Spending's On the Rise Market factors, notably the changing automotive materials mix, are prompting service centers to invest in new equipment. By Myra Pinkham, Contributing Editor Despite uncertain business conditions, service centers appear to be moving ahead with fairly ambitious capital spending plans this year. Rather than just repair and maintenance, many are investing in new technology that will position them for strategic growth. Topping processors’ wish lists are new laser cutters and other equipment capable of handling heavy-gauge plate, high-strength steels and other automotive materials. Unlike domestic mills, which are idling production capacity, most U.S. service centers appear to be forging ahead with previously announced capital investment plans, says Al Waigand, vice president of sales and marketing for Butech Bliss, Salem, Ohio. His service center customers expect the soft market conditions to improve by the third quarter, and they want to be ready. Service centers are not exactly on a spending spree, but many recognize that investing in the latest technology could improve their quality and efficiency and give them a competitive edge, says Gregg Mollins, president and chief executive officer of Los Angeles-based Reliance Steel & Aluminum Co. Most service centers have been working down their inventories and have improved their cash flow. “That will only get better as the quarter progresses,” he adds. Capital investment industry-wide is getting a boost from both pent-up demand and changing requirements in the marketplace, say the experts. Up until recently, service centers’ spending was largely limited to essential maintenance and basic upgrades as they navigated their way out of the economic downturn. “We just did what we had to do versus what we would have liked to do, and we were very conservative about spending the cash we had on hand,” says Geoff Gilmore, president of Worthington Industries Steel Processing, Columbus, Ohio. “But that is now starting to change.” Worthington’s spending was up a bit last year, but much of that was still largely for maintenance. This year and next the company plans to spend considerably more, much of it weighted toward strategic upgrades for the processing of new stronger-but-lighter automotive materials, Gilmore says. Reliance, the industry’s largest competitor, spends about $160 million to $200 million a year on facilities and equipment, which sounds like a lot. But Mollins says the company’s capital spending has been fairly flat for the past three years and will remain so this year in light of the mixed market conditions. About a third of this year’s investments are aimed at the replacement and maintenance of equipment, while the remaining two thirds are for internal growth initiatives, he says. Working against further capital investment by service centers is the large installed base of processing equipment in the market and a lot of underutilized capacity, says Kip Mostowy, president of Andritz Herr-Voss Stamco, Inc., Callery, Pa. As much as 80 percent of service center purchases in the past two years have been for rebuilt or retrofitted equipment rather than completely new processing lines. Service centers are always looking for ways to increase their processing capabilities at the lowest cost and with the shortest downtime possible, he notes. There is no typical service center capital spending budget. Investment levels vary widely by company, observes Dean Linders, vice president of marketing and sales for Red Bud Industries, Red Bud, Ill. Larger companies are more likely to have the wherewithal to invest consistently year after year, taking a long-term view. Others are sitting on the sidelines waiting for demand and steel prices to improve before taking the cap ex plunge. Some, like those serving the automotive sector, invest reluctantly. They know that if they wait to buy new equipment to process the new automotive materials, the competition will pass them by. Even companies that aren’t quite ready to pull the trigger are making inquiries so they will be ready once their business activity picks up, says Jerry Waziak, steel service center account manager for Koike Aronson, Inc., Arcade, N.Y. This includes looking into the cost of the equipment and other changes they would need to make in their operations once they do make the purchase. Brownie Cox, leveler specialist with Bradbury Co., Inc., Moundridge, Kan., maintains that interest in laser cutting is the single biggest driver of the industry’s equipment upgrades. That includes both the purchase of lasers and of leveling equipment to make sure the metal is perfectly flat and stress-free before it is cut. Laser cutting has experienced record growth over the last several years due to the speed and precision at which it can produce parts, while generating less scrap. “I think the technology has developed to a point it can’t be ignored,” says Mollins, noting that more customers are looking for laser-cut parts. With more service centers actually doing the laser cutting, rather than just leveling the coils to be cut, they are walking a thin line between meeting their customers’ needs and competing with them. “We are very careful not to cross that line,” Mollins adds. Laser cutting the new, higher-tensile-strength steels presents some new technical challenges. They are more difficult to level and remove the internal stresses that can cause springback. Rapidly moving laser heads can be damaged by impacts with cut parts that have twisted or curled from “coil memory.” Applying additional force to level the steel can work harden it and change its properties, explain the experts. That’s why interest in leveling technology has been rising, says Joe Savariego, president of Delta Steel Technologies, Irving, Texas. Orders for temper mills are at an all-time high. Stretch levelers offer an alternative to roller levelers. Temper mills level sheets by applying enormous compressive forces. Stretchers relieve the internal stresses by stretching the material beyond its yield point. Makers of both claim they offer superior leveling, even on very high-strength steels. Carmakers’ quest to improve vehicle fuel economy by using lighter parts made of advanced high-strength steels and aluminum has prompted a wave of investment by companies serving the automotive sector. At Worthington, where 70 percent of the business is auto-related, pickling, slitting, blanking and cut-to-length lines have been beefed up with additional horsepower and more durable tooling, Gilmore says. Worthington also is making some modest investments related to processing aluminum. The company plans to wait another 18 months or so before committing further, Gilmore says, so it can gather more data on the ultimate automotive material mix. “We don’t anticipate that aluminum will take over the majority of the new vehicles,” he adds. “There is a lot the aluminum industry needs to prove before we make that kind of big bet.” Chuck Damore, president of Braner USA, Inc., Schiller Park, Ill., says some service centers are looking for equipment that can be used to process both steel and aluminum on the same line. Slitters and cut-to-length lines can be equipped with dedicated leveling cassettes and tensioning systems so they can be quickly adjusted for ferrous and nonferrous coils. One issue with handling both steel and aluminum coils is the outside diameters. Because aluminum is so much lighter, its coils can be much bigger, explains Chris Mitrecic, director of coil processing services at Andritz Herr-Voss Stamco. An aluminum coil typically has an outer diameter significantly larger than the typical steel coil. The line has to be adapted to handle both. Equipment vendors also cite a pickup in demand for cut-to-length lines able to work heavy-gauge sheet and plate from half-inch to one-inch thick, including high-strength steels. Waziak, at Koike Aronson, reports growing interest in plant automation. Service centers are considering the ROI on automated feeding systems and plate stacking systems, for example. Others are installing software that allows their processing lines to feed productivity information to their front office ERP systems. Comments from service center executives and equipment vendors in the metals industry generally mirror those of experts in other industrial sectors, who predict strong growth for U.S. manufacturing in the next few years—and along with it a bounce in capital spending.