January 2010
Service Centers Give Year Ahead a Big Thumbs- Down

At just 3.5, this year’s MCN Optimism Index shows a dramatic decline from years past.

By Tim Triplett, Editor-in-Chief

Looking ahead to the coming year and the likelihood of a lingering recession, service center executives are decidedly less optimistic about their prospects than at any other time since Metal Center News began tracking industry sentiment in 2000.

Data from the latest MCN survey show that the majority of service centers across the country expect sales and profits to weaken in 2009. Only about two out of 10 forecast growth. Also reflecting this bearish outlook are figures for employment, which indicate that service center industry staffing levels are down 15 percent or more compared to last year.

Each fall, MCN polls its readers to gauge their expectations for the coming year. To quantify industry sentiment, MCN asks respondents to rank their feelings on a scale from 1 to 6. Those indicating 1, 2 or 3 fall on the pessimistic half of the scale; 4, 5 and 6 on the optimistic half. This year’s Optimism Index of 3.5—a weighted average of all the survey responses—shows a sharp drop from last year’s 4.3. For an index that typically only shifts in increments of 0.2 from year to year, this 0.8-point drop is significant. In purely mathematical terms, it suggests a four-fold erosion of service center sentiment.

Obviously, attempting to quantify human emotions in simple mathematical terms is an inherently imprecise exercise, but changes in “optimism” levels among service center decision-makers tend to correlate to their forecasts for growth, purchasing, compensation and capital spending, among other factors. In other words—and not surprisingly—the more pessimistic they feel, the more bearish their forecasts.

Human beings (especially the breed that thrives in metals distribution) have a bias toward optimism. Reflecting this naturally positive attitude, 80 to 90 percent of all respondents typically place themselves somewhere on the optimistic half of the scale. That is until this year. For the first time, under MCN’s methodology, the pessimists nearly equaled the optimists.

Service center profile
Companies responding to this year’s survey ranged from less than $1 million in annual revenues to more than $7 billion. The average service center reported estimated 2008 sales of approximately $147.8 million, down 12 percent from 2007.

Small service centers, those with less than 20 employees, averaged $6.7 million in sales in 2008, down 18 percent from 2007. Midsize service centers, with 20 to 99 employees, averaged $35.9 million in 2008 sales, up more than 3 percent from the previous year. Large service centers, with 100 or more employees, averaged $580.0 million in 2008 sales, up nearly 17 percent from 2007. Once again it appears that larger companies are better able to weather weakening market conditions than smaller competitors.

Calculated as medians—the point at which half the responses were higher and half lower—the typical small service center achieved $4.0 million in sales in 2008, compared to $26.3 million for midsize and $220.5 million for large companies.

The average service center operation has four to five facilities, though the majority (52 percent) operate with just a single location.

Based on median figures, the typical small service center employs a workforce of eight, while the typical midsize service center has 38 employees and the typical large service center has about 200. Difficult market conditions appear to be affecting staffing levels. While the headcount at small service centers is relatively unchanged from last year, midsize and large companies have cut back employment by 15 percent or more. Large companies, in particular, appear to have cut staff through layoffs or other means as demand for their products and services has waned.

Sales staffs—the revenue generators—have been less affected by job cuts. The median small service center employs four salespeople, and midsize companies eight salespeople, as they did in 2007. At large service centers, the size of the typical sales staff has declined modestly from 39 down to 35 individuals.

The typical sales professional at a small service center generated $1.20 million in 2008, about the same as the year before. The median salesperson at a midsize company generated about $3.06 million, down about 8 percent, while at large companies the median revenue per salesperson topped $5.55 million, a 17 percent increase. Once again, the large-company advantage in sales productivity is apparent, most likely due to the larger percentage of contract sales.

Pricing predictions
Sharp declines in metals prices late in 2008 clearly colored respondents’ predictions for pricing in 2009. In the steel market, hot-rolled sheet began 2008 in the $560 to $580 per ton range, climbed through the first half to over $1,100 per ton, but plummeted in the fourth quarter back to January’s levels, according to various industry sources.

Likewise, aluminum began the year around $1.10 per pound, peaked midyear in the $1.40 to $1.50 range and declined through the second half to around 70 cents.

The story is much the same for the copper price, which peaked in April at nearly $4 per pound, but dropped sharply in the fourth quarter to under $1.50.

Last year service center executives were evenly divided on the outlook for steel prices, predicting a 9 percent swing one way or the other. None foresaw the big upturn or the precipitous nosedive that followed. This year, the consensus is much clearer. Nearly three out of four service center executives predict steel prices will decline further in 2009 by an average of over 18 percent. That could take the price of commodity hot-band to under $500 per ton.

Thirteen percent of respondents predict steel prices will increase by an average of 13 percent. The remaining 13 percent predict no change or that the steel price decline has bottomed out.

Similarly, last year more respondents predicted an increase in aluminum pricing than the decrease that eventually took place. Among distributors of aluminum, 62 percent expect the average price to erode by a further 16 percent in 2009, which would take it to under 60 cents per pound. Twenty-four percent expect no change. Only 14 percent predict an increase, averaging 13 percent.

Despite copper’s unusually high price at the time of last year’s survey, the majority of distributors were predicting stable or even increasing prices in 2008—which turned out to be true for the first half of the year, but quite the opposite in the second. For 2009, the majority (60 percent) of responding copper distributors expect further price declines averaging nearly 19 percent, which would take the price of a pound of copper down to around $1.20. Twenty-six percent feel prices have bottomed out, while 14 percent predict a 15 percent increase for copper.

The wide range of service center predictions suggests that no one can really predict what will happen to metals pricing, especially in such a questionable economy. The only certainty is that service centers should plan on the volatile pricing environment of the past few years to continue.

Sales, profits point down
More than half of all respondents to this year’s survey expect their sales and profits to decrease in 2009. Never before in MCN’s Outlook survey has industry-wide contraction been the consensus view.

Fifty-two percent expect their sales to decrease by an average of 16 percent, while 25 percent expect sales to remain flat. Twenty-three percent predict an increase in sales averaging 12 percent.

At the same time, 60 percent predict their profitability will decline by over 21 percent, while 23 percent expect profit levels to remain the same. A small group, 17 percent, predicts an increase in profits averaging 12 percent.

Based on the overall weighted average, MCN forecasts a 5.5 percent decline in sales and a 10.9 percent decline in profitability for the service center industry in 2009.

Capital belt tightening
Capital spending plans, down 30 to 40 percent on average from last year, mirror service centers’ generally downbeat forecasts. About 57 percent plan to spend less on new equipment this year than last, while only 14 percent will boost their capital budgets. On average, small service centers plan to spend $50,200, midsize service centers $161,200 and large service centers $1.04 million on new equipment in 2009.

Comments from the field

Comments from many respondents to the survey were negative, most ruing the state of the economy, the poor automotive and construction markets and declining metals prices:

n Why do I feel this way? Read the newspapers!
n Too much manufacturing is closing in Canada.
n There’s no business to speak of, a horrible borrowing environment and too much government intervention.
n Housing will be down for two to four more years, automotive for one to three.
n Consumers have no money and foreign markets have disappeared.
n Automotive and building and construction markets are hindered due to the credit crisis. The Boeing strike will also have a negative effect on our aerospace shipments during the first three to four months of 2009.
n Carbon prices are tumbling and the financial mess has only begun to unravel.
n Customers are going out of business.
n We are in a very strong contraction of a very overpriced market. We still have high-priced inventory to work off, and our customers are telling us that their forecasts are off considerably.
n  The economy will continue to struggle and credit will remain very tight. Our margins will be squeezed as we compete with the tremendous amount of inventory at the mills.
n The entire U.S. economy will be in decline for most or all of 2009. It is impossible for it not to have an effect on every industry.
n Incoming orders are slow, $50 for a barrel of oil, slumping demand, collapsing material costs, devaluation of inventory, tight credit, an overall economic recession and an anticipated higher tax burden—otherwise things look pretty good!
n The market dynamics are not there. The automotive industry is in disarray. Customers cannot get credit for capital purchases. There’s a lack of total domestic activity.
n Don’t know how the new administration in Washington will work for us.
n The situation cannot get much worse.

Not all negative

Not all respondents’ comments were negative, however. Some chose to put a positive spin on their situation:

n We have long-standing relationships with our customers
n Business will slowly improve as the year 2009 goes along.
n I believe there is business to be found, however, it won’t come easy. We need to be proactive.
n We are a specialty company. We are not recession proof, but we stock product needed in both strong and soft markets.
n Our inventory levels are in check, we are not over-staffed, and we have an aggressive plan for continued expansion based on market-focused growth.
n We’re a small distributor in a specialized market. Though sales are off and pricing is down, there is still a demand to be filled in my niche.
n The defense industry is still active.
n We’ve invested in added capacity to increase sales opportunities and improve profits from our existing customer base.
n Early 2009 will be rough, but we predict great improvement by the late second quarter.
n We’re cautiously optimistic; it depends on the global economy.
n Government will become a bigger part of our business.
n The economy may be bad, but the discipline of mills to decrease production to match demand should prevent a pricing freefall.
n The summer slowdown stayed with us through the balance of the year, but we anticipate a bounce in demand and a stronger economy in 2009.
n Our company sees the downtime in the economy as the chance to expand into different territories and market for new customers.
n We’re very diversified in our customers and the industries that we serve. We are able to trigger hot markets where others may be in decline.
n We have invested in many new pieces of equipment in 2008. These investments will allow our company to go into new markets and new services.
n We are a “small quantity” distributor. When times are tough, people buy just what they need.
n Recessions cull out the weakest players. Capitalism is survival of the fittest.
n This is America! We have the best opportunities of anywhere in the world!

Questions or comments about Metal Center News. E-mail feedback@metalcenternews.com
December 2017: Two Traits Common to Honored Executives
December 2017: FMA Members Expect to Spend More on Equipment in 2018
Fall 2017: Cutting & Sawing Equipment
Summer 2017
Advanced Controls on Braner Slitters
AHVS Precision Leveler Features Flip-Top Design
Formtek’s Tishken Slitter Increases Production Volume
Red Bud System Handles High-Strength Steels
Bradbury Launches Flat Trak CL Monitoring System
Artus Knives Custom Designed
Privacy Statement  |  Terms Of Use
Copyright by Metal Center News

Monday, January 22, 2018