With Cap Ex, Caution Reigns

By Dan Markham, Senior Editor

Service centers have slowed major equipment purchases in response to challenging market conditions. Equipment makers hope stronger metals prices will spark more investment in the second half.

Wakers of processing equipment are feeling the effects of the distressed metals market. Declining sales and uncertainty about the future have made many customers hesitant to invest in new machinery.

“Early on, when the price of steel began to fall, people thought it would be a short-lived event, so it didn’t have much of an impact,” says Al Waigand, vice president of sales and marketing for Butech Bliss, Salem, Ohio. “But after a few quarters, everyone began to realize prices for flat-rolled carbon steel and oil country tubular goods were going to remain low for a longer period of time. This has had an impact on major equipment orders and pending capital projects.”

“We saw a clear slowdown in the fourth quarter of last year, and that certainly affected our backlog coming into the beginning of the year,” says Richard Klipp, president of Behringer Saws, Morgantown, Pa. “Some of the projects we were working on have been pushed out a little.” Behringer had fewer overall orders in 2015, but revenue similar to the prior year, as the company sold more large sawing systems to bigger customers.

Government inaction failed to help matters in 2015. In years past, Congress has authorized Section 179 tax deductions to give companies breaks on new equipment purchases. In 2015, legislators signed off on the measure too late in the year to make much difference. “The window was too small. Customers couldn’t really take advantage of it,” Klipp says. 

Naturally, given the unbalanced state of the industrial economy, conditions vary widely from one sector to another. Companies that provide equipment to processors in the automotive and aerospace supply chains saw their sales hold up well last year. Sales to customers serving the oil and gas industry have been disappointing. “Auto-related business has mitigated a weakness with our OCTG pipe and building products customers,” says Chuck Damore, president of Braner USA, Schiller Park, Ill.

Spending to increase in second half?
The uptick in steel prices to start the year, coupled with other modestly promising developments, has triggered a bit more activity in the equipment market, but buyers remain skittish, says Jeff Herrell, sales engineer for Red Bud Industries, Red Bud, Ill. “Quoting activity has been a little tight, a combination of low steel prices and the current political climate.” 

For equipment makers, previous downturns in the U.S. often were offset by increased opportunities in other countries. That isn’t the case this time. The domestic economy is still the strongest in the world. “Coil processing equipment activity in Europe is poor and not likely to improve much in the near future. China has been the driving force in Asia, so the Asian market has been slow due to troubles there,” says Damore. On top of that, the strength of the dollar makes U.S. products more expensive for foreign customers.

Politics is a factor, as well as economics. “We had previously done quite a bit of work in Russia, and that’s all gone by the wayside now with sanctions and the devaluation of the ruble,” says Herrell.

One exception to the international slowdown is Mexico. Mexican operations have retained a healthy appetite for new metal processing equipment, largely to support the country’s growing auto production. Half of Canada has gotten a similar boost. The eastern half, home to Canada’s auto industry, is seeing continued strength, while capital investment has stalled in the western half, which is dependent on the struggling oil and gas industry.

Used equipment: more supply than demand
The challenging conditions in the steel market have forced some service centers and fabricators to close or downsize operations, leaving them with used equipment to sell. Makers of new equipment say competition from the used equipment market is modest.

“Historically, we’ve seen minimal effect from used equipment sales,” says Pete Kerrick, president of Butler, Wis.-based Bushman Equipment, Inc. “Our products are custom-made. Unless the exact piece of equipment becomes available, the customer is likely to buy new.”

Certainly, the used equipment market is busy, given the abundance of machinery that’s available and the large number of buyers looking for a bargain. But much of the older equipment in the field has limited utility, especially for processing the new generation of high-strength steels, say vendors. “Used equipment is commonly older and less efficient and precise. It is often too narrow and can’t handle the high-strength materials,” says Damore at Braner.

Used equipment is often shipped to processors outside of the U.S. where its capacity and quality limitations are less of a factor. But it still adds to the competitive pressures vendors feel. “It doesn’t affect the U.S. market per se, but that equipment often ends up in a foreign country and places where we’re proposing new equipment,” says Alex D’Alfonso, sales director, coil processing systems, for the Bradbury Co., Moundridge, Kan.

For some service centers, the alternative to buying new or used equipment is to retrofit existing processing lines. Adding new process controls or material-handling systems can increase productivity at a much lower cost. Naturally, equipment vendors prefer to sell new lines, but say they are more open to doing retrofits if that’s all customers can afford.

Slower periods give equipment makers more time to spend on research and development. Even though metal processing is a mature industry, vendors continue to look for that next technological breakthrough that will result in a machine service centers not only want, but need, to stay competitive.

Common items on service center shopping lists today include automated high-production sawing systems, levelers that can produce super flat sheets, and sophisticated plasma and laser systems that can cut them. Coil lines that can slit and blank demanding high-strength steels without sacrificing speed and quality are also in demand. Devices that can make service centers safer, as well as more productive, are always sought after, vendor say.

“When the metals market is tight, equipment buyers focus on improving production efficiency and expanding their product offerings,” Damore says. “Equipment that quickly changes from one order to the next and is able to process a wide gauge and product range, as well as generate close-tolerance surface-critical products, is in demand even during difficult market conditions.”
 
Capital Budgets Tight for Most Service Centers

Service centers big and small say they are taking a prudent approach to capital spending until the market improves.

“We go into each year expecting to spend a similar amount of money [on cap ex],” says Mike Rowland, chief financial officer for O’Neal Industries, Birmingham, Ala. “In years where profitability is tough, we tend to look internally and build up business we already have.”

Cleveland-based Olympic Steel engaged in an aggressive growth campaign earlier in the decade, expanding both its geographic reach and its product line. But the publicly traded company has cut spending considerably over the past three years to focus on cash flow. Olympic expects to spend $11 million to $14 million this year on capital projects, mostly maintenance, says a company spokesman.

Weaker business conditions can extend the life of a piece of equipment. With less material running through a line, a service center may be able to get an extra year of output. But that approach has limitations. “One of the problems of deferring spending is you wake up one morning and instead of needing to replace one piece of equipment you have to replace three or four,” says Bill Hickey, president of Lapham-Hickey Steel, Chicago. “We try hard not to have to replace the entire fleet all at once. We want to be steady in our replacement.”

Attempting to squeeze additional time out of a piece of equipment at the expense of productivity or quality may not be wise, in any conditions. “If it’s cheaper and more efficient to rebuild a piece of equipment that will last 10 more years, it doesn’t matter what the economy’s like, that’s the right decision,” Rowland says.

Extreme business conditions may demand a more cautious approach. “When you see a long-term shift like we’ve seen in oil and gas over the last 18 months, that changes your view completely. The rig count is not just down a little, it’s down by 75 percent. There’s really no need for expansion cap ex anywhere in the energy supply space,” says Gary Stein, president of Houston’s Triple-S Steel Supply Co. Stein’s company will devote its capital expenditures this year to regular maintenance, some lease buy-outs, plus costs associated with consolidating two Denver plants into a single, larger facility.

Mill Steel, Grand Rapids, Mich., was quite active in 2015. The distributor and processor added a location in Indiana, embarked on a growth project to pull its two Ohio River-based operations under one larger roof and added some roll forming capabilities in Birmingham, Ala.

It invested in the down market of 2008, as well, says Eric Lambert, senior vice president and CFO. “We believe in the long-term cycle that our customers are operating in, and felt comfortable making those investments. At the same time, we’re focused on making sure we achieve returns under the utilization model that makes sense for our business.”



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Friday, October 20, 2017