Service centers have plenty of reasons to invest in new metal processing equipment
, not the least of which are recent changes to the U.S. tax code that incentivize capital spending.
The Tax Cuts and Jobs Act, which was signed into law in December, is already influencing capex within the service center industry, according to Dean Linders, vice president of marketing and sales at Red Bud Industries, Red Bud, Ill. In just three months, Red Bud has already exceeded its total sales from all of 2017. Linders says the strong market is a direct result of the new tax code.
“I think the tax law changes have helped quite a bit,” he says. “If a company has a good year, they can offset their taxes with an equipment purchase. It’s kind of a win-win situation. Instead of paying the tax to the government, they can use that to help pay for their new equipment.”
The change allows companies to expense 100 percent of the cost of equipment that is put into service after Sept. 27, 2017, and before Dec. 31, 2022. After that date, the 100 percent allowance decreases by 20 percent per calendar year for qualified property placed into service.
Additionally, the amount of Section 179 depreciation has been increased to $1 million per year. Previously, a company could immediately expense up to $500,000 per year on property placed into service, with a maximum bonus depreciation of 50 percent. The new law increases bonus depreciation to 100 percent, and the limit on equipment purchases is now $2.5 million.
Dave Lerman, CEO at South Bend, Ind.-based service center Steel Warehouse Co., says the ability to depreciate at a faster rate is giving companies more flexibility. “If you have a piece of equipment that’s not fully depreciated, but on the other hand, it can’t keep up productivity-wise with the newer stuff, you have a chance to depreciate that, and in effect, reduce your taxes so that you can reinvest in more competitive equipment,” he explains.
Lerman adds that the new tax code will give service centers that are looking to invest the capital to do so, which makes the industry more competitive. “The companies that do want to compete and keep up are going to have more ability to do that, and therefore, the guys who choose not to do it are going to fall that much further behind,” he says. “I think that will continue to make our segment, as well as all the other segments of manufacturing, more competitive, because we’re basically encouraged to move forward on capex that really works towards efficiencies… It encourages you to have the opportunity to spend more of it to stay competitive.”
That competition is another reason service centers are moving to invest.
Steven Baker, industry sales leader at The Bradbury Group, Moundridge, Kan., says the need to match or exceed a competitor’s capabilities is one of the biggest external forces encouraging companies to purchase new equipment.
“It’s all about production and efficiency and how fast you can do the job,” he says. “A lot of times, they’re looking at technology from a production aspect and the ability to change from one setup to the next to increase their productivity, and therefore, be able to offer a better price than their competitor. It becomes a very competitive market.”
According to Lerman, a company must be able to keep up with the market if they want to stay in business. “In general, the market is moving toward bigger coils, it’s moving toward higher strength levels and it’s moving towards more efficiencies,” he explains. “So, to stay up with the market, or to try to stay a little ahead of the market, those are the areas you want to make sure you have the right tools. If not, it’s going to be hard to compete.”
Chuck Damore, president at Braner USA, Schiller Park, Ill., notes that while the new tax code may incentivize capital spending, market forces are driving the bulk of equipment purchases.
“Certainly, it will have an effect, but I haven’t seen a customer say they’re buying a piece of equipment because of a tax plan,” he says. “They’re buying a piece of equipment because they want more capacity, the timing is right, they’re running aluminum, they’re running advanced-high-strength and they can’t run it on what they have, or they’re growing their business.”
One possible deterrent to new equipment purchases is anticipated price increases associated with the recently enacted Section 232 tariffs. Equipment experts say metal costs are already on the rise, as a result of the tariffs, and it’s only a matter of time before those costs get passed on to the companies buying metal processing equipment – service centers, toll processors and fabricators.
“We’ve got to go out to market and purchase materials and plates when we get orders, and we’re already seeing pricing starting to rise,” Linders says. “How far that goes and how it will impact pricing, we’re not sure yet. But, I’m sure that it’s going to impact it by a few percentage points at some point.”
The same is true for Bradbury, according to Baker, who says the tariffs will influence prices. “We’ve already had our suppliers telling us about price increases in steel, especially in tool steel,” he says. “We’ve been warned already, that within the next couple of weeks, to expect maybe a 15-25 percent hike in that material.”
Baker warns that the cost of all metal processing equipment will be going up. “We’re going to see some price increases,” he says. “We’ve warned our customers that we can’t hold prices for an extended period of time.”Whether the rising cost of equipment will dissuade equipment purchases is yet to be seen. In any case, Linders still sees plenty of reasons for optimism.
“Anytime the equipment costs go up, there’s always a concern,” he says. “I think that as long as the service centers see that they are making money and will do so for at least a predictable period of time, they’ll take that into consideration when they buy the equipment. If a guy thinks he can make money, then he’ll probably spend it.”
If that desire to remain competitive is pushing service centers to invest in new equipment, it could also be the reason equipment makers avoid raising prices too much, according to Lerman. “I think there’s so much competition amongst the machinery builders that they’re going to keep prices down,” he says.
Leading the market
Among the top service centers, capex plans are already in place for 2018. And, many are predicting big increases in their capital spending budgets. Los Angeles-based Reliance Steel and Aluminum is leading the way, with capex expected to jump 39 percent this year.
“In regard to value-added processing, we will continue to make strategic investments in equipment and facilities to drive organic growth,” Gregg Mollins, president and CEO, told Reliance investors in February. “Our 2018 capital expenditure budget is $225 million, with the majority of these investments growth related.”
During its recent fourth-quarter earnings call, Olympic Steel, Cleveland, also announced plans to boost capital spending in the upcoming year. Olympic said it will spend approximately $25 million on capex in 2018, compared with $10.2 million last year.
President David Wolfort told investors that these investments, which include a new stainless steel cut-to-length line at Olympic’s facility in Schaumburg, Ill., will help meet anticipated demand increases. “We are also prepared for customer growth with new processing capabilities,” he said. “In addition to the new cut-to-length line, which is scheduled to come on line at the end of this year, a second slitter dedicated to our growing stainless steel business in Streetsboro, Ohio, will begin operations in the second quarter of 2018.”
Wolfort added that the company is also investing in new flat and tube laser cutting equipment to meet increasing demand, which he partly credited to the Tax Cuts and Jobs Act. “On the demand side, recent tax legislation is encouraging capital investments,” he added. “This should boost real GDP growth further, which is bullish for Olympic Steel.”
Equipment makers have noticed an uptick in service center purchases, as well. “I would say the service center activity is very good,” Damore says. “Most all of our customers are reporting that business is good. They’re always struggling with pricing, as everyone is, but business is very good within our customer base.”
As for the type of equipment being purchased, Linders says it’s been a mixture of everything. “We’ve sold a number of new plate lines, and lot of these lines have stretcher levelers,” he says. “We’re also seeing activity with the high-speed slitting lines for the ultra-high-strength materials for the automotive sector.”
Linders adds that Red Bud has also sold several CTL lines and stretchers. “We’ve already done four or five of those so far this year. We’ve got orders for at least three or more slitters, and we’ve got a number of orders for blanking lines. So, it’s really been pretty much across the board.”
Baker, of Bradbury Group, says the emphasis on higher strength metals has given a boost to the slitting market in recent years. “A lot of people are trying to move to high-strength, and a lot of the older lines struggle with those high-strength materials,” he says. “People that are [processing] higher strength materials, need to look at their equipment very seriously. And, a lot of times they’re considering new lines, versus upgrading.”
The emergence of advanced-high-strength steels, as well as aluminum, into the automotive industry is also being felt at Braner. “The automotive aluminum slitting market is becoming more and more prominent in our industry,” Damore explains. “Everybody wants to run aluminum to get the weight down. The advanced-high-strength has been there, and that’s going to continue to stay there.”
The metal processing equipment industry is more evolutionary than revolutionary, according to Linders. When it comes to the future of innovation, he says the machines themselves are quite advanced, and equipment makers are now looking at ways to set up and change over machines more rapidly. And, that drive is leading to increased automation industrywide.
“Nowadays, you have got to make these lines set up much more quickly and easily,” Linders says. “What that leads to then is a much greater degree of automation in the metals industry. We’re doing a lot of automation on the equipment for quicker setup, easy changeover and less personnel.”
Additionally, Red Bud is also developing new tools for efficiency and time tracking on its machines. Linders says software can now monitor a line through all process stages, capturing data and storing it for later analysis.
“So, this doesn’t force you to be efficient and accurate,” he adds, “but it puts a great big spotlight on it and then tells you where you’re losing your time.”
The development of automatic tools to measure material and help ensure a better-quality product has impressed Lerman. The Steel Warehouse CEO says improvements in the different computer-control areas allow equipment to be set automatically and more precisely, thus improving the accuracy of what is produced.
“The cost of computers that can measure and software that can work all your equipment more accurately is an overall gain, whether you’re buying a lot of new equipment or if you’re trying to upgrade your equipment,” Lerman says.
Damore agrees, and notes that these technological advances are about one thing: making it easier for operators to run the equipment. “Automation is always something we’re working on.”
Ultimately, Linders sees increased automation as the main driver of future innovation. Red Bud has even worked with some companies on the initial design of their buildings in order to accommodate a number of automatic processes, including the company’s new automated material handling system.
“We’re not actually the architect, but we’re doing building layouts, we’re laying out for automatic coil handling, we’re laying the lines out so they can be self-loaded, we’re laying out the material storage at the other end,” Linders says. “We’re moving towards full automation at some point.”