Service Centers Go Shopping
Service center operators and equipment manufacturers both report a pickup in capital spending.
By Dan Markham, Senior Editor
Manufacturers of metal processing and material-handling equipment are excited about the level of interest so far this year from their service center customers. Small and large companies alike are boosting their cap ex budgets as business conditions continue to improve.
Reliance Steel & Aluminum Co., the nation’s largest service center company, announced earlier this year a budget for capital expenditures of approximately $200 million. That’s far in excess of the $140 million the Los Angeles-based company planned to spend in 2010—and the gap is even larger between the money budgeted and the money actually spent. During the company’s quarterly conference call in January, President and Chief Operating Officer Gregg Mollins said Reliance spent “more than $110 million in property, plant and equipment in 2010,” so this year’s budget nearly doubles that amount.
Certainly, Reliance’s capital budget for 2011 dwarfs the spending plan of the typical service center. But such a significant jump by the service center giant suggests that after a few years sidelined by the recession, North America’s metal distributors may finally be shopping in earnest again.
Service center operators responding to Metal Center News’ annual Outlook survey last fall reflected that mindset. Of the executives who responded to questions on cap ex plans for 2011, about 78 percent expected to spend the same or more in 2011 as they did in 2010. Only 22 percent expected to spend less this year.
Based on those same responses, the average large service center (with over 100 employees) anticipated spending over $1 million on new processing and material-handling equipment this year. The average capital budget for a midsize service center (20 to 99 employees) was $227,400, while the average for a small service center (less than 20 employees) was about $89,700. Overall, the average service center planned to spend 16.4 percent more on capital improvements in 2011.
Service center executives polled in April by MCN may not be as ambitious in their spending plans as Reliance, but most are planning some substantial upgrades.
Richard Robinson, president of Norfolk Iron and Metal, Norfolk, Neb., says his company’s spending will be up slightly in 2010, “mainly in rolling stock and some processing equipment.” As a private company, Norfolk is able to act quickly if additional opportunities arise down the road, he says.
Al Glick of Alro Steel, Jackson, Mich., offers a similar assessment of his company’s spending plans for 2011. “We do have some new value-added equipment on order. We’re always looking for improvement in lasers and saws. Anything where we can continue to improve our quality for our customers,” Glick says.
According to MCN’s Outlook survey, slitters top service center wish lists for 2011, followed closely by material-handling and cut-to-length equipment, trucks, saws and computer systems (see chart).
A.M. Castle & Co., Franklin Park, Ill., a public company, will spend approximately $14 million this year, a significant increase from the $7.6 million in 2010. The company expects an annual outlay of about $10 million for the foreseeable future. “The increase to both what we said was going to be normal and compared to last year is a reflection of growth opportunities we have available with some of our key customers,” says Scott Stephens, vice president-finance and chief financial officer for the specialty metals distributor. “The nature of the $14 million will include facility expansion, including some of our key end markets such as Mexico, Europe and Southeast Asia.”
Castle’s growth-related expenditures are largely dictated by customers, Stephens says. “We’re not in the ‘build it and they will come’ mentality,” Stephens says. “If we have an anchor customer or a small group of anchor accounts that are looking for us to give them support in a particular way, then we make a decision.”
Another publicly traded company, Mississauga, Ontario-based Russel Metals, expects spending to be comparable to last year. “We see very little expansion type spending because our tons are still below what we were running in 2007,” says Marion Britton, vice president and chief financial officer for the Canadian metals distributor.
Russel instead will focus most of its expenditures on process improvements, such as new lasers for quicker cutting or computer systems for better data processing. “Additional equipment for additional capacity—that’s not happening. If it’s working reasonably well, we’ll keep it for another year. If we do an upgrade now, it’s because it gives us additional efficiencies,” Britton says.
Birmingham, Ala.-based O’Neal Steel continues to take a cautious approach to spending as the economy recovers. “Coming from where we have as an industry and economy the past several years, and with some level of uncertainty still in the market, we continue to be very careful with how we approach capital spending projects,” says Stephen Armstrong, vice president of administration. “That being said, we have increased capital spending to ensure our resources are properly aligned with our customers’ needs.”
O’Neal will spend most of its funds on metal processing equipment and facilities, with less of an emphasis on new IT applications in 2011, he adds. “The primary driver in our decision-making process is the expected impact on customers and shareholders. We study both the impact on service capabilities and the return on the investment required. The projects we approve must provide an improvement in either of these categories.”
Equipment vendors’ perspective
Equipment manufacturers serving the service center industry have seen a significant increase in inquiries for the last several months. Coming off a few rough years, the change has been welcome.
“Quoting is way up and activity is way up,” says Chuck Damore, executive vice president of Coil Tech, Schiller Park, Ill. “We’re starting to see orders come in on a wide range of product.”
The industry suffered a tremendous setback in 2009 when most distributors put the kibosh on spending in the face of the recession. Conditions improved in 2010, though gradually. Today, with confidence up throughout the industry, the outlook is considerably more upbeat.
“We’re seeing a lot more optimism. Earlier we saw some pent-up demand, previous projects customers were working on but had been holding back. Now we are actually seeing some legitimate new projects,” says Red Bud Industries Vice President of Sales and Marketing Dean Linders.
Don Duran, sales manager for Amada Cutting Technologies, Rolling Meadows, Ill., has noticed a significant shift in his customers’ outlook. “The people that are buying from us right now are looking further over the horizon than we are able to see. And whatever they’re able to see, it’s not a blip, not a short-term aberration. The money they’re investing is high-dollar capital for a long-term buy.”
Manufacturers say activity has picked up in most regions, particularly the Midwest. “Canada and Mexico have both woken up as well, but the West Coast is the laggard right now,” says Duran.
He believes the fact that much of the economy’s recovery has been a jobless one is fueling some of the purchasing decisions by processors. “It doesn’t seem like employment is on the front burner. They want to do more with less and cut more with fewer people,” he says.
A similar assessment is offered by Damore, whose company produces both coil processing and material-handling equipment. “Our customers are running as few people as they can to get the job done. We saw this in 1999-2000; as business got slow, they learned to do more with less.”
But Linders, whose Red Bud, Ill.-based company makes coil processing equipment, believes most companies have already met their lean objectives. “Even before this, we saw a trend toward equipment that was more efficient. They’ve always been trying to produce more product with fewer people on the equipment. Once you get to a minimum, the impact you get on productivity by eliminating another half-position isn’t worth it,” he says.
The increase in business has its challenges. Duran acknowledges that his company was tested both from a personnel and an inventory standpoint by the sudden rise in activity at the start of the year. “You can rectify the manpower pretty quickly. It’s tougher with inventory, but we’ve done a good job of attacking that.”
The Caldwell Group Inc., a material-handling equipment manufacturer based in Rockford, Ill., has faced a similar issue. Applications Specialist Dan Brenneman says his company has enjoyed a major boost in custom orders from both its mill and service center customers. That can make it difficult to keep up with the standard catalog business. The high price and tight availability of some of the high-grade steel alloys that Caldwell uses to manufacture its products is another concern. “It’s a tough balance. When you get a lot of larger orders from customers, it has an impact on our steady stream of catalog items,” Brenneman says.
But equipment makers welcome these too-much-business challenges vs. the little-or-no-business challenges of the recent past. “It does seem the preponderance of companies in the metal service and fabrication world are doing darn well,” says Duran. “I’m very confident this should continue unabated through this year, and 2012 will be even better.”