Despite a whirlwind of trade activity, 2018 was a relatively steady year for toll processors. Some may even call it “boring.”
“It’s not a bad thing to say it’s boring,” says Tim Bilkey, managing director at Voss Clark. “We did see a slight increase last year. It wasn’t anything dramatic, but it was a slight increase over 2017.”
The Jeffersonville, Ind.-based processor of flat-rolled steel saw both sales and volumes increase a few percentage points in 2018. That’s hardly anything to crow about, but some growth is better than no growth, and a slight loss is better than a big loss.
At Taylor Coil Processing, located 380 miles northeast of Voss Clark in Lordstown, Ohio, volumes were down slightly from 2017. “We still kept ourselves busy throughout the year,” says Peter Adamski, general sales manager, who notes that decreased business in the automotive market was offset by gains in distribution and other end markets, such as construction. “I would say that our revenue numbers on a per-ton basis were better than 2017.”
The tales of these two toll processors are intimately tied to their respective supply chains, and both stories highlight the crucial role these business networks play in the individual success of any given processor. That’s because the geographic location of a toll processing business in relation to its customers, which are predominantly automotive OEMs, largely determines the amount of available business.
In the case of Taylor Coil Processing, business took a major hit when General Motors began shifting production away from its Lordstown, Ohio, Plant.
“The volume of business associated with that and, consequently, associated with a specific line we had decreased quite a bit,” Adamski says. “That being said, processing volumes on our other lines were slightly ahead of 2017.”
Automotive is the largest end market for the metal moving through toll processing facilities, making unit production an important indicator of a processor’s prospects. “The automotive market, which is a big part of our corporate business, remained fairly steady,” Bilkey says. “Sales remained and production remained good.”
Overall, domestic car production declined in 2018. The U.S. Bureau of Economic Analysis reported a total of 2.6 million auto units were produced through November, compared with 2.8 million units through the first 11 months of 2017.
Despite this, automotive sales grew last year. According to Patrick Manzi, senior economist for the National Automotive Dealers Association, light vehicle sales totaled 17.2 million units in 2018. Light trucks accounted for 69.2 percent of all light-vehicle sales, with car market share falling to its lowest point in U.S. auto sales history.
“One of the main factors for this shift has been continued low oil and gasoline prices and the fact crossover utility vehicles are nearly as fuel efficient as their sedan counterparts,” Manzi writes. “And we’ve seen fuel economy increases across the board, not just on crossovers but also traditional SUVs and pickups. We also expect gasoline prices to remain relatively low in 2019, not as low as present but still low enough not to cause a panic and a consumer shift back to the car market.”
This trend away from smaller passenger cars toward more metal-intensive light trucks and SUVs should be a good sign for metal distributors and the toll processors they employ. However, shifting or discontinuing production of specific models, as in the case of GM’s Lordstown plant, could disrupt established supply chains and have some regional impact on processors along the way.
“It all comes down to your location and the supply chains that you serve,” says Bilkey, adding that changes to a particular vehicle platform can have a big impact on business. “Location means a tremendous amount for a toll processor. When they change those supply chains, whether they change a steelmaker or where the forming or blanking is being done, that can add us to a supply chain or it can easily remove us.”
Trade actions can also affect supply chains. In a year when Section 232 tariffs were placed on foreign imports of steel and aluminum, in addition to the North American Free Trade Agreement being slated for renegotiation, it stands to reason that some supply chains should have shifted in response.
However, Bilkey says he hasn’t seen any major changes in traditional supply chains, at least those supply chains linked to Voss Clark. “A lot of people are waiting for these things to kind of settle,” he says. “There’s a lot of newness, there’s a lot of recent changes, with regard to 232 and with regard to NAFTA.”
That could be because a good deal of steel supply chains have been in place for a long time, and it takes time for changes to unfold. ”Maybe they haven’t yet amended themselves to the cost structures that are now going to settle in,” says Bilkey. “In 2019 you could start seeing some movement because of those major factors, but I haven’t seen any dramatic movement yet.”
On the flip side, Taylor Coil Processing has benefited somewhat from the tariffs. Adamski says some customers that may have shipped metal to Canada to have it processed in the past ended up keeping it in the states to avoid the tariffs and to the benefit of companies like his. “We saw a little bit of a benefit from that,” Adamski says, adding that the tariffs could also prevent Canadian steel that would have been processed in the states from reaching their facility. “We have relationships in Canada, where we would obtain steel to sell from time to time. With tariffs placed on that, that put the majority of that steel out of domestic price ranges.”
Freight is another factor underscoring the importance of supply chains. Reduced capacity and higher rates means a processor’s location is a major consideration for customers. Go a few hundred miles in the wrong direction, and all of the sudden a toll processor may no longer be geographically competitive.
“Freight is an aspect of supply chains that is becoming much more highlighted now than what it used to be in the past,” Bilkey says. “It’s because the costs of freight are so much more significant now in the supply chain than what they used to be.”
Despite these uncertainties and challenges, both Adamski and Bilkey are optimistic about their prospects in 2019. However, Adamski expects any growth to be modest at best. “I think we can grow at 2-3 percent,” Adamski says. “I don’t think the volume is going to change a great deal.”
As for the segment’s major end market, automotive sales are expected to decline slightly this year, which could affect build rates. “We’re forecasting sales of 16.8 million new cars and light trucks in 2019,” Manzi said at an industry briefing. “This would represent a falloff in sales of about 1.1 percent compared to 2018.”
Considering all these factors, Bilkey knows how hard it is to predict the market. “The best words that I could put out there are we hope, and expect, our business to remain steady,” he says. “I don’t foresee any factors within the next year that would affect the market significantly.”