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Capital Spending Report

Service Centers Spending Big

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Record profits and robust demand from customers have service centers keeping equipment makers extremely busy in the early days of 2022. 

High steel prices and strong demand in 2021 put a lot of money in the accounts of North American service centers. And with the never-ending pressure to upgrade their value-added capabilities from demanding customers, those companies are ready to plow that money back into their operations. 

Take Ryerson. North America’s second-largest service center company expects a robust cap ex budget in 2022. “We’re always mindful of what we can afford, but if you look at benchmarks for CapEx spend, take it on a ratio basis, even at $100 million, given the improvements that we’ve made financially, the amount seems reasonable and is very well aligned with our strategy and what we hope to accomplish going forward,” President and CEO Eddie Lehner said at the company’s year-end conference call. 

Fellow service center company Russel Metals was also anticipating a larger budget for expenditures this year. “In total, our CapEx for 2021 was around $29 million, and we expect this to grow to closer to $50 million in 2022 with an increased focus on additional value-added equipment projects throughout our system,” said Martin Juravsky, Russel’s CFO. 

The makers of processing equipment are seeing that play out firsthand. Manufacturers are seeing an uptick in capital spending on equipment despite supply chain issues. 
The beginning of 2022 saw strong capital spending inquiries and activity levels for many businesses. Salem, Ohio-based Butech Bliss’ inquiries “have remained at a high level for several quarters now, and our sales activity is off to a promising start for 2022,” according to Lisa Kravec, marketing manager. 

Rick Arcaro, vice president of sales and marketing of HYDMECH, Woodstock, Ontario, Canada, concurs. “Band saw machine and material handling system orders have been the highest for the first quarter of 2022 than in the past two decades,” he says.

“I would say this is turning into one of our best years ever,” says Stefan Dolipski of KASTO, Export, Pa. “We can’t keep enough equipment in and we’re backlogged as far as we can look. It’s very good.”

For many businesses, COVID-19 initially presented a problem with capital spending inquiry and activity, as was the case with Braner USA Inc., Schiller Park, Ill. The company had a period of relative inactivity related to the COVID-19 crisis. However, business picked up in mid-2021 and has been doing well ever since. “Inquiry and activity level in 2022 has been strong through the first quarter and appears to be a condition that will continue through the year,” says Executive Doug Matsunaga.  

He is also optimistic about Braner’s customers’ future capital spending. “Most of our customers benefited from the 2021 metal pricing run-up and are optimistic about future business conditions,” he says, “so most have some plans to upgrade and modernize existing capacity and expand with new capacity able to process higher strength and more exotic materials that are becoming more and more prevalent.”

Kravec points out that capital spending projects vary, depending on the customer, saying that, for example, “steel producers are looking for productivity upgrades, and service centers are investing in new highly productive equipment.” 

“While there are exceptions, for the most part, customers are either planning to spend or are already spending large amounts of capital on new equipment.  And it’s really not limited to one segment of the market or product type,” says Dean Linders, vice president of sales and marketing for Red Bud Industries, Red Bud, Ill. 

Most of Charlotte, N.C.-based Cosen Saws’ customers plan to spend on capital investments but face the challenge of obtaining equipment quickly.  “They have demand to produce products, and need to get production going; however, delivery delays have really plagued everyone,” explains Yu-Hsien Ho, director of channel sales and marketing. “For the majority of the cases it seems that prices don’t matter so much as availability.”

That’s the impression of Signode’s John Rometty, director of equipment sales for the company, which is in the process of relocating operations from Glenview, Ill., to nearby Roselle. Their primary concern is “when can I get delivery?”

That isn’t always easy. As with participants of all sectors, the industry is challenged by supply chain shortages. “The electrical components that are part of our drives, they’re going crazy on delivery times. Some of those things are out 52 to 55 weeks,” says Pete Swenson, sales manager for North America for Fagor Arrasate, Portage, Ind. 

Customers are aware of this. And they’re willing to pay a premium to obtain equipment with the quickest lead times. 

When businesses buy new equipment, they are looking for purchases that will meet goals of efficiency and productivity, all the while keeping safety at the forefront. Overall, technology and automation greatly assist companies in cutting labor costs and preventing injuries. “The metals industry is always seeking the most productive and reliable equipment currently offered by suppliers,” says Kravec. 

And with the labor issues, productive machinery is paramount. “Many customers are looking for complete optimization and automation of their equipment in order to combat the labor shortage,” says Ho. “They’re planning for the long term and willing to invest in automation.” 

Customers are actively looking at what they can do to automate their processes,” says Swenson. “As a European manufacturer, specifically Fagor, we’ve been a leader in automation because for a long time the cost of an employee in Europe was higher than the U.S., so European companies have long desired to take as many people out of the equation as is practical.”

“They want automated stuff. Machines that help them not reduce manpower, but allow them to relocate the manpower so you don’t need it for pulling orders or manning a saw with two or three people,” Dolipski says. 

This attitude has been growing in recent years, accelerated by the ongoing labor problems.  

“In the past, customers were somewhat reluctant to spend the additional money to purchase automation. However, due to the cost and availability of labor, customers are not only willing to pay a higher price, they are requesting these items,” says Linders. 

Arcaro says most of HYDMECH’s customers are seeking equipment that uses more technology and automation, as well as “reliability, ease of operation and service support.” 

Matsunaga concurs. “We see our customers demanding higher product quality, improved safety, production efficiency – higher tons per man-hour – and equipment reliability,” he says. “In response, we have invested in equipment and system improvements that address all four goals.” 

Further buoying investments, now and in the years to come, is the activity level at the mills. With new facilities either just ramping up or planned in the coming years, service center investments will follow them, creating more demand for new equipment. Swenson points to the investments under way at Steel Dynamics’ new Sinton, Texas, facility as evidence. “The level of building going on out there from service centers is mindboggling,” he says. 

It’s not just mills and service centers expanding. “Orders are being placed at an unprecedented rate, to the point that deliveries are becoming protracted despite our best efforts to keep up. In fact, we are currently adding another 55,000 square feet to our current 200,000-plus-square-foot. facility,” Linders says. 

In the current conditions, customers are also concerned about environmental sustainability, and this includes energy-efficient machines that help lower utility costs. “Depending on a manufacturer’s end markets, environmental accountability is increasingly a focus,” says Arcaro. “To develop and deliver against net-zero or carbon-neutral goals, more organizations are dedicating or redesigning sustainability roles and initiatives and quantifying efforts and results around energy consumption.” 

Ho says some larger companies have prepared for, or are in the process of preparing for, environmental sustainability and that manufacturers cannot ignore the Biden administration’s green initiatives. “For the domestic steel producer it is a larger concern, and companies are gearing up for it,” he says, adding that U.S. steel producers are more carbon efficient than other global producers.  

At the same time, the cost of doing business has been rising for suppliers of capital equipment and their customers. “All of our shipping costs are up. Our component costs are up. And you see it in people’s labor costs,” says Rometty. “But it’s affected everybody.”

“Cost of materials and availability are enormous issues today, and we are affected by both,” Matsunaga says. “The cost of raw materials and components – including steel products, forgings, castings, wiring, mechanical power transmission components, motors, hydraulics, etc. – are increasing in cost almost daily.” 

The equipment makers have no choice but to pass those cost increases along. “Costs over the last few years have been climbing. For the most part we were able to hold off because of a favorable exchange rate, but with the market being upside down now, we’re looking at bringing our prices up a little bit in the next four to six weeks,” Dolipski says.

Kravec says Butech Bliss is also experiencing inflationary challenges, especially in the extrusion and forging components vital for the company’s equipment.

Ho points out inflation hit the equipment segment relatively early, with most businesses having had several price increases since the beginning of 2021. “Many have seen it as a perfect storm of factors that led to the surprising demand, and ultimate supply chain failure, which led to higher costs on material, freight etc.  

Manufacturers had no choice but to increase prices,” he says, adding that this will continue as long as supply chain challenges persist and demand stays high.

Not only is the increased cost of components an issue for capital equipment manufacturers, but acquiring goods to build their products for customers is an even bigger issue for some. “For us, supply is a larger issue than cost of goods.  Not being able to acquire goods needed to complete and ship a project is probably our biggest issue,” says Matsunaga, adding the situation is only getting worse. “We try to cope by designing equipment to utilize comparable goods and components that are available, but that strategy is limited because some goods and components are not substitutable because of performance and reliability we and our customers expect.”  

The issues exist regardless of where you get your raw materials. “We source from all sorts of places, and we’re having problems both here and there,” says Rometty. 

Besides the increase in container rates for ocean freight level, delays are taking place all over, whether that’s leaving the port in Taiwan or coming into places such as Savannah, Ho says.

Arcaro agrees supply chain challenges are a significant problem, causing major disruptions globally in business, leading companies to be creative in their ways to adapt to these costly supply chain issues.  “Purchasing managers continue to deal with worldwide complications from high demand, rising costs of raw materials and freight, and slow deliveries in the United States,” he says. “Transportation challenges are likely to continue in 2022, including driver shortages in trucking and congestion at U.S. container ports. As demand outpaces supply, higher costs are more likely to be passed on to customers,” he says. 

Of course, the frenetic pace of 2022 can’t keep up forever. “The business is ultimately a cycle, and what goes up must inevitably come down. We’re hoping it’ll be a slow slide down and not a drop off a cliff when it does happen,” Ho says. 

For the time being, the equipment makers are going to enjoy the run they’re on.

Butech Bliss’ sales activity is healthy for 2022 thus far.  (Photo courtesy Butech Bliss)