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Bradbury hopes service center profits in 2018 turn into more equipment purchases this year. (photo courtesy of Bradbury)

Capital Spending Outlook 2019

Time to Buy

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From tax incentives to material changes, service centers have plenty of reasons to invest in new equipment… and they are.

When steel prices spiked in the middle of 2018, metal distributors also saw their inventory values go through the roof. This development gave many service centers the financial backing they needed to move forward on some much-needed capital investment.

“When metal prices went up, it gave people a good opportunity to look at things they wanted to do because it certainly helped everybody’s cash flow,” said Bret Wells, vice president of operations at Heidtman Steel.

The Toledo, Ohio-based service center recently completed installation of two 17-roll, hydraulic levelers with e-drive technology on its pickling lines in Granite City, Ill., and Butler, Ind. While positive market conditions may have contributed to Heidtman’s decision to invest in its pickling operation, the company had more than one reason to move forward on these equipment purchases.

According to Ben Shinkle, director of engineering at Heidtman Steel, the Bradbury Group’s e-drive technology is an innovative step forward in the evolution of leveling technology. “Ultimately, we went with the e-leveler because it gives us the best shape correction,” Shinkle says.

Ensuring their equipment is able to process the newest materials and meet the latest industry standards was necessary if Heidtman was going to keep up with the competition, according to Wells.

“We were a little bit behind the curve, and we really needed to upgrade our pickle lines,” he said, adding that their new e-drive levelers are a step above what most other pickle lines utilize. “We decided to upgrade, and we did that to attract new business. We were losing market share because of not having these.”

Chuck Damore, of Braner USA Inc., Schiller Park, Ill., says the need to keep up with the Joneses is driving a lot of recent equipment purchases. The reason is because new materials, such as advanced high-strength steels, are creating new processing requirements. To keep pace with these material advancements, service centers have no choice but to invest in their equipment.

“We continue to see very high demand for equipment that can process advanced high-strength materials and, more recently, automotive-grade aluminums,” Damore says. “Everybody wants to run thinner, stronger materials to lighten up whatever they’re making, particularly in the automotive industry. And most all of our customers are into automotive to some degree or another.”

Damore says an increasing number of traditional steel service center customers are also diversifying their equipment in order to process aluminum materials for the automotive industry. The need to process aluminum, as well as high-strength steel, is prompting service centers to not only purchase new equipment but also upgrade old processing lines as well.

“We’re also seeing our customers invest in older equipment that they’re running this new material on,” Damore says. “Because they’re running this high-strength material, it has the tendency to tear up the equipment a little bit. So, we’re seeing a lot of equipment retrofits and replacement of older and obsolete equipment that’s worn out on some of these lines.”

Another factor contributing to the positive capital spending environment is the Tax Cuts and Jobs Act, which was signed into law in December 2017. The legislation allows companies to expense 100 percent of the cost of equipment put into service 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. The law also increases bonus depreciation to 100 percent from 50 percent and changes the limit on equipment purchases to $2.5 million.

Dean Linders, vice president of marketing and sales at Red Bud Industries, says this accelerated depreciation is prompting a lot of companies to spend money. “It’s been a very favorable environment for manufacturers,” he says, noting the Red Bud, Ill.-based manufacturer of metal processing equipment has seen increased sales activity among service centers. “2018 was a very good year, and that’s continued into 2019. We’re back to the levels basically that we haven’t seen consistently since before the 2008 crash.”

And Linders says equipment demand is up across the board, with service centers buying everything from slitters and multi-blanking lines to levelers and heavy-gauge plate lines. “Right now, it’s kind of hitting on all cylinders,” he says. “It’s much more diversified than it’s been in the past.”

The Section 232 tariffs are partly responsible for the uptick in business, according to Linders. “When the steel tariffs originally hit, right off the bat, everybody’s inventory was more valuable because the steel prices went up,” he says. ”2018 was a really good year for service centers in terms of their profits, so that fueled a lot of the activity we saw.”

With many in the industry anticipating steel prices will stabilize, Linders says there is some uncertainty in the market. Despite this, service centers are still buying machines. “We do see and hear a little bit more about uncertainty in the marketplace, but that doesn’t seem to have throttled back companies’ interest in buying equipment,” he says. “The markets are still strong enough; the economic data are still strong enough that people are optimistic and confident moving forward. We just don’t hear about people putting equipment on hold these days.”

Similarly optimistic about the equipment market is Steven Baker, industry sales leader at the Bradbury Group, Moundridge, Kan. While he acknowledges that the market is relatively good, he says last year could have been better.

“The service center group, while it’s busy, didn’t meet our expectations,” Baker says. “The market didn’t react as well as we thought it would when the steel prices jumped up.

The hope is that when the steel market slows down, companies will spend their profits on capital expenditures, such as new metal processing equipment. “From my experience, those larger projects usually start to gain traction after the market slows a little bit,” Baker says. “When the market slows a little bit, you’ll see some of those capital funds get released.”

Braner’s Damore is also hoping to see the market improve over 2018. And so far, all signs are pointing to a strong year ahead.

“Our quote backlog is healthy, and we’re hopeful that that quoting is going to transmit to orders,” he says. “Our customers seem to be investing in equipment. We’re retrofitting, we’re selling new lines; that’s a great thing.”

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