Service center operators across North America, big and small, projected a drop in capital spending in 2008 when surveyed last fall by Metal Center News. But through the first four months of the year, the anticipated decline hasn’t been evident to major equipment manufacturers.
Despite uncertainty in the economy and a tight credit market, service centers are continuing to invest in lasers, saws, slitters and other processing equipment at respectable rates.
“Historically, when the economy goes into a slide, capital equipment is one of the first things that gets pulled back,” says Dean Linders, vice president of marketing and sales for Red Bud Industries, Red Bud, Ill. “So we’re kind of questioning if the economy is as bad as it sounds, because we’re seeing near-record levels of equipment sales. Business is actually excellent, and has been good for well over a year now.”
The new year is providing similar returns at KASTO, a manufacturer of cold saws, band saws and automated storage and retrieval equipment. “Most of our equipment has relatively long lead times, so 2008 will be good because our order intake in 2007 was excellent,” says Werner Rankenhohn, president of the Export, Pa.-based KASTO. “Now we’re working for 2009, and the first two to three months of the year have been amazingly good for us.”
The areas of sluggishness seem to be industry and location specific, says Jim Russell, vice president of sales for Chicago Slitter, Itasca, Ill. “For guys up in Detroit, it’s very, very slow. But for guys in the South who are closer to the newer automotive companies, those customers are looking to make investments. With housing, it’s slow no matter where you go.”
When surveyed by MCN in late 2007, most service center operators anticipated spending less for capital equipment in 2008. The projected average cap ex budget at smaller companies was down
11 percent compared to 2007, while midsize and larger companies were also projecting declines in the 4.5 percent range (see sidebar on page 23).
But more recent comments from service centers suggest a typical budget comparable to 2007, except for one large outlier—Reliance Steel & Aluminum Co. The Los Angeles-based company has been increasing its cap ex budget in tandem with its overall growth over the past several years, but will almost double its expenditures in 2008.
After spending a company-record $124 million in 2007, the nation’s second-largest service center company has established a budget of $220 million for 2008.
Gregg Mollins, president and chief operating officer of Reliance, says the higher figure is the result of the company’s preference to own facilities. Almost $100 million will go toward buying out leased locations, while additional money is earmarked for its new greenfield facility in Portland, Ore.
Another $10 million is budgeted for the company’s truck-trailer fleet, while $10 million more will be put into the information technology maintenance budget. Reliance still has more than $70 million earmarked for new equipment.
Mollins says the money targeted for machinery will be used to purchase a wide range, including saws, laser burning equipment, and more. “We continue to grow the business internally, and we like to make sure the quality of the material we’re shipping out is state of the art. With that, you have to continually upgrade and replace equipment.”
Also, at the company’s new 180,000-square foot facility in Portland, Reliance will install a heavy-gauge leveling line. The facility is expected to open in the third quarter.
While no other companies contacted by MCN are committing that kind of capital to investments, most indicated spending similar to previous years.
“Last year, our total cap ex was just north of $20 million,” says Larry A. Boik, chief financial officer at A.M. Castle & Co., Franklin Park, Ill. “This year will be close to a similar amount.” Of Castle’s 2008 spending, much will go to complete an Oracle ERP project that began in 2007.
Russel Metals, Mississauga, Ont., is also looking at a $20 million budget this year, a slight uptick from 2007. The figure is closely tied to depreciation.
The formula is similar at Marmon/Keystone Corp., Butler, Pa. “Our approach is we try to replace equipment every year, usually the equivalent of our depreciation. We have a saw replacement program to replace X amount of saws per year,” says Norman Gottschalk, president of Marmon/Keystone. Since putting together its 2008 budget, Marmon/
Keystone has undergone a change in ownership, with famed investor Warren Buffett’s Berkshire Hathaway taking over. Gottschalk says that the change at the top has not had any impact on the service center company’s business. “Warren Buffett has not made one change,” he said.
At O’Neal Steel, the capital spending budget will also be in line with previous years, says President and CEO Bill Jones. “We continue to see demand for processing, particularly of plate products. We’ll continue to upgrade our processing equipment and facilities to keep up with that.”
While the larger service centers create a fairly firm budget for equipment in advance of the coming year, most have some degree of flexibility. At Marmon/Keystone, monies can be set aside for special projects, such as items needed for the company’s expansion into satellite facilities. “If it’s strategic, that would be excluded from the cap ex budget,” Gottschalk says.
While simple replacement remains a prime factor in the decision to invest in equipment, it isn’t the only one. Many times, equipment manufacturers say, service centers are looking to enhance their capabilities.
“We don’t find too many people buying a new machine because the machine they’ve got is full and they need another one. Everyone’s looking for a value-added benefit. A lot of service centers are going into the laser market, for example. That’s a great thing,” says Red Bud’s Linders. “What that tells you is that when a service center buys a machine, they’re buying one that gives them an advantage over their competitors down the street. It’s not extra capacity, but more capabilities that drives our sales these days.”
A couple of other companies, Koike Aronson and TRUMPF, are even more excited about the interest in lasers.
Koike Aronson is a relative newcomer to the service center market, with no sales to metals distributors until a few years ago. But its business grew to the point where the company needed to move a production facility from Japan to the United States in 2007.
“The majority of the lasers we’re shipping are going into steel service centers,” says Jerry Leary, president and CEO of Koike Aronson, Arcade, N.Y. “They want to upgrade their quality, they want round-the-clock production and they’re cutting larger plate in-house than they ever have before.”
TRUMPF, Farmington, Conn., also sees increased interest in its laser products.
“Standardized laser machines that will cut the full range of materials are the most popular,” says James Ragowski, TRUMPF’s product manager for 2D laser and automation projects. “Because the laser machine has become such a universally accepted tool for manufacturing, in many different applications, it is able to survive and grow in some areas during adverse times.”
With the increased cost of energy, Ragowski is also seeing a trend toward more energy-efficient machinery. Similarly, Rankenhohn finds his customers are seeking to cut labor costs through machine purchases.
“People are looking to invest in machines that take the operator out or minimize the impact the operator has to the bottom line. Automation, and lights-out automation wherever feasible, is going to be the big thing for the next 10 years,” he says.
While the well-publicized sub-prime mortgage crisis has led to credit issues in some industries, most equipment manufacturers say it hasn’t had a major impact on their customers’ ability to secure financing. While some capital projects may be temporarily delayed when business conditions decline, companies are generally averse to shelving purchases once they’ve been budgeted.
“The products we sell have a relatively long life span, they have a relatively long decision-making process, and short-term ups and downs in the market don’t influence those decisions. When you are investing or buying something you need for the next 25 years, something happening today is not that much of an issue,” says KASTO’s Rankenhohn.
Moreover, as Gottschalk notes, there is also a cost to pulling back, one that Marmon/Keystone is not willing to incur. “My philosophy is, if we budgeted to replace it, it’s either unproductive or unsafe. Even if we’re making $20 million less, that doesn’t mean I want a piece of equipment that’s unproductive or unsafe. So we’re going to stick to the plan.”
Capital Equipment Survey:
Spending Down Sharply
Service centers forecast their spending plans for 2008 in MCN’s seventh annual equipment and technology purchasing survey.
Service centers’ capital spending plans for 2008 show a significant decline from last year, most likely reflecting concerns about the uncertain economy and weakening demand in the face of volatile metals prices.
According to the latest Metal Center News data, the average service center budgeted about $494,500 for new processing and distribution equipment this year, down 17.6 percent from 2007’s $600,400. This compares to the recent peak of $613,200 in 2005, but remains well above the $320,000 average for spending in 2002-2004.
The average 2008 capital budget among small companies was $66,300, about 11 percent less than last year. At midsize companies, the average capital budget was $243,300, 4.4 percent less. Large service centers, with nearly $1.68 million in the average budget, planned to spend 4.5 percent less on capital upgrades this year.
Polled in October and November 2007 as part of MCN’s annual Outlook Survey, about 72 percent of service center readers planned to maintain or increase spending on capital equipment in 2008. While that sounds positive, it’s a decline from 77 percent last year.
About 30 percent planned to spend more in 2008 than they did in 2007—down from 39 percent in last year’s survey. About 28 percent planned to spend less this year—up from 24 percent last year. The biggest group, 42 percent, planned to spend at about the same level. This compares to 38 percent last year.
Given the erosion in U.S. economic conditions since this data was gathered last fall, it’s likely many service centers will pull back on their capital spending plans even further than these figures suggest.
What additional tools do service centers plan to buy with their capital spending dollars in 2008? Ranked from highest to lowest importance: material handling equipment, trucks, saws, cut-to-length lines, computer systems, slitters, and plasma and laser cutting equipment, among others.
Asked what innovative new technologies are at the top of their “wish lists,” the most common response was laser cutting technology, followed by computer hardware and software, waterjet cutting systems, sawing equipment, plasma cutters, levelers, cut-to-length lines, packaging systems and material handling. Also receiving mentions were machines for welding, bending, forming, beveling, drilling, press braking and roll forming. Respondents’ comments on CNC controls, robotics and wireless technology reflect a clear desire for increased automation in their warehouses and processing centers.
—By Tim Triplett, Editor-in-Chief
Methodology
Metal Center News conducted a combination mail/e-mail survey during October and November 2007. Questionnaires were mailed to 2,500 subscribers in late October. An electronic version was e-mailed to 3,000 subscribers in mid-November. In total, 217 mail and 150 e-mail responses were received for a total return of 367. A sample of this size yields an accuracy level of plus/minus 5.1 percent at the 95 percent confidence level.
