Many of today’s service center companies began as secondary steel houses, taking material the mills couldn’t sell as prime and finding another use for it. But that pathway is closing, as the current non-prime steel market is a smaller segment that bears little resemblance to the days of old.
There remains, and always will exist, a market for non-prime steel. But the market has changed dramatically in the last 20 years, based on a variety of internal and external factors.
“Like the steel market in general, the non-prime market has changed pretty significantly,” says Dan Goldstein, vice president of sales and marketing for Bala Cynwyd, Pa.-based Mainline Metals, one of the larger distributors of non-prime material.
It starts with supply. Since the turn of the century, the North American production community has seen extensive consolidation, with producers being gobbled up or shuttered in the process. That has an obvious effect on the availability of excess material.
“There were 33 producing mills in this country not that long ago. Today, there’s nowhere near that,” says Charles Calabrese, CEO of Gerber Metal Supply, Somerville, N.J. “Automatically, the amount of steel available gets whacked in half.”
And it’s not just the number of mills that is meaningful. The industry has seen improvements in processes, as well as an overhaul in attitude.
The quality and consistency of mill production has increased significantly in recent years, driven by strong competition, the embrace of technology and capital investments.
“Prime quality, in general, has improved over time. Cap ex at existing mills, new minimills, steelmaking technology that continues to improve, quality detection systems that allow producers to catch problems. We’ve made investments in technology and software to reapply material that didn’t make the original specification to find another prime application,” said Jeff Unruh, ArcelorMittal’s director of special products, at an ASD meeting earlier this year.
Distributors have seen the difference. “The mills are definitely better than they were, so there is less non-prime,” says Max Levin, CEO of Titan Steel, Baltimore.
Calabrese agrees. “The mills got better at what they did. They improved their mills and they improved their systems.”
Just as important, the production community began to embrace, to an extent, the idea the solution to every issue wasn’t to simply make more steel. “The capacity utilization rates weren’t something mills valued as much as they do now,” says Goldstein. “They were just balls to the wall making as much steel as they could.”
But events that extend beyond the production community have also altered the secondary landscape. Steve Goldman, president of Surplus Steel, Apopka, Fla., points to Sept. 11, 2001, as a turning point for his company, an anecdote that highlights the unique and creative history of the players in the non-prime sector.
“I used to have free reign roaming the docks in Florida. You’d find bundles set off to the side when imports came in that were damaged or whatever. I’d contact the importers and buy up truckloads of material on the dock. After 9/11, you can’t just walk around the docks anymore,” says Goldman, whose company is one of many that has moved primarily into prime over the years.
The goal, of course, for producers is to not make any product for the secondary market. “Mine, ideally, is a job that does not exist. That we wouldn’t need anybody to sell non-prime because we don’t make it,” Unruh admitted.
But making steel remains an imperfect pursuit, so there will always be material that doesn’t quite meet the needs of its intended user. “They’ve eliminated as many flaws as they can, but the nature of the business is they’re always going to have something that doesn’t meet their prime orders,” says Rob Cherrin, president of Commerce Steel Corp., Commerce Township, Mich.
Thus, there will continue to be a place for those companies that take that steel and try to find a new home for it. But as with the mills, there are far fewer of them than there used to be.
Calabrese tells a familiar story. “Our business has completely changed over the years because the availability of good secondary is totally gone,” he says, while acknowledging there is a geographic bent to non-prime availability.
Goldman agrees. His company started as a supplier of secondary material to the Orlando market, but there’s just not much call for that material in the area any longer. “There’s only so much secondary material that can be put into this environment, and we’ve been here so long we’ve put in everything we could. Around 2010-11 we switched to mostly prime steel with mill test reports, in order to sell more into the construction market.”
Many service centers that started out as secondary houses have morphed into fully, or mostly, prime distributors. Lane Steel is that kind of company.
The McKees Rock, Pa.-based service center currently stocks about 30 percent non-prime material, with the rest devoted to prime. Company President Paul Gedeon has seen a significant change in how the supply chain operates.
When he began, companies like his were on programs with the mills, agreeing to take 100 percent of their secondary material. And service centers had to accept that arrangement, because “if you got a program out of the mill, you had to protect it because there were 100 people who would try to take it from you.”
That’s not the case these days. Lane Steel will no longer take everything the mill has, opting only to accept that material the company believes it can find a market for.
“There are very few programs where people take it all anymore. We had gotten rid of a couple of programs, and the mills said they would replace us. That was 5-6 years ago, and they couldn’t replace us. There are a lot fewer of us out there that know what to do with segments of it.”
Of course, what constitutes non-prime is a pretty broad grouping of products. It ranges from simple excess prime, when a mill produces more of a product than it has a market for and wants to get the product off its floors, to products with modest defects or issues that result in very little variation from the prime material, all the way to the lower-end materials with significant problems, such as rust or dents.
And one of the biggest changes has been the push at the mills to make higher-end steels, particularly for the automotive industry. The high-strength and advanced-high strength steels being produced at the mills have helped steel keep pace with aluminum in the drive to maintain autobody sheet market share. However, the specific traits inherent in these products that make them useful for the auto companies also make them more difficult to find a home for on the secondary side.
“On the prime side, their buyers are willing to pay more for it. There are times, however, when on the non-prime side, it makes it much more difficult to sell,” says Levin.
“I can’t speak for others, but in my world, we don’t have a lot of customers for that type of material,” agrees Cherrin. “There’s definitely a lot available, but we don’t buy it because we don’t really have anywhere to go with it. That’s more of an issue for the steel mills.”
The mills, of course, recognize this. Efforts are being undertaken to find alternate uses for some of the higher-strength material. And, they also respond at times by simply scrapping the material and remelting it for use down the road.
But whether super high-strength or terribly low-grade, “There’s almost always a use for steel, if one looks hard enough,” Levin admits.
However, it doesn’t always make sense to look that hard. A company can spend many weeks dedicating resources to finding an alternate application, but if the mill fixes a problem that caused the defect, the product may not be available again.
Another major change in the supply chain has occurred downstream, many executives say. Today’s end-use customer is so much more knowledgeable about steel and its properties than the past.
“Everyone, including myself, is an amateur metallurgist now. It’s not just vanilla steel or hard steel,” Goldstein says. “When we started, the manufacturing facility in the hills of Alabama or Tennessee didn’t know much about steel or its properties. He didn’t know a mill cert or grade. He knew commercial grade and that was about it. When we go into these facilities now, they’re talking China or different grades of steel.”
Such a change is both good and bad. “A lot of times it’s helping us, because they’re more educated on the product. Sometimes it’s hurting us because they’re more educated on the pricing,” he says.
Advancements in equipment, at both the distributor and end-use level, have also changed the dynamic.
“End users started getting better and better equipment, where they couldn’t use secondary. If it wasn’t panel flat, they couldn’t laser it,” Gedeon says.
And it’s not just end users. “Some coils are perfect and they’re easy to process. If it’s heavy gauge with an edge wave, it takes real skill to clean it up. You better not pay much for it, because you’re going to lose time and you’re going to lose yield,” Gedeon says. “If it looks difficult to process and we don’t want to mess up our line schedule, we’ll just scrap it.”
The knowledge of end users, plus the upgrade in equipment, have pushed the suppliers of secondary material to truly understand the metal and its properties, as well as their customers’ needs. “The name of the game in non-prime is finding applications, usages, different than what the mill intended for that steel. We’re pretty good at it,” says Goldstein.
Understanding both can truly benefit the end user. “If you have a customer that uses a lot of different stuff, and there’s 5-10 percent they can use a lower quality, it helps them with their cost structure,” Gedeon says. “A lot of customers with that 5-10 percent would just buy prime, but we will help guide a customer if we know it’s nothing critical.”
Pricing for non-prime material is obviously lower than the top-shelf stuff, but there’s no single discounted formula for the product, as the fewer uses for AHSS stuff demonstrates.
“It can fluctuate on a lot of factors,” says Goldstein. “The market value is the market value. We point to that more than the prime cost of steel. We get that’s the prime cost, but that doesn’t necessarily translate to three-quarters of the value. It’s situationally and market position determined.”
And the market has changed in many ways. Andrew Geisler, president of Mainline Metals, notes global developments have played a significant role in altering the landscape for non-prime material. Many of the lower-end users of secondary have moved offshore. Additionally, “You don’t have much of an export market. The combination of a strong dollar and weak overseas demand and a glut of metal has significantly removed that bottom of the export of non-prime material.”
Still, while the market has obviously declined over the years, Gedeon doesn’t expect much further deterioration. “Maybe it will decrease a percentage point or something, but I think it’s kind of hit bottom. It’s in the mill’s interest to make as little of it as possible, but there’s always going to be some percentage of it. You can’t be 100 percent perfect.”