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May 2012
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'Just Wait Until Next Year'
 
Most producers of expanded and perforated metals are hoping that continued increases in consumer and business confidence will translate into a surge of pent-up demand next year. In the meantime, they have to be satisfied with small, incremental gains in sales of these niche products.
 
Unlike in other regions of the world, U.S. producers generally do not make both expanded and perforated metal products. Nevertheless, the two markets are interconnected as they both deal in metal sheets with holes in them and are often used in similar applications, says David Brenneman, executive vice president of McNichols Co., a Tampa, Fla.-based distributor of “hole” products.

Expanded metals start as sheets that are slit and stretched into a grating with diamond-shaped openings of various sizes. Perforated metals start as sheets that have holes punched in specific sizes and shapes. As opposed to the perforating process, expanding metals produces little or no scrap. Both bring certain esthetic and practical functionality to different applications.

About 63 percent of all expanded and perforated products are made of carbon steel (either uncoated or galvanized), while stainless steels account for 22 percent and aluminum 15 percent of the total, Brenneman estimates. Aluminum and stainless have been gaining share due to their anticorrosion properties and lower maintenance in exterior applications.

Brenneman says demand for all hole products is up over last year, although the rate of increase for perforated metals, at about 12 percent, is higher than the 5 percent for expanded metals. “That is partly because perforated metals were hit harder during the recent recession than more commodity-like products such as expanded metals. Therefore, perforated metals have more room to bounce back from their low point,” he says.

Gary Huppert, marketing manager for Accurate Perforating, Chicago, says demand for perforated metals was strong in 2010 and 2011, but he has seen a marked slowdown in orders this year across the various markets his company serves. “We are working hard not to go backwards, but our profits are being squeezed,” he says, as customers in some markets are price sensitive due to the high level of international competition they face.

Other suppliers remain optimistic that 2012 will finish up slightly better than 2011, as many end markets continue to gain steam. Some are even hopeful that 2013 will be a much better year for perforated and expanded metals. Based on strengthening sales in the first quarter, perforated metals are on track to increase 13-14 percent on a tonnage basis this year, says Michael J. Gilboy, vice president of Quality Perforating Inc., Carbondale, Pa. “As we move forward, we are seeing heightened optimism about the business climate,” says a spokesman for supply chain management at O’Neal Steel Inc., Birmingham, Ala. “We expect steady to moderate improvement.”
 
Despite the construction sector’s ongoing struggles, 2012 should be a good year for perforated metal products, agrees David Simpson, given the improving fundamentals of such major markets as energy, automotive and industrial equipment. “As the world gets greener, faster, noisier and dirtier, it is good for perforated metals,” says Simpson, president and CEO of Diamond Manufacturing Co., Wyoming, Pa., a subsidiary of Reliance Steel and Aluminum Co.

The market dynamics are similar for expanded metals, with demand up a surprising 10-20 percent so far this year, according to officials of the Expanded Metal Manufacturers Association, which is part of the larger National Association of Architectural Metal Manufacturers. Metal perforators are represented by a separate trade group, the Industrial Perforators Association. “It [expanded metal] hasn’t been growing like wildfire, but we are seeing steady and solid growth,” adds Rod Miller, president of Spantek Expanded Metal, Hopkins, Minn.

Expanded metal companies that serve such robust markets as energy and automotive have been seeing even more impressive growth rates, says Rick Bahner, managing member of Expanded Solutions LLC, Oklahoma City, Okla. His business has been “going like gangbusters” to keep up with demand from the oil and gas sector in the region, he says, necessitating the addition of 10 employees so far this year.

For companies such as Alabama Metal Industries Corp., Birmingham, Ala., which sell most of their expanded metal products through distributors, it is harder to pinpoint what’s driving the growth. “This is especially true since there are about 100 different uses of expanded metal,” says Jim Quinn, AMICO’s corporate product manager.
 
Because of the broad range of applications for perforated and expanded metals, these products tend to track closely with the general economy, say the experts.

Overall activity in the U.S. industrial sector is expanding. According to the Federal Reserve Board, March industrial production was up 3.8 percent year on year. “Manufacturing in general is the shining star of the U.S. economy,” notes Gilboy at Quality Perforating.

On the other hand, some factors are having a dampening effect on the economy and manufacturing, including the uncertain U.S. political and regulatory climate. “Whenever these uncertainties are lifted, it will release long-term pent-up consumer demand, which in turn will spur parabolic growth,” predicts Brenneman. “Until then, there will be just a trickle of demand building up slowly.”

The surging automotive market is one of the strongest sectors for suppliers of hole products. Experts forecast automotive production of 14.5 million cars and light trucks this year, up from 13.1 million vehicles last year, 11.9 million in 2010 and 8.6 million in 2009 at the depth of the recession. Perforated or expanded sheets are often used to contain insulating material for noise reduction in cars and trucks. They are also used in aftermarket parts such as filters and exhausts. “Even with people buying fewer cars than they did prior to the downturn, they are taking good care of their current vehicles. That means more aftermarket purchases,” says Spantek’s Miller.

The energy sector is also a high-growth market, with U.S. oil and natural gas drill rig activity up 8.7 percent year on year. Bahner at Expanded Solutions says these products are used not only for filters in oil and natural gas drilling and transmission equipment, but also for security around the rig site, including guardrails, barriers and mezzanine catwalks. Expanded and perforated metals are also used for solar applications, Brenneman says, including for rooftop supports and visual screening of solar panels.

In contrast, the use of expanded and perforated metals in building and construction has been weak, especially for new construction. “One indicator of where commercial construction is going is office furniture,” Spantek’s Miller says, noting that the office furniture market is down 10-20 percent. He does not expect to see any significant pickup in commercial construction and hole product consumption for at least the rest of the year.

But there are signs that new construction may be due for an upturn. For example, the Architecture Billings Index of the American Institute of Architects remained positive for the fifth straight month in March. This is a leading indicator of a pickup in building activity within the next nine to 12 months. Meanwhile, companies are actively upgrading and remodeling existing commercial facilities using expanded and perforated products for both functional and aesthetic applications, suppliers say.

Although building and construction remains weak on the whole, perforated and expanded metals have been getting support from the “green” movement. Materials with holes, like wire cloth or mesh, are used on building facades as sun screens, for example. “In addition to reflecting the heat, therefore reducing air conditioning costs, expanded and perforated metals reflect light so there isn’t as much need for shading,” Brenneman notes. “There could be even more architectural projects as we make young, and even some old, architects aware of the advantages of our product,” Quinn adds.

How much of expanded and perforated metal is sold direct and how much through distribution varies widely company by company and product by product, say suppliers. By some estimates, distribution’s share is as low as 25 percent, by other estimates as high as 70 percent. Expanded metal, due to its more commodity nature, is more likely to be sold by distributors vs. perforated products, which tend to have a higher percentage of customized orders.

“With the demand for expanded and perforated metals so sporadic, and with the options so varied with all the combinations of material type, hole size, gauge and sheet size, a lot of distributors keep their inventories low and buy only on an as-needed basis,” Brenneman says. “If they buy for stock, they are cautious. It’s easy for them to wind up with a herd of ‘white elephants’ after a couple of years if they try to stock most of these items.”

Service centers’ cautious attitude toward hole products has changed somewhat, says Huppert at Accurate Perforating. The amount of perforated metals sold through distribution is rising a bit, as some distributors have changed their selling models and are now going after larger projects on their own. “More service centers are coming to us, as their sales managers have found they can increase profits by adding perforated metal to truckloads of raw coils and sheets,” he says.

Service centers are more likely to sell standard-sized sheets, generally 4-by-8 and 5-by-10 foot product, Bahner says. More custom-sized sheet, as well as product with custom-sized holes, is more likely to be sold directly to the OEMs by producers.

“We have made a conscious decision to keep our inventories leaner than in the past—not just for expanded metals, but for other products as well,” the O’Neal spokesman says. With producer lead times a relatively short two to three weeks, and suppliers keeping more commodity-grade material on the floor, service centers don’t have to take on the inventory risk, he adds.

Producers are trying to keep their inventory risk to a minimum, as well, Bahner says. “We are taking a lesson from the service center industry and watching our inventory turns more carefully. The steel we get today we ship out in the next few weeks.”

There has been some consolidation in the hole products market, but mostly tied to succession of family-owned businesses. One notable move was Reliance’s October 2010 purchase of Diamond Manufacturing, a privately held perforator for 96 years. Reliance followed that up with the purchase of McKey Perforating Co. Inc., New Berlin, Wis., and McKey Perforated Products Co. Inc., Manchester, Tenn., earlier this year.

Other service centers are unlikely to follow Reliance’s lead. Perforated and expanded metal is a craft industry requiring a lot of technical expertise and specialized equipment, Gilboy says. “While service centers like to provide added value, buying a perforated or expanded metal producer is somewhat outside the box.”

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