Will Consolidation Defrag the Service Center Sector?
By Metal Center News Staff
on Aug 7, 2013
Aug. 7, 2013 Will Consolidation Defrag the Service Center Sector? The early days of 2013 ushered in one of the largest mergers in industry history when Los Angeles-based Reliance Steel and Aluminum Co. acquired Metals USA, Fort Lauderdale, Fla. But that merger of the nation’s largest service center company with its 8th largest rival did not set off a flurry of further consolidation, as many expected. Instead, the wheeling and dealing was rather muted in the first six months of the year. Service center executives have mixed opinions on how quickly the on-again off-again trend will resume, and how much it will benefit the industry. "We're still a fragmented industry, so consolidation will continue to take place. There's already been a lot among our customers and our suppliers, just not as much in our industry," says Bill Jones, vice chairman of O’Neal Industries, Birmingham, Ala. "We do need it. I hope it will continue, and I hope O’Neal continues to be one of the consolidators." Jim Bouchard, chairman of the Esmark Steel Group, Chicago Heights, Ill., says the ongoing tightness in banking will ultimately reinvigorate the consolidation movement. The larger, well-financed service centers will pick up the smaller, family-run service centers that don’t have the necessary access to capital. “The bigger guys are going to have to push the consolidation efforts,” Bouchard says. “I think we’ll eventually start to consolidate and reduce some of that capacity in the marketplace, allowing margins to improve.” However, that effort is stalled by the current economy. Service center operators are reluctant to sell now because they are unlikely to get book value for their companies, while buyers are not gung ho to invest in the sector until they see more of a rebound in the economy, he says. Others question whether the dealmaking will ultimately lead to the desired result. “I think companies will continue to get bought and sold, but is that going to create long-term consolidation? I’m not sure,” says Gary Stein, president of Triple-S Steel in Houston. “There are so few barriers to entry in this business. Every time a company gets sold, two guys go out and hang a shingle and start a new company.” Lapham-Hickey President Bill Hickey has heard the consolidation rallying cry for a long time, and he’s uncertain how much it will really benefit the industry. "I've been doing this for about 40 years, and my family for 90, and all I've heard is there are too many service centers. The marketplace will decide if the industry really needs consolidation," says the third-generation owner of the Chicago-based service center. “Does a larger selection of service centers provide better service levels, better opportunities for the customer base that makes the industrial economy more efficient? That’s the question.” On the red metals side of the business, Dan Kendall of ABC Metals, Logansport, Ind., sees a different kind of consolidation occurring, one that isn’t exactly encouraging for service centers. "Right now, you have a brass mill, a brass distributor and a brass consumer. What happens if the mill starts selling direct to the consumer and the distributor doesn’t have the business anymore? What you’ve done is consolidate the supply chain. That's where I see consolidation going."