Consolidation One Solution to Volatility
By Dan Markham
on May 15, 2019
Over the course of the final six months of 2018, the price of hot-rolled coil declined more than $170 per ton. The start of 2019 has not changed that trend, with prices dipping another $60 through April.
That kind of price volatility, particularly on the downside, is a major cause of concern for service centers. Gross margins for publicly traded service center companies dipped under 20 percent, below the five-year average of 21.1 percent.
Vince Pappalardo managing director of Brown Gibbons Lang & Co. says one service center response to that volatility is through spending, most notably mergers and acquisitions.
In a monthly report from the company, he notes, “There is movement toward consolidation with larger players pressured to improve profitability and expand product lines and geography. Consolidation will create more stable supply/demand dynamics, potentially reducing volatility in pricing. The highly fragmented and localized marketplace will be conducive to acquisitive growth, with market conditions likely to drive more sale activity.”
However, spending on equipment, or acquiring more value-added processing capability, is another solution. He points to Ryerson’s plans to grow its value-added mix to 15 percent of revenues by 2021, an increase from the 10.2 percent in 2018, and more than double the 6.7 percent it represented in 2010.
The industry’s largest player, Reliance Steel & Aluminum, continues that move as well. In 2018, nearly half of Reliance’s orders included value-added processing. The company has spent nearly $1 billion on equipment over the past five years.
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