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Service Center Cap Ex

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Spending's Still 'Tight to the Vest' Even though the market is much improved, service centers remain fairly conservative with their capital spending plans. By Myra Pinkham, Contributing Editor While the rate of capital investment has been picking up, especially since the depth of the economic downturn, service centers are by no means spending like gangbusters. Rather, most appear to be cautiously increasing their outlay just on specific projects to help improve their competitive edge and provide them with targeted growth opportunities. Of course, the amount service centers are spending on capital improvements varies greatly from company to company. "It depends on the service center’s business model," says Scott Stephens, vice president of finance, chief financial officer and treasurer at A.M. Castle & Co., Oak Brook, Ill. Some companies just spend enough to keep their operation running, while others pursue "opportunistic spending" aimed at growing their business. "Currently service centers are investing more on maintenance than growth," says David Hannah, chairman and chief executive officer of Reliance Steel & Aluminum Co. in Los Angeles. That could change once the economy improves and service centers have better cash flow, he adds. Reliance, the market leader with around $9 billion in annual revenues, has a capital budget of about $220 million for 2014. Though obviously better than in 2008-09, service center profit margins are still about half what they were prior to the recession, notes James Bouchard, chairman and chief executive officer at Esmark Inc., Sewickley, Pa. With profitability still challenging, many service centers are keeping their capital spending plans "tight to the vest." Due to low operating rates, some companies have even rationalized capacity, taking existing equipment offline, he adds. Naturally, that is not true for all service centers. Those that are "appropriately capitalized" have the ability to make improvements when the competition may not, says Brian D. Robbins, chief executive officer of MidWest Materials, Perry, Ohio. In 2012, MidWest completed a multimillion dollar capital improvement project that included the installation of an advanced, heavy-gauge stretch leveling system. Petersen Aluminum Corp., Elk Grove, Ill., is another company that believes in continual improvement. "We have continued to invest in value-added equipment over the past five years despite the economy," says President Michael Petersen. That commitment requires a healthy balance sheet, he adds, and may not be an option for everyone. A down market can be a good time to upgrade, Stephens says. The new machinery may be cheaper and can be installed with less disruption than when the service center is busy. "Customers come first," he notes. Investing in a weak market is more the exception than the rule, however. More often service centers pull back during a downturn and put projects on hold, says Al Waigand, vice president of sales and marketing for Butech Bliss, Salem, Ohio. "Even now investment is not really robust," he adds--tempered by uncertainty over weakness in the global economy, political gridlock in Washington and volatile metal prices. While machinery manufacturers are aggressively striving to sell their products, the market has not picked up as quickly as anticipated, says Todd Zyra, president and chief executive officer of Klein Steel Service Inc., Rochester, N.Y. "Instead of capital investments, many service centers are focusing on lean processes and automating what they already have in place." Klein Steel, for example, has undertaken a number of lean initiatives over the past year across such key functions as material handling, processing center utilization and order processing workflows. Zyra says Klein Steel’s consolidation into one centralized location has not only helped it minimize redundancies, but also to leverage its investments over a wider customer base. But service center cap ex may finally have reached a tipping point, says Kip Mostowy, president and chief executive officer of Herr-Voss Stamco, Callery, Pa. He sees an increasing number of service centers coming off of the sidelines. "Largely due to pent-up demand, we have seen about an eightfold increase in order intake in the past nine months," he reports. "There wasn’t any magical event. Some service centers just realized they couldn't wait any longer to go ahead with planned investment projects." Dean Linders, vice president of marketing and sales for Red Bud Industries Inc., Red Bud, Ill, also has noticed the subtle shift in industry sentiment, despite the lingering uncertainty in the market. "Some are taking what could be seen as a leap of faith and are now starting to look at ways to differentiate themselves." Bill Hickey, president of Lapham-Hickey Steel Corp. in Chicago, says many factors influence the level and type of capital expenditures that service centers make. While they differ from organization to organization and location to location, they all typically are based on the company's current and future expectations of business. "Purchases can be offensive or defensive. The question is whether a company wants to grow its market share or is just looking to protect the share it has," he says. "It used to be that if service centers spent an amount close to their level of depreciation and amortization expenses, that was considered reasonable," Hannah says. "But over the last few years we have been spending more than that on our capital expenditures. If we see an area that will enhance our growth and therefore benefit us, we make those purchases." Other common formulas for capital investment include $1 per square foot per year or a 24- to 36-month return on investment, says Bouchard at Esmark. "But many companies have not been adhering to such traditional ratios recently." Chuck Damore, president of Braner USA Inc., Schiller Park, Ill., estimates that 60 percent of recent purchases by service centers are motivated by their desire to upgrade equipment to process the new advanced high-strength steels. Steelmakers are now developing their third generation of AHSS alloys to help automakers lighten vehicles and improve their fuel efficiency. The stronger the steel, the more difficult it is to level, slit, cut or shear. "AHSS is very abusive to equipment that wasn’t designed for it," he says. Processing steels with high yields and tensile strengths calls for levelers with greater stretching or compressive forces, uncoilers and recoilers with more horsepower, and slitters with larger arbors to minimize deflection and knives that won't chip or wear too quickly, among other enhancements. "We haven't yet seen the level of investment we will eventually see, as some new AHSS grades are just being introduced into the marketplace. Service centers are still determining if they can cut these steels with the equipment they already have," says Linders at Red Bud. Much of the recent investment in new facilities and equipment at Reliance is geared to the automotive market, Hannah concurred, as well as appliance customers served by its toll processing operations. The auto industry is also expanding its use of aluminum to lighten vehicles. Thus some processors are making parallel equipment investments to allow them to slit both AHSS and aluminum, notes Mostowy at Herr-Voss. Ideally, a processor will have different lines dedicated to steel or aluminum. "Cleanliness and contamination are critical issues when considering the processing of aluminum." Damore says few steel-oriented service centers have invested in new aluminum slitting or cut-to-length lines to date. "The volumes aren’t there yet to justify it and, while not preferable, it is possible to process aluminum on the same line as carbon steel." Also garnering a bigger share of service center cap ex budgets is the latest laser and plasma cutting equipment. Vendors report that a growing number of service centers are looking to differentiate themselves by venturing into first-stage part production for certain customers. That dovetails nicely with the general desire of many OEMs to outsource pre-production fabrication, as well as other supply chain solutions. Use of laser and plasma cutting systems calls for extremely flat, stress-free steel that won't bend and curl as pieces are cut from each sheet. That has boosted demand for shape correction equipment, such as stretcher levelers, advanced roller levelers and temper mills, says Michael Kruse, vice president of marketing for Heidtman Steel Products Inc., Toledo, Ohio. Rather than investing in completely new lines, service centers often find it more economical to upgrade parts of existing lines. That might entail adding a new stretcher leveler to a line, for example. "A service center can take a machine that is close to obsolescence and bring it up to a level where it can compete with other companies that have brand new lines," he says. One up-and-coming technology that is gaining a foothold in the service center market is EPS acidless pickling, a product developed by The Material Works and Red Bud. It uses a grit-blasting system rather than chemicals to clean and prepare the surface of steel coils. Traditionally, only very large companies could afford the capital expense of a pickling line. EPS systems are smaller, more scalable, environmentally friendly and less costly, which makes them an option for a much larger group of processors, Linders says. "Barring an economic collapse, I believe service centers will continue to increase capital investments going forward," says Hannah at Reliance. Like most industry executives, he expects it to be more of a slow, steady march than a cap ex sprint. ["Some service centers are taking what could be seen as a leap of faith and are now starting to look at ways to differentiate themselves." Dean Linders, Red Bud Industries ]

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