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May 2012
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Renewed Faith in Market Sparks Buying Frenzy
 
Service centers and equipment manufacturers both report vastly improved capital spending as the market downturn recedes further into the past.
 
For the past two years, a still-skittish service center industry has begun to expand its capital investment. In 2012, the cautious attitude has been replaced by ambitious objectives. Both service center executives and major equipment manufacturers indicate that capital spending has rebounded in a big way. The level of expenditures may not rival the pre-recession outlays, but it’s getting close.

“I would suggest that this year will be markedly greater from a capital spending perspective than 2011 or 2010,” says Tom McGrogan, president of Ontario and Western Canada service centers and vice president of operations for Samuel, Son & Co., Ltd., Mississauga, Ontario. “We’re probably going to be 25 to 30 percent greater from a capital spending perspective on the service center side.”

And Samuel isn’t alone in planning such a large increase. During its January conference call with investors, Reliance Steel & Aluminum Co. officials indicated their company’s capital expenditures were likely to jump more than 60 percent to a record $250 million this year. Los Angeles-based Reliance will spend its money buying out some leases of companies it has acquired, building new facilities here and abroad, adding processing capabilities and doing routine maintenance.

“If you look back at 2009, when things were pretty difficult, we cut back severely,” Chairman and CEO David Hannah said. “Now we are catching up, to a certain extent, on some of the stuff we did not do back then. It really is an indicator of the confidence we have in these markets.”

That confidence is reflected throughout the industry. The average service center expects to spend about $418,000 on new equipment this year, according to the most recent Metal Center News reader survey (see sidebar). That figure is 5.9 percent higher than a year ago, which in turn was up substantially from 2010.

A.M. Castle and Co., Oak Brook, Ill., has budgeted $15 million for capital expenditures this year, up about 25 percent from 2011. That figure represents about 1 percent of revenue, which is what a typical year would look like in the rare event of a typical year, says Scott Stephens, vice president of finance and chief financial officer. “If a year were normal, where we did our typical maintenance and a little bit of growth, that 1 percent of revenue would handle it. But almost no year is normal,” he says.

This year, in addition to routine projects, Castle’s spend will cover some computer upgrades. “We kind of cycled through IT a few years ago because we implemented Oracle, then it cycled down. We’ve been static for 24-36 months on the PC side, and that backlog will get cleared out a little in 2012,” Stephens adds.

Steel Warehouse, South Bend, Ind., has three major projects scheduled in 2012, says CEO Dave Lerman. The company is installing a temper mill cut-to-length line in Houston in partnership with Triple S Steel; a high-strength, heavy-gauge pickle line in Mobile, Ala.; and a stretcher leveler at its Milwaukee operation. “The rest of our cap ex is based on improvements and replacement of old equipment. The standard kind of stuff that has to be attacked from time to time,” says Lerman.

Increased spending at Samuel will go toward equipment that expands traditional value-added services, as well as adding capabilities that open the company to new customers. As an example, McGrogan points to the increased use of higher-strength steels in automotive applications. Samuel is adding new, more-heavy-duty equipment designed to handle it.

Though capital budgets typically are set in the fall, most companies are opportunistic if the situation arises. “We do our capital planning in the fall of the year and extend it out as a five-year plan, but within any given year, if we see a solid business opportunity, we take advantage of it,” McGrogan says.

Equipment manufacturers’ POV
North America’s leading equipment manufacturers are in agreement with their service center customers that spending is on the rise.

“Eighty percent of our business is with steel service centers,” says Werner Rankenhohn, president of KASTO Inc., Export, Pa. “For the first quarter of this year, I can honestly say it’s the best we’ve ever had.”

Most equipment vendors say the market started to turn sometime in the last two years and has grown steadily ever since. “Beginning in 2010, it started to come back around,” says Joerg Toberna, marketing manager for Messer Cutting Systems Inc., Menomonee Falls, Wis. “Now we’ve got a very nice backlog. People are looking to get equipment faster than we can get it to them.”

And it’s not just the service centers. “We not only supply to the steel service centers, but also to their customers. We see very good trends coming from their customers, as well,” says Carl Wallin, director of sales [ARE YOU SURE HE IS NOT PRESIDENT?] of the Caldwell Group, a Rockford, Ill., material handling equipment supplier.

The level of activity is somewhat surprising, Toberna says, given that most customers tend to be cautious during election years. “Obviously, customers have been sitting so long with money in their pockets. In years past, when there was an election year, things would tail off. But pent-up demand is overcoming that.”

Not only is the number of orders picking up, but also the size. “Our growth started out with some smaller orders, retrofits, that type of thing, and gradually picked up to larger and larger orders,” says Chuck Damore, executive vice president of Braner USA, Schiller Park, Ill. “Now we are seeing a lot more significant investment by companies, with a fair amount of expansion, as well.”

Investment in the big-ticket item, the equipment makers believe, is a testament to the faith these companies have in their markets. “Nobody is going to spend a couple of million dollars if they don’t believe they’ll have a return on investment in the next two or three years,” Rankenhohn says.

Wallin at Caldwell says he not only has been selling more machinery, but more advanced machinery. “We’re seeing trends into more of the hydraulic sheet lifter rather than mechanical or motorized, automated coil grabs rather than standard coil grabs,” he says. During and in the months after the recession, companies were willing to make do with less ambitious purchases just to get by. “Now they’re willing to spend the extra bit to get the productivity gains.”

There is some geographic tilt to the buying trend. Executives agree that customers in the middle and southern parts of the country have led the recovery, while the East remains quieter on the capital expenditures front. Even a company headquartered there, such as Arcade, N.Y.-based Koike Aronson, has experienced the imbalance.

“The Northeast—New England, eastern New York and New Jersey—has been slow for us,” says Jerry Leary, Koike president. “But the Southeast and Midwest have been very good.”

One trait in customer preference is the continued movement toward more automation, Leary says. “They want to get away from as much manual input as possible, to minimize the labor content.”

Additionally, equipment manufacturers are selling more machines in the United States. In 2009, Red Bud Industries, Red Bud, Ill., sold 80 percent of its equipment overseas. Today, it’s back to its more historical 50-50 split between domestic and foreign buyers, says Dean Linders, vice president of marketing.

Linders points to a few notable trends. For starters, companies are looking to process heavier gauge plate and higher-strength steels. “Once one or two guys in an area get one [a heavy-gauge line] and it works out well for them, then the competition follows within a year or two,” he says.

New technologies are attracting attention from service center buyers. Among them is EPS, an “acidless pickling process” developed by The Material Works, in partnership with Red Bud. EPS uses a slurry blasting process rather than acid to remove dirt and scale from the surface of steel coils.

Damore of coil processing specialist Braner says automotive and other industries’ move toward higher-strength steels is continuing to drive many decisions. “It’s becoming more commonplace, so much so that if a customer doesn’t specify he’s going to run some high-strength material, we make it a point to bring it up.”

Also contributing to the more robust market is the overall business environment. An extension of tax credits and accelerated depreciation makes buying more attractive, and even companies without large cash reserves can access credit more easily.
 
“There seems to be a lot more financing available than there was between the end of 2008 and the end of 2010,” Leary says. “Now, if you’re creditworthy, you’re going to get the financing.”

All of this makes for a healthy outlook for metal processing equipment makers. “There’s pent-up demand, and a lot of the large markets we serve are going gangbusters. It’s a combination,” Leary says.

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