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2-2010 Toll Processing Outlook
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Lean Times Call for Lean Tolling

Improving prospects for the North American economy, especially automotive production, give toll processors reason for cautious optimism.

By Dan Markham,
Senior Editor

Employees at Metal Processing Corp., Gary, Ind., run coil through the company's slitting line. Like many Processors, MPC reduced head count in 2009 and is attempting to manage improved order books through expanded use of overtime.
Following a year when cutting, shearing and leveling were just as likely to refer to the mayhem a company was experiencing than the services it was offering, most of North America’s toll processors are delighted 2010 is finally here.

Like other links in the supply chain, most toll processors suffered significant losses in 2009. After a dreadful start, the year saw modest gains in the fourth quarter that spawned some feelings of cautious optimism entering 2010.

“It’s a lot better start to this year than last year,” says Peter Adamski, president of the Outside Processors Council, Rockford, Ill. “We’re not at levels we’d like to be, but they’re dramatically improved.”

That sentiment is common throughout the industry. According to a survey of toll processors conducted by Metal Center News (see related article on page 21), two-thirds of respondents reported sales declines averaging 28 percent in 2009. More than three-quarters are predicting sales increases averaging 19 percent in 2010.

“There’s some hope and optimism. We’ve definitely reached the bottom. We’ve even had a couple of blips off the bottom, driven a lot by Cash for Clunkers,” says Keith Medick, president and chief operating officer of Metal Processing Corp., Gary, Ind.

Signs of life from the automotive industry are encouraging for many toll processors whose fortunes are tied to carmakers in America’s Midwest and South. It was the inactivity of the automotive companies in the first half of 2009 that made life so miserable for many tollers.

With little demand and two of the three domestic automakers on the brink of bankruptcy at the start of 2009, production was at a near standstill. Overall, North American vehicle production last year totaled just 8.5 million units, down 32.4 percent from the already low levels of 2008. Much of that production was concentrated in the second half of the year, according to automotive analysts CSM Worldwide. Production of 2.7 million units in the fourth quarter was up 59 percent from first-quarter figures, showing growing momentum.

MCN Toll Poll:
Toll Processors Forecast
Double-Digit Gains in ’10
Like the tornado that levels the neighborhood but leaves a few houses unscathed, the recession has taken a serious toll on most toll processors. Some, however, have survived well.

According to the latest Metal Center News Toll Market Survey, two out of three toll processors report that their business declined by an average of 28 percent in 2009. Of the other one-third, however, nearly 10 percent say their business was about the same, while 23 percent actually saw growth last year.

Surveying this market is challenging because it is so difficult to define a toll processor. Some companies are dedicated toll processors that derive 100 percent of their revenues from processing other people’s metal. Many others are service centers that process both their own and other companies’ coils. Some dabble as toll processors, taking the occasional order to fill excess capacity on their lines, while others market their toll capabilities as a significant part of their service center strategy.

To conduct this informal poll, MCN e-mailed a link in mid-January to roughly 1,000 subscribers who have identified themselves as toll processors. The link took them to a simple online questionnaire. Pencil-and-paper questionnaires were also mailed to the 170 companies in MCN’s Directory of Toll Processors. In total, the survey netted 68 usable responses.

No doubt the results were affected by sampling the subscriber list of a service center magazine. While about one-third of the respondents derive almost all of their revenues from processing other people’s metal, other respondents’ toll business ranged from as high as 80 percent to as low as 5 percent. On average, the companies polled generate a little less than half of their revenues from tolling and a little more than half from conventional service center sales.

All total, respondents to the survey accounted for about $500 million of last year’s toll market, with the average company reporting about $7.8 million in toll processing revenues.

Who are their customers? Full or part-time toll processors serve mills, OEMs and service centers, to one degree or another. Some are dedicated to a particular mill, others to a particular manufacturer, but most spread their business around. On average, the poll found, service centers represent 43 percent of tollers’ business, OEMs 36 percent and mills 21 percent.

That service centers showed up as the biggest customer group for toll processors probably reflects a bias in the sample. As a service center magazine polling its service center readers, it’s not surprising that many respondents tend to be part-time toll processors who often do work for other service centers in their area. Just looking at the one-third of respondents who derive almost all their business from toll processing, service centers become the smallest customer group, with the rest split about evenly between mills and OEMs.

What services do toll processors offer? Clearly, most are flat-roll processors. The top five services and the percentage who offer them are: cutting to length, 70 percent; slitting, 64 percent; leveling, 48 percent; shearing, 42 percent; and blanking, 39 percent. Toll processing is not all about flat-roll, however. About 15 to 20 percent offer flame, plasma and laser cutting or sawing, among various other services.

Like companies of all types, toll processors had to reduce their headcounts last year as the economy tanked. On average, toll processors cut their workforces by more than 20 percent in 2009—and they don’t appear to be in any hurry to add that cost back to their operations. Fully one-third of respondents have no plans in 2010 to hire back any of those laid off. The majority say they will rehire less than half of those they let go.

What are toll processors forecasting for business in 2010? Seventy-eight percent expect an increase in sales averaging 19 percent, while the other 22 percent expect business to be about the same. Virtually no one is predicting a further erosion of their business, which reflects a generally hopeful climate in the metals sector. However, a 19 percent gain following a 28 percent decline will not make the market whole again this year. Realistically, most toll processors are unlikely to see a net gain until 2011 or beyond.

By Tim Triplett, Editor-in-Chief

“I don’t know if it’s all related to Cash for Clunkers, but the automotive side of the world has definitely been a positive for processors,” says Brian Habermel, sales manager of outside processing for Steel Technologies, Louisville, Ky. “You can point to Cash for Clunkers as a kick start. It did a good job of scrapping a lot of vehicles.”

For 2010, the outlook is considerably brighter for the automotive segment. CSM Worldwide forecasts sales of light vehicles in North America to hit 14.2 million—including 10.4 million in the United States—a 12.5 percent increase.

“Apprehensive consumers have postponed auto purchases for nearly two years, so an enormous amount of pent-up demand has accumulated,” says Joe Barker, senior manager of North American vehicle forecasts at CSM. “However, we think it will take at least another six months before demand of larger magnitude is unleashed.”

Production will enjoy an even greater boost than sales, improving 26 percent to 10.8 million units, CSM projects. But the analysts believe the automakers should proceed cautiously to “avoid letting production outpace the recovery in demand,” says Mike Jackson, CSM’s director of North American vehicle forecasts.

The past year was a watershed one for the North American automobile industry, with the first-quarter bailouts of Chrysler and General Motors followed by their second-quarter bankruptcy filings. In the wake of the tough times, auto execs promised a new way of doing business, which would be welcome to many in the processing community.

Adamski, who serves as general sales manager for Taylor Coil Processing, Lordstown, Ohio, says the automotive companies have followed through on some of their promised changes. “We’ve seen an improvement in communication. Their production schedules have changed and in some ways expanded and ramped up. We feel we’re in a better flow of communication, not only with the auto customers but also steel suppliers.”

Surprisingly, the automakers’ distress, and its effect on the whole supply chain, does not appear to have caused many toll processing casualties. The larger processing companies have emerged from the downturn shaken but intact. “Most processors remain in business. The main players are still there,” says Habermel. That’s also the impression held by Adamski, who keeps a close eye on the industry in his role with the Outside Processors Council. “There were probably some smaller facilities in more logistically challenged areas that faded away,” he adds.

For the rest, 2009 was a year of trimming operations to the bone. Most companies had to make significant staff reductions to match manpower costs with the lower level of demand. MCN’s survey shows toll processors reduced headcount by more than 20 percent on average, and will be conservative about rehiring as the economy recovers.

Worthington Industries was fairly typical of the way metal processors addressed staffing in 2009. The Columbus, Ohio, company, one of the nation’s larger processors, reduced its workforce by 19 percent last year through a variety of measures. Thus far, the move has been successful, President and Chief Operating Officer George Stoe told investors at the company’s last conference call. Worthington’s steel processing division enjoyed an operating income of $15 million during the company’s second quarter, which ended Nov. 30. The company said it was achieving increased productivity, greater flexibility and improved responsiveness to customers even after the headcount reduction, positioning itself “for significant operating improvements as volume continues to increase,” Stoe said.

Most companies will be reluctant to add back labor cost before it is absolutely necessary. “We cut employment substantially,” says Medick at Metal Processing Corp. “We brought a few back in the second half of the year, but our intent is, unless business picks up to a significant degree, we’ll just deal with it in overtime. If we’re normally running eight-hour shifts and a bunch of orders come in, we’ll just run 10-hour shifts.”

Employees are eager to work the extra hours to make up for lost pay, notes Habermel, who also serves as vice president of the Outside Processors Council. “There are a lot of operations running a lot of overtime now, as opposed to hiring people,” he says. “Guys who might have been cut back to 20 hours a week are being asked to work 50, and they’re pretty happy they’re getting the work. But you can only play the overtime game so much. Eventually you realize it’s time to put another shift on, to have a workforce that’s rested and ready to go, as opposed to guys working so much overtime that it’s not productive.”

Besides the liberal use of overtime, another byproduct of the market downturn is compressed lead time. “Customers are so thin on inventory, everything is super hot,” Medick says. “Ours is typically a short lead time business, but now everybody wants it next day.

The tighter lead times put further demands on the processing industry and call for a deft touch with customers. The only thing worse than telling a customer you can’t handle a job is telling him you can and then failing, Adamski says. “You need to be honest with your customers. You can’t promise them something you can’t deliver. Most of our customers have been fairly judicious in terms of what’s needed right away compared to what can be held off a bit. We need to prioritize what’s needed first and work it down the line.”

That will be particularly important whenever demand picks up. Ben Kalb, director of operations for Ameristar Coil Processing LLC, Tulsa, Okla., says the unprecedented nature of the past recession makes forecasting difficult. “Last year was so strange that nobody has any idea what to expect about demand. I’ve been in the business 42 years and I’ve never seen anything like 2009.”

Kalb’s solution for forecasting 2010 is to plan for another year like 2009. Ameristar primarily serves the markets for small trailers, HVAC and appliances. “I have erred on the conservative side and said we’ll do the same as we did last year. That should put me over budget. There’s going to be growth, it’s just a matter of whether we can sustain it,” he says.

Humberto Maldonado, who operates Bayou Processing and Storage Inc. in Houston, says the coming year will “still be a slow year, comparable to 2009 through the second quarter. It should take off after that.”

“I don’t think you’ll find a processor too disappointed today,” adds Habermel. “Who knows what tomorrow will bring, but we’re going to remain positive and hope it continues in the right direction.”

  
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Saturday, October 25, 2014