Caution’s the New Watchword in Distribution

While the aluminum market is finally starting to improve, some service center executives feel the business may never be quite the same.

By Dan Markham, Senior Editor

The aluminum supply chain is finally seeing signs of relief from its yearlong struggle with sinking prices, overstocked warehouses and abysmal demand. But the industry emerging from the chaos of the now-ending recession may be considerably different than the one in place before.

Executives throughout the chain report changes in behavior and philosophy among mills, service centers and customers that may become more than just a temporary response to difficult conditions, but signify a new way of doing business.

“Everybody has gotten very skeptical about buying inventory without having a hard order first,” says Bob Stiles, chief operating officer of Erickson Metals Corp., Cheshire, Conn. “The way customers want to do business has changed. They don’t want to hold inventory. The days of large-quantity orders with extended lead times are gone.”

And it’s not just end-use customers. Service centers that were burdened with sizable inventories when the metals market crashed have felt the pain of selling off material below cost. “It’s all up and down the supply chain. It’s not fun to get caught the way we all got caught last year,” Stiles says.

As companies struggled to stay solvent, even one of the strengths of the service center business model—customer relationships—was compromised. For some service centers, carrying customer-specific inventories, either large quantities or hard-to-find specialty items, is a part of doing business. But when the market plunged, not all customers lived up to their commitments to take their material, sticking the service centers with unwanted inventory. In the future, executives say, they will take steps to avoid such inventory hits in a declining market.

Service centers have spent the past year working down their inventories. Now that industry stocks have hit perilously low levels, mills have been expecting distributors to begin restocking their barren warehouses. Yet the typical buying pattern has not resumed, despite prices inching upward, which suggests a change in attitude among service center buyers.

“We’re working very hard to manage our inventory. Even though prices are going up, we’re not buying any more than we absolutely need,” says Sandy Nosler, president of Pacific Metal Co., Portland, Ore., whose parent company Reliance Steel & Aluminum Co. has been an industry leader in the trend toward running leaner.

Running operations at considerably lower volumes than the industry standard of the past may simply be the new reality, say some executives. “We’ve all gotten used to levels of business that are at least 25 to 30 percent below where they were a year ago. The question is whether we have to figure out how to run our business at that level for an extended period of time or whether we will have a leap forward in demand,” says Mike Petersen, president of Petersen Aluminum Corp., Elk Grove Village, Ill.

But there is a limit to how lean the service center industry can go without compromising its role in the supply chain. If service centers don’t have what customers’ need, when they need it, they have failed their main mission.

“They’re going to work really hard to keep their inventories low, but the laws of physics have not been repealed,” says Jack Hockema, president, CEO and chairman of Kaiser Aluminum, Foothill Ranch, Calif. “When real demand starts to pick up, they’ll come in with more orders to the mill. The mills will say we’re not staffed up for that, we need to push out our lead times. The service centers will say they need more safety stock because the lead times are extended. And we’ll get back into the cycle of restocking.”

Resumption of the traditional purchasing dynamic will be delayed for some time, however, as business levels show few signs of improvement. “Most people are pretty flat. There’s been no real change in demand over the last 120 to 150 days,” says Nosler.

“The mills are seeing a higher level of demand from some distributors. My concern is they may mistranslate that as real demand backed up by some new rush of orders from our customer base. That’s not the case. We’re looking at inventory replenishment,” Petersen says.

Parks Dodd, president of Atlanta-based Aluminomics LLC, who delivered the outlook for the aluminum market at the Metals Service Center Institute’s forecast conference last month, expects shipments to increase just 3 to 4 percent over the course of 2010 from very low levels. He estimates aluminum shipments will run slightly ahead of the overall economy’s growth of 1.5 percent.

Even if the outlook for 2010 calls for only modest improvement, the direction will be positive. “2011 will be stronger than we think. This time next year, we will be in a much better frame of mind. Unemployment will be headed down and consumer confidence will be up,” Dodd says.

As business investment kicks in, once projects put on hold during the recession finally move forward, aluminum shipments will increase by 10 to 12 percent in 2011 and another 9 to 10 percent in 2012, Dodd forecasts.

In the short-term, Dodd and other analysts see the most promising market for aluminum as automotive. “The one thing you’ll see a little more pop in next year is car production. Of the various end markets, the transportation sector is the one that will see the most improvement—but in auto, not in trucks,” Dodd says.

One market that is not generating much short-term optimism is nonresidential construction, which is the primary customer for Petersen. “It’s going to be pretty rough for the foreseeable future. Kiplinger’s said it would be 18 months before commercial construction returns to normalcy,” Petersen says. “Until the residential market starts emerging from its depression, you’re not going to see a whole lot of demand for strip shopping centers that go with new subdivisions.”

At the year’s outset, Petersen and others held hope that the federal stimulus package would spur industrial production and aluminum demand. To date, it has had little effect. “We haven’t seen a lot from the stimulus,” says David Pace of Industrial Metal Supply Co., Sun Valley, Calif. “Maybe next year, but we haven’t seen it yet.”

Steve Larkin, president of the Aluminum Association, Arlington, Va., says that is the sentiment across the industry. “Everybody believes the further into 2010 we get, things will look a lot better. But that’s not a forecast,” he says. “We hope that, and we’re all working to make it a reality. But the uncertainty is what preys on a lot of people’s minds.”

Automotive Fuel Economy Standards
Assure a Growing Share for Aluminum

Despite the automotive industry’s recent slump, producers and distributors of aluminum products remain bullish on the long-term prospects for sales to makers of cars and trucks.

“Aluminum is on a 40-year trend of continuously improving share growth in automotive,” says Randall Scheps, chairman of the Aluminum Association’s Transportation Group. “And all the megatrends are in place for aluminum use to continue to rise.”

In 1970, aluminum represented about 2 percent of the curb weight of a typical American vehicle. By 2008, that number had increased to 8.6 percent. The results of a Ducker Worldwide study of aluminum content in North American, European and Japanese automobiles suggests that the nonferrous material’s growing market share capture will stretch out until at least 2020, when it will make up more than 10 percent of curb weight.

Automakers, in the United States and around the world, are under increased pressure to improve fuel economy. While taking weight out of vehicles has always been a goal of car designers, the stringent fuel economy targets now in place put weight savings at a premium.

“One of the best ways to improve fuel economy without impairing the function of the car is to use lighter-weight material,” says Scheps, who also serves as marketing director for ground transportation at Pittsburgh-based Alcoa. “You can maintain the size of the vehicle, so the passenger comfort doesn’t change, but you reduce mass. It does not negatively impact crash performance; it improves the handling performance of the vehicle. You end up with a better product that also gets better fuel economy.”

Until now, aluminum has made the most inroads in the power train, including cylinder heads, engine blocks and other underhood components, with nearly 70 percent of all engine blocks made of aluminum this year. It has also made tremendous gains in wheels.

Going forward, there are two significant areas where aluminum can increase its percentage of the typical vehicle. In the near-term, Ducker sees sizable gains in the chassis area, with knuckles, drive shafts, control arms and suspension-related items moving from steel to aluminum. Longer term, suppliers are optimistic about the potential for aluminum’s use in auto body applications. The industry has already enjoyed some penetration in hoods and trunk lids, with doors and other wide parts the next target. “The body is the final frontier for aluminum,” Scheps says.

While some foreign automakers, specifically Audi and Jaguar, have introduced all-aluminum bodies on some models, most industry analysts don’t think that will become the trend. Of the 32 automotive executives and analysts interviewed in a survey by Ducker Worldwide, less than 15 percent believe there will be a significant number of mass-produced full aluminum bodies by 2020. But the aluminum industry, with assistance from the carmakers, continues to see inroads in many areas of production.

“What automakers are looking for from us are alloys that are easier to process, alloys that are more dent resistant and alloys that are stronger. They are looking for new ways of joining steel and aluminum in an auto body. And they are looking for us to bring those next-generation alloys and forming technologies that will help them use the materials more economically,” Scheps says.

Jack Hockema, president, CEO and chairman of Kaiser Aluminum, Foothill Ranch, Calif., says his company has seen this increased attention from automakers in the past year.

“The auto engineers are pounding our doors down to talk to us about new aluminum applications for automotive,” Hockema says. “That 5 percent compound growth rate in terms of content per vehicle will accelerate substantially, and it will be a nice growth market for us going forward, irrespective of what happens with build rates in North America.”

Sapa Tries to Ease Service Center Concerns After Indalex Acquisition

With producers and distributors of all metals having spent most of the past 12 months trying to manage through the downturn and putting a premium on liquidity, the merger and acquisition activity of the past decade has largely been absent in 2009. The one exception on the aluminum front was the recently completed purchase of Indalex by Sweden’s Sapa Group.

Indalex, the Lincolnshire, Ill.-based manufacturer of aluminum extrusions, had entered Chapter 11 bankruptcy in March of this year. By July, Sapa had acquired the company and its 10 plants in two countries for an estimated $95 million. For Sapa, a producer of aluminum profiles, the deal gave it the opportunity to grow its presence in North America, including an introduction into Canada.

At the time of the deal, the two companies cited the cost synergies that would be available through the acquisition. But there was one area of operation where Sapa and Indalex differed, the dependence on selling to the distribution market. Sapa’s existing service center customers took notice of the change.

“Our customers on the distribution side have been generally positive, but they do recognize the former Indalex sold more direct to customers,” says Chuck Strong, who is responsible for Sapa’s distribution markets across the country. “That company doesn’t exist anymore. From the top down, the organization is fully committed to supporting our distribution partners in the marketplace.

Part of that commitment was the creation of a new operating structure. In the new company, Strong reports to Timothy Stubbs, the former president and CEO of Indalex, who is heading up Sapa’s North American operations. “In order to emphasize the importance of distribution, and make sure distributors have a seat at the table at the top level of our organization, my position has changed to a direct reporting relationship with our North American president,” Strong says. “From a distribution perspective, we have a North American view that goes across the organization, as we do for top transportation and construction customers. Below that, we’re organized regionally to give us a ground-level focus.”

To illustrate that commitment, Sapa has created a new program, Premier Plus, open to customers interested in developing a more firm relationship with the company. The program will provide more products and services to those customers willing to become more dedicated partners.

Undertaking a major acquisition and operational overhaul during such dismal market conditions was an uncommon move, but Strong believes the company will be better in the long haul for its actions now. “We’re positioning ourselves with our new capabilities to excel beyond market trends,” he says.

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Wednesday, March 21, 2018