2-2009 Toll Processing Outlook
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'Just a Really Ugly Situation'

Mill shutdowns and auto industry doldrums represent a double dose of bad news for toll processors.
 
By Dan Markham, Senior Editor

The trying conditions facing steel mills and service centers are, not surprisingly, a major headache for toll processors, as well. If the mills aren’t producing material and the service centers and end-users aren’t buying, then toll processors’ phones stop ringing.

Steel producers and distributors throughout North America are feeling the effects of the recessionary market, though the gruesome conditions may be taking an even bigger toll on the processing industry. With toll processors’ strong connection to local mills and their heavy participation in the North American automotive market, the outlook for processing material for a fee is bleak at the moment.

“I’ve been through three of these [downturns], between times I was with the mills and now as a processor, and this is far and away the worst,” says John Stroud, plant manager at Arlington Metals, Sawyer, Mich. “It’s just a really ugly situation.”

MCN Toll Processor Poll

The latest research from Metal Center News shows a toll processing industry facing lean times.

Steel headed for the construction, automotive, appliance and fabrication markets is the bread and butter of toll processors and their customers—the very markets hardest hit by the current economic downturn. Respondents to the latest Metal Center News survey forecast an unsatisfying dry-toast type of year in 2009.

MCN conducted an e-mail survey in December, polling about 600 subscribers who have identified themselves as either full or part-time toll processors. This figure includes members of the Fabricators & Manufacturer’s Association’s Outside Processors Council and the 150 companies listed in MCN’s Directory of Toll Processors. Forty-five companies responded, including 10 dedicated toll processors and 35 service centers that also process steel on a toll basis. A sample of this relatively small size offers a margin of error of plus/minus 14.3 percent at the 95 percent confidence level.

The majority of respondents (57 percent) said their toll business was down by an average of 22 percent in 2008. Sixteen percent reported flat revenues and 27 percent actually saw gains.

Toll processors operated at about 72 percent of capacity in 2008, and predicted that their operations will slow further to an average around 68 percent in 2009.

Forecasting revenues for 2009, the majority (60 percent) expect another 20 percent decrease. Of the remaining 40 percent, half expect revenues to remain the same this year, and half expect a modest increase. Averaging all the responses yields a forecasted decline of 9 percent for the industry as a whole this year (albeit based on a limited sample.)

Profile of the toll poll
Ten of the 45 respondents, or 22 percent, are dedicated toll processors who derive 100 percent of their revenues from slitting, leveling, blanking or otherwise servicing customers’ metal. Thirty-five of the 45, or 78 percent, are service centers that process both their own inventory and other companies’ metal. On average, the service center respondents derive about 30 percent of their revenues from their toll business.

Who are these toll processors’ customers? The larger group of part-time tollers say they get 42 percent of their business from other service centers, 44 percent from manufacturers and 14 percent from mills. Looking at the small group of dedicated toll processors, they get 64 percent of their business from service centers, and they split the other 36 percent about evenly between mills and OEMs.

(Note that these figures do not necessarily reflect the toll processing market as a whole. Dedicated toll processors more typically work for mills or OEMs. The large service center customer group most likely reflects a bias in the sample derived from MCN’s readership. Nevertheless, service centers are active and growing participants in the toll processing market as both customers and service providers.)

Toll processing is almost exclusively a flat-rolled steel business. Nearly all the respondents say they handle carbon steel. Sixty-seven percent say they also handle galvanized and coated steels, 60 percent stainless steel, 50 percent aluminum and 30 percent copper and brass. In terms of product form, nearly 90 percent handle flat-roll, 20 percent plate 17 percent pipe and tube and 15 percent bar, rod and wire.

The vast majority—more than 70 percent of respondents—operate a single processing center with about 30 employees. On average, they toll processed about 270,000 tons in 2008, though that figure was significantly higher for companies that are 100 percent dedicated to toll processing.

Respondents reported toll revenues in the $6 million to $9 million range in 2008, based on the median responses (the point at which half the responses were higher and half lower). That may or may not reflect the typical toll processing operation, given the relatively small sample size in the study.

Indeed, it is difficult to characterize a “typical” toll processor today as the lines continue to blur between those companies dedicated solely to processing steel coils for a fee vs. service centers that seek to leverage their value-added processing capacity as a means of generating new revenue—especially during difficult economic times when declining metals prices devalue inventories.

By Tim Triplett, Editor-in-Chief

And, as Stroud says, the ugliness is exacerbated by the uncertainty. “The problem I see is nobody has a really good idea when it’s going to turn. There are an awful lot of unknowns out there.”

What is known is almost uniformly negative. The American automotive industry, which has been weak for the past two years, is expected to decline even further in 2009.

Just over two years ago, North American automotive production was at 16.5 million units. The most recent forecasts call for 10.5 million light vehicles in 2009, a 36 percent decline from 2006.

Even that number may be optimistic. Beleaguered Big Three duo General Motors and Chrysler essentially took the month of January off, and were engaging in little production through February. Stroud wonders how that will impact the year-end production totals. “What effect will not building any in January and few in February have? Is that number really 10.5 million or is it 9 million?”

Whatever the number, it’s not a promising development for toll processors.

“In our industry, which is hot-rolled pickling, we’re totally tied into automotive. When you see auto down 25 or 30 percent from where they were a year ago, that pretty much gives you a picture of where we’re at right now,” says Dave Detzel, director of outside sales for Voss Industries, Taylor, Mich. “Our business is probably 40 to 50 percent off from where it was this time last year.”

Even New Domestic automakers such as Toyota and Honda, with their shiny new assembly plants and nonunion workforces in the South, are not immune from the economic malady that’s crippling the Big Three. All are prescribing production cutbacks.

“The New Domestics aren’t really sure where their demand is going to be this year,” says Ed Panek, senior executive vice president, All Metals Service & Warehousing Inc., Spartanburg, S.C. “Mercedes has really hit a pretty significant slowdown in their production in Alabama.”

What differentiates the New Domestics and the traditional Big Three is the long-term outlook. With new plants continuing to pop up in the southern states, including a new Volkswagen operation in Chat­ tanooga, Tenn., and a Kia facility in LaGrange, Ga., processors and other automotive suppliers are confident about the supply chain’s long-range prospects.

In contrast, the economic issues facing the traditional domestic car brands cause sleepless nights for processors in Detroit and other northern cities.

“One issue is the uncertainty with General Motors and Chrysler,” says Bob Demyan of Flat Rock Metals, Flat Rock, Mich. “If you supply GM and Chrysler, and GM buys Chrysler, that could be half your supply base gone.”

CSM Worldwide, a leader in global automotive forecasting, says the supply base for the auto market is in peril. “For 2009, the global automotive market has fallen back to sales levels of 2004, but the industry has added more than 19 million units of production capacity since then, setting the stage for the devastating situation that OEMs and suppliers are facing today,” says Henner Lehne, CSM director of global vehicle sales forecasts. “The industry will see dramatic changes. Certain parties, especially on the supplier side, will not survive the upcoming year without external help. It is inevitable that a consolidation will take place.”

The struggles of the customer base give this new downturn a much different feel than the period of mill bankruptcies early in the decade. “With mills, it was adjusting at the front end with your purchase orders,” says Demyan. “But you still had the business there. Now, you’re losing end-users. Our customer base is diminished.”

And it’s not just the customer base. Toll processors anticipate a shakeout among their peers, as well. “Like the steel mills went through, you can see a change in the face of toll processing,” says Brian Hamermel of Louisville, Ky.-based Steel Technologies. “I don’t think it’s an exaggeration to say the processing market has had an overabundance of supply for quite a long time. These are the kinds of markets that, unfortunately, put some companies in a difficult position.”

Stroud concurs that a change in the landscape is inevitable, with smaller processors particularly at risk. “There are going to be some companies that go out of business. In all likelihood, you’ll see some big guys come in and pick up a location that’s convenient to them because the smaller guy can’t make it on his own.”

Though bankruptcies and business failures haven’t taken off yet, the industry has reacted to the changing conditions. Among noteworthy developments were job cuts and plant closings at Worthington Industries. The company cut more than 500 jobs in its metal processing and metal framing businesses in separate actions late in 2008. It closed steel processing facilities in Louisville, Ky., and Lunenburg, Mass., while suspending operations at facilities in Miami, Fla., and Phoenix, Ariz.

Steel Technologies did close an operation in Flint, Mich., in October 2008, but otherwise doesn’t anticipate shuttering facilities. Toll processors need to be close to customers for the logistics of transporting steel back and forth to make sense, which limits the amount of consolidating individual companies can do.

“Every other facility we have is in a region for a reason. As far as trying to consolidate facilities, that hasn’t happened and I don’t see it happening, because you’ve got to deal with the logistics situation,” Hamermel says.

Virtually every company is running fewer shifts in the new environment, however. “We’ve got about 40 percent of our plant laid off, and from what I can see that’s where everybody else is,” says Stroud. “There are several companies in the Lansing area that have more than 50 percent of their people off.”

For processors, location has become even more crucial than usual. With mills taking production off line at certain sites and loading up production at others, some processors are being hit harder than others.

“One of the bigger factors facing a lot of the processors is that the major mills have shut down so many of the facilities,” says Hamermel. “With U.S. Steel shutting down Great Lakes (Mich.) and Granite City (Ill.), and Mittal shutting down Cleveland, processing facilities that support these major mills are probably having a difficult time.”

“Some customers like to have the material processed near the location it’s going to be used, so some of those pickle lines in the Cleveland area are still going to have some business,” Detzel says. “But there’s just not that much business available when the feeder mill in an area closes up shop.”

The return of production to these mills is subject to a lot of conversation, but not much consensus. “Originally I was told by the end of January, but that’s been pushed out until February and March,” says Stroud.

“They’ve thrown some dates up, but they’ve thrown a lot of caveats as well,” Hamermel says. “I don’t think anybody’s really certain of anything.”

Getting through this rough market— however long it lasts—demands a deft managerial touch. Conditions force operators to scrutinize every decision in a way that more robust markets don’t demand.

“You’ve got to manage your business day-to-day. You start to look at things when you tighten your belt buckle, and ask, ‘why weren’t we doing these things before?” Stroud notes.

Jerome Hack, president and COO of Dearborn Steel Center Inc., Dearborn, Mich., says the credit crisis that has accompanied—and in many ways created—the downturn in demand is affecting the processing sector, as well. Operators must be increasingly wary about extending credit to customers. A credit-approval process that used to take an hour can now take several days.

In such perilous times, it’s no surprise there are few reports of planned expansion. Any new equipment installation, such as Steel Technologies’ slitter at its Murfreesboro, Tenn., location, was planned well before the downturn.

“If you need equipment, the used equipment market is probably pretty full right now, while the new equipment market is hurting,” Hamermel says. “There are probably a few companies putting slitters in for various reasons, but from what I know and the companies I talk to, nobody’s looking at any kind of expansion right now.”

One of the few still expanding is Northwest Ohio’s Fulton County Pro­ cessing, which just completed installation of a fourth coil line with a new SMS slitter. Soon to follow will be a new pickle line as part of the company’s 85,000-square-foot expansion. But like Steel Technologies, the equipment was ordered long before the downturn took hold.

Jeff Kunkel, plant manager for Fulton County Processing, admits the timing wasn’t perfect for the installation. But with the new line, the company may be able to add some business from customers who can now have material pickled and leveled in one facility. “Hopefully, things will be picking up,” Kunkel says.

While that’s certainly a universal sentiment, it’s not one that processors are banking on. The industry is steeling itself for a protracted downturn.

“We think we’ll see the first half of 2009 mirror the last half of 2008. Hopefully, the second half of the year will get us to the point where we’re even with our total forecast for 2008,” says Detzel.

Others don’t see any kind of improvement until the calendar turns to 2010. “Most everybody I talk to is still very pessimistic about demand coming back this year. They’re all hoping for the best going into 2010,” says Panek.

“If we get back to 65 or 70 percent of what we produced in September-October of last year, I’d be tickled pink,” Stroud says of 2009.



  
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Friday, December 19, 2014