Members of the prepainted coil supply chain see nonresidential building, remodeling and increasing conversion opportunities as ways to offset declines in new-home construction.

By Dan Markham,
Senior Editor

With residential construction on the decline, demand for prepainted steel and aluminum coils is likely to soften in 2007, say the experts. Executives from all levels of the supply chain remain largely upbeat, however, despite the troubling home-building forecasts.

Building and construction drives the market for prepainted coil, accounting for an estimated two-thirds of demand. That includes building materials, such as gutters and siding, and appliances to equip the new homes.

Coil coating lines—which basically unroll each coil, clean it, treat it, run it through primer and paint baths, cure it in hot ovens, then reroll it—can apply a high-quality finish to coils up to 72 inches wide at speeds up to 700 feet per minute. More importantly, using prepainted coils helps OEMs meet government air-quality and solid waste regulations. For some, such as appliance makers, it makes more sense to stamp and form a stove or refrigerator from prepainted metal than to form the product and paint it afterward, generating solvent emissions and paint overspray that are environmental liabilities.

With residential construction off about 10 percent in 2006 and projected to decline a further 7.8 percent in 2007, coil coaters and distributors of prepainted products are feeling the effects of fewer new-home starts. Yet the overall market is holding up pretty well, says John Mitchell, president of Nichols Aluminum, Lincolnshire, Ill. “It has had an impact. We’re seeing some short-term slowdowns,” he admits. But he also sees moderating interest rates as a sign that the economy’s downturn won’t be as severe as predicted.

Other mitigating factors will also help offset declines in residential construction, he continues. For one, the industry has enjoyed record performances in recent years, so it’s starting from a good position.

“I wouldn’t talk about forecasting another record, but I’m not forecasting another bust,” says Mitchell, who is completing a two-year term as president of the National Coil Coating Association based in Cleveland, the trade group representing coaters, producers, service centers and equipment suppliers.

Though new-homes starts may be down nationwide, housing shortages exist in other areas of the country, such as California. Moreover, though residential building is lagging, the forecast for nonresidential construction is more favorable.
Finally, an increase in remodeling projects may help offset the loss in new-home starts, says Don Switzer, prepainted product manager for Steel Dynamics Inc. in Fort Wayne, Ind.

“A lot of times when people don’t build a new house, they spruce up the old one,” says Switzer. SDI’s main product line for residential construction is material for garage doors.

Steelscape Inc., Kalama, Wash., is heavily invested in the construction market, but even executives there see reason for optimism. “Overall, construction has tailed off. We anticipate that will carry forward into at least part of the next quarter,” says Renee Ramey, marketing manager for Steelscape. “But we get mixed feedback from customers. Some customers actually see their order book looking pretty good toward the middle and the end of the first quarter.”

Steelscape, which sources steel from parent company IMSA Acero in Mexico, produces about 500,000 tons of cold-rolled, metallic-coated and painted steel coils for the construction market in the United States and Canada each year. It operates coating facilities in Rancho Cucamonga, Calif.; Shreveport, La.; Fairfield, Ala.; and Kalama.

Until Steel Dynamics entered the prepaint market a few years ago, Steelscape was the primary player both producing and coating its own coils. SDI has since leveraged the advantage of both making and painting steel to establish a significant presence in a market traditionally dominated by toll coaters. It plans to nearly double its output over the next 12 months.

SDI produced about 250,000 tons on its coating line in Butler, Ind., in 2006, and forecasts production of nearly 300,000 tons in 2007. Additionally, the company is opening a second, 250,000-ton capacity paint line in Jeffersonville, Ind., in July.

“People are very comfortable with our supply model,” Switzer says, noting that SDI is the only supplier in North America that can move coils directly from the mill to the coating line. “It’s the model in Europe and the model in Japan, and it’s certainly been very effective for Steel Dynamics. Our ability to control the entire process and provide our customers with a finished product in short cycle times is very attractive to them. I think it’s been the key to our growth.”

SDI’s increasing capacity is potentially a favorable development for service centers, as the producer sells 100 percent of its prepainted material through distributors. “We support the distribution industry,” Switzer says. “Our whole focus is to work with service centers to focus on end-users.”

While SDI, and Steelscape to a lesser degree, sell through service centers such as Ryerson, Macsteel Service Centers USA and MISA, the number of service centers that carry prepainted steel and aluminum is relatively small. Those in the market say distributing prepainted coil requires specialized skills.

“Prepaint is very forgiving if it’s the right system, but you’ve got to have quality assurance in handling the coil, in transit, in slitting, so your customer gets a product that’s not marred or damaged in any way,” says Parker Pruett, specialty products manager at MISA Metals, West Chester, Ohio.

That thought is echoed by Jim Geddes, president of Alliance Metals Inc., Westchester, Pa., which specializes in painted, anodized and mill-finish aluminum. “Aluminum is a soft metal; a lot of things can go wrong in handling it,” he says. “We’ve spent a lot of time perfecting the processing we do here to ensure we get good metal in, that it’s coated correctly, processed correctly and delivered to our customers correctly.”

Much of the work is done after the metal is processed, Geddes says. Alliance applies a protective coating and has developed special packaging and racking systems to ensure that the material is stored and transported in pristine condition.

“We have methodologies for handling the stuff so it doesn’t get marks, fingerprints, scratches. We deliver most of the product on our own trucks by our own employees. We don’t use common carriers, so the product arrives to the customer when it’s supposed to and in the condition that the customer demands,” Geddes says.

“It’s a very visual kind of market, so the quality of the product we put out is absolutely pivotal,” adds Geddes.

Besides the specialized handling demands, the large number of possible colors poses a barrier to entry for distributors. Many service centers stock only the highest volume colors, or colors contracted by particular customers. Often an order starts out as an unpainted coil that is sent to a toll coater en route to the customer. Relatively few who specialize in stocking prepaint carry the wide range of available colors.

It also helps to have some knowledge of paints and coatings chemistry, Pruett notes. “If you were a service center wanting to get into the prepaint business, you’d have to have some technology behind you. You’d have to have some schooling at the paint level.”

Most observers agree it’s highly unlikely any service centers will entertain the idea of bringing new coil coating lines to the market. Such technology represents a multimillion-dollar investment in equipment and expertise in a market segment that already has excess capacity. The most prominent service center company with a coating line is Metals USA, though the line is part of its Buildings Products unit, which acts more as a producer of construction materials than a distributor.

Prepaint imports added to the capacity concerns and pricing pressures in 2006. “Imports have impacted us quite a bit. The demand side fell off while imports remained, making the market more competitive,” says Steelscape’s Ramey.

SDI’s Switzer agrees that imports were more of a threat last year, though their effects varied by geographic area. “They’re a greater issue in the Texas and South markets than they are in the Midwest, but we see a fair amount of imported products even this far north,” says Indiana-based Switzer.

Unlike on the steel side, aluminum coaters did not see much competition from overseas, says Bob McShane, president of First Precision LLC in Chicago. “The European market is strong, so there’s no sense exporting it. Plus with the value of the euro compared to the dollar, it makes sense for them to sell it there,” McShane says.

While toll processors do most of the coating of steel coils, including those purchased direct from the mills by large OEM customers, aluminum producers prepaint the bulk of their product. More than 80 percent of aluminum coating is done at the mill level, experts say, which brings a level of stability to the supply side. With mills able to better control the amount of coated product in the market, “it’s a little more stable and a little more balanced,” adds Nichols’ Mitchell.

The same is not true on the steel side. With new lines opening at SDI, plus relocations by Indianapolis-based Roll Coater and Precoat Metals in St. Louis, the overcapacity situation could worsen and prompt a shakeout of older, less efficient lines, executives say.

“The consolidation of those lines that are not as busy will probably happen in 2007, 2008,” Pruett says. “The outdated lines are probably going to be refurbished, relocated, reapplied or even mothballed.”

Ever-tightening environmental standards are the main spur behind the purchase of new equipment or the retirement of old lines. The prepaint industry incorporated new EPA MACT (maximum achievable control technology) standards over the past year and is now working through new hexavalent chromium standards set by OSHA in 2006.

While new standards can be costly initially, they tend to benefit the industry in the long-term. Instituting new controls is generally less costly for coil coaters then for manufacturers who post-paint materials. Tighter standards often help lead the industry to additional conversions as OEMs opt to switch to prepaint rather than upgrade their old paint lines to meet new emissions restrictions.

“We’re seeing more end-users considering dismantling their paint systems,” Pruett says. “There’s the possibility that conversions could offset demand dips.”