Spending’s on the Rise
By Dan Markham, Senior Editor
Service center operators and processing equipment manufacturers both see improved capital investment this year, though it will take more time to get back to pre-2009 levels of spending.
When the metals market went spiraling south in the fall of 2008, manufacturers of processing equipment knew exactly what was in store for 2009. Major capital expenditures for new slitters, levelers and other pieces of machinery would be among the first items slashed from processors’ budgets.
After weathering a very difficult 2009, executives from leading processing equipment manufacturers report improving conditions. Likewise, officials from many North American service centers say they plan to boost capital spending—though not to pre-2009 levels. Cautiousness, for the time being, remains a predominant attitude.
According to Metal Center News’ annual Outlook Survey, the average capital budget for service centers this year is $339,300. That represents a 12.8 percent increase over the capital budget of $300,900 in 2009.
The capital spending plans for O’Neal Steel, the Birmingham, Ala.-based service center company, are fairly typical for North American distributors. The company plans to spend more than it did in 2009, but still nowhere near the levels of the boom years.
“The spending level will be lower than historical levels as we continue to move equipment around. We did a better job last year of maintaining things and consolidating facilities,” says Mike Rowland, chief financial officer.
That approach is mirrored by Marmon/Keystone, Butler, Pa. “We’ll spend two to two-and-a-half times what we spent in 2009, but probably half what we spent in 2008,” says Norm Gottschalk, company president.
Much of Marmon/Keystone’s spending this year will go toward equipment at the new plant that will house its Chicago operations. The pipe and tube specialist is leaving its 396,000-square-foot facility in Bolingbrook, Ill., for a newly leased facility in Spring Valley, Ill., part of a company-wide effort to move toward smaller locations closer to customers.
While much of the cutting equipment will be relocated from the old facility to the new one, Marmon/Keystone will be purchasing new cranes for its Spring Valley operation. Most of its other purchases across the country will be for new saws.
Marmon/Keystone’s focus on material handling and sawing equipment is in line with the plans of many in the industry. According to MCN’s survey, material handling purchases will top distributors’ wish list for 2010, representing 15.5 percent of planned expenditures. Sawing equipment is second at 14.2 percent, followed by trucks at 13.9 percent of the average capital budget (see complete list above).
But not all distributors are following the trend of increasing expenditures. Worthington Industries will actually spend about half what it spent in its previous fiscal year. The Columbus, Ohio-based company spent $64 million in 2008-2009, but will only spend $30 million to $35 million in fiscal 2009-2010 and 2010-2011, according to company spokesperson Sonya Higginbotham.
Others, such as Norfolk Iron and Metal Co. and Contractors Steel, consider this year’s spending plan to be more “normal.” Rich Robinson, president of the Nebraska-based Norfolk Iron and Metal, says his company tends to keep its spending fairly consistent, regardless of market conditions. “We try to keep up, whether it’s good times or bad. We don’t want to fall behind one year.”
Contractors Steel, Livonia, Mich., is coming off an extensive stretch of ambitious growth initiatives—it has historically done much of its spending during downturns, as President and CEO Don Simon believes that’s when opportunities are more plentiful. So this year’s investment will be more conservative. Much of Contractor’s 2010 spending will go toward equipment upgrades at the East Chicago, Ind., facility it recently acquired from Steel Sales and Services. The company will add some cranes and flame-cutting machines at what is its first plant outside of Michigan.
The biggest spender among North American service centers is likely to be the biggest company. Reliance Steel and Aluminum Co., Los Angeles, has about $140 million in capital expenditures budgeted for 2010.
Officials from Reliance, No. 1 on the Metal Center News annual Top 50 service center ranking, told investors and analysts at the company’s quarterly conference call that about $50 million to $60 million will go toward maintenance, while the rest is targeted for growth initiatives. But determining what’s considered routine maintenance and what constitutes a growth initiative can be tricky. “You may have an old leveling machine that needs to be replaced. But when you replace it, you may have some enhanced features and more capacity that allows you to grow your share in the local market,” said Karla Lewis, executive vice president and chief financial officer.
Reliance’s plans for 2010 include a new facility for its EMJ subsidiary in Orlando, Fla., a new flat-rolled facility for its Liebovich Steel and Aluminum operation in Rockford, Ill., and new facilities for Yarde Metals in the Northeast.
For Reliance, the budgeting process becomes rather simple. “We’re just plowing money into companies that, very honestly, are making us a lot of money,” said President and Chief Operating Officer Gregg Mollins.
Some companies set a firm capital budget, others remain flexible to change with market conditions. At Marmon/Keystone, which is part of a larger conglomerate, the budgeting is done in early November of the previous year and “we pretty much live by it,” Gottschalk says.
Smaller, privately held companies may have a little more wiggle room. “We try to budget, but we definitely have the flexibility of a family-owned company. We have a strong enough balance sheet and a strong enough will to take some risks to move forward reasonably quickly,” says Dave Lerman, president of Steel Warehouse, South Bend, Ind.
Lerman, like others, expects to spend a little more this year than last year. “I would call it, if it continues, a comeback year.”
But the service center buyers are just one half of the capital spending equation. Are the equipment manufacturers seeing the same uptick on the sales side? Yes, thus far they are.
Werner Rankenhohn, president of Kasto Inc., Export, Pa., says the change in orders has been dramatic. “The first quarter of this year, as far as orders we’ve received, was better than the entire 2009. That tells you how bad 2009 was. It actually began in December, and is continuing.”
Dean Linders, vice president of sales and marketing for Red Bud Industries, Red Bud, Ill., offered a similar assessment. “Since December, our business has been excellent. We don’t know if that trend will continue throughout the year. We kind of doubt it will, but we’re hopeful that it will remain at respectable levels.”
While the increased activity is not limited to one segment of the industry, or one part of the country, it is not all inclusive. “Some guys are very busy right now, but the majority will tell you they’re still fairly slow,” Linders says.
Still, even among those customers who have yet to see significant pickup in their order activity, there is a fair amount of optimism. Companies are expressing more confidence in the conditions going forward, and are willing to explore capital equipment purchases that will position them to take advantage of the rebound.
To John Gehring, vice president of sales and marketing for Butech Bliss, Salem, Ohio, this confidence among service centers is best reflected in the amount of requests for quotations they’re making. “One of the things I always look at is inquiry levels. We have seen, starting sometime between the fourth quarter and first quarter, an uptick in inquiries. And orders follow inquiries. It’s really simple.”
Likewise, Butech is demonstrating its own confidence in prospects for 2010 and beyond. After reducing headcount in 2009, the company has already brought back many of its employees. “There’s no way we would hire people if we didn’t think the bottom had been reached and we’ll be coming back. We may be coming back slow, but we’re coming back,” Gehring says.
Equipment manufacturers are seeing a general increase among most product lines, though some trends are emerging. Linders says that most of the orders his company receives involve companies simply trying to expand their processing capabilities, not necessarily adding capacity. “They want something new or some way to be better than the guy down the street. I’m not sure there’s a lot of new business out there, but guys who want to steal business from the competition,” he says.
Additionally, the industry-wide headcount reductions of 2009 are having an impact on the types of equipment being sought. Machines that require fewer individuals to operate are growing in importance.
“Rather than have four guys run a piece of equipment, customers want to have three,” says Chuck Damore, executive vice president for Braner USA, Schiller Park, Ill. “If there’s any one thing we’ve seen, it’s that our customers are always looking for ways to reduce manpower.”
Rankenhohn says the desire for automation is driving much of his company’s business. Kasto is currently installing a cutoff saw with an automatic robot in a Seattle-area service center.
“The recovery here is pretty much a jobless one,” Rankenhohn says, “which means people are trying to do more with less personnel. That requires automation.”
Even when the machines are manned, it doesn’t mean the operator has the same level of expertise processors once had at their disposal. Joe Mashione, vice president of sales for Amada Machine Tools America Inc., Schaumburg, Ill., says equipment manufacturers are being asked to account for lower levels of experience in shops.
“Not only do we have to have a machine that’s faster cutting, it’s got to be very operator friendly,” says Mashione. “We’re trying to bring in CNC equipment that, if you can read, you can run.”
Mashione, for one, still sees lots of ups and downs in the current market, with sales activity and inquiries fluctuating wildly. Many customers are still uncertain about whether to hang on to their cash or to begin positioning themselves for the market’s upturn, he says.
Both service centers and their equipment providers do expect demand for processing equipment and capital spending to fully recover—whenever the market for metal does.