep your equipment top-notch,” says Tom McDonald, vice president of operations at Arlington Metals, Franklin Park, Ill.

A number of processors will demonstrate that in 2007 with significant investments in new machinery and facilities.

Ferrous Metal Processing will expand operations at its FerrouSouth facility in Iuka, Miss. The Cleveland-based company is in the process of installing a slitting line there, with plans to add a cut-to-length line by the end of the year.

These changes follow a major investment in hydrogen anneal equipment, started up last month at the company’s Cleveland facility. The hydrogen anneal capability, added to the company’s 60-inch, four-high combination cold-rolled reversing mill, allows Ferrous to convert coils up to 60 inches, well ahead of the industry average of 24-30 inches.

“My operating costs are the same, but I get three times the tonnage through it,” says Eduardo Gonzalez, president of Ferrous Metal Processing.

Feralloy Corp., Chicago, mitigates the cost of new investments by participating in five joint ventures. Its Oregon Feralloy Partners, a venture with Oregon Steel Mill launched in 2001, is investing $2.7 million to upgrade its coil-to-coil capabilities. The primary addition is a new recoiler that can wind steel up to 0.750-inch thick. The upgrade, being installed this month, will allow OFP to process the heavier gauge and higher strength coil produced at Oregon Steel.

Main Steel Polishing Co., Tinton Falls, N.J., is adding 34,000 square feet to its Youngstown facility, where it will place a Herr Voss Strand Extensioner on its slitting line and add a second cut-to-length line. Main is making investments due to the growing demand for ethanol products, says Vice President of Marketing Jody Pitts.

Main Steel will also add 20,000 square feet to its Atlanta facility and increase buffing capabilities at its Chicago operation.

One of the annual leaders in capital expenditures is Steel Technologies, and 2007 will be another year of significant investment for the Louisville, Ky.-based company. The biggest expenditure, $8 million, is going to complete the company’s greenfield operation in Juarez, Mexico. Another $3 million will be used to add annealing capacity at its Ottawa, Ohio, facility.

The biggest investment in 2007 is likely Heidtman Steel’s construction of a 240,000-square-foot processing facility near the new SeverCorr mill in Columbus, Miss. The new rail-accessed facility is expected to house several processing lines, including stretcher leveling, sheeting, laser cutting and an SCS system. It will be capable of processing hot-rolled, cold-rolled and coated products.

“The opportunity to place a state-of-the-art processing facility on the same campus with a new world-class steel mill is exciting, and continues the mill-adjacent strategy that we have employed elsewhere,” Heidtman CEO John Bates said when the announcement was made in 2006.