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Toll Processing Outlook

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Weak Pricing Hurts Tollers, Too By Dan Markham, Senior Editor Though North America’s toll processors don’t own the material they handle, they still felt the sting of softening metals prices in 2015. Early signs point to a more positive year ahead. North America’s toll processors have two major advantages over other segments of the industry: Their business is heavily tied to the automotive market, which is booming. And, unlike their service center brethren, they don’t own the metal they handle, so they’ve been spared from watching inventory values plummet along with metals pricing. Nevertheless, toll processors were not immune to the difficult market conditions in 2015. Executives report a general downturn in business activity, from modest losses to double digits, especially for those serving the energy market. North American auto sales topped 17.3 million vehicles in 2015, the sixth straight year of increases, reports the National Automotive Dealers Association, Tysons, Va. “The automotive market is still great, coming off record year-over-year numbers,” says Brian Habermel, sales manager for outside processing at Steel Technologies, Louisville, Ky. “Last year would have been a disaster for us if it hadn’t been for all the material we process for automotive,” says Bret Wells, processing manager for Heidtman Steel, Toledo, Ohio. “It would have been as ugly as 2008-09.” For companies removed from the auto market, 2015 was more challenging. “Our business was probably off 15 percent,” says Ken McAvoy, president of Maryland Metals Processing, a Baltimore-based processor of aluminum and specialty metals. The performance of Ferrous Metal Processing demonstrates how results varied depending on the market. Most of its business is linked heavily to automotive, with facilities in the Midwest and Southeast. But the Cleveland-based company has one facility in Kentucky serving the energy market, which “took a big hit,” says Eduardo Gonzalez, FMP president. “The rest of our business was off a little bit, about 2 percent.” Habermel says the past year demonstrated the importance of the energy market to the steel industry. “When you look at what the energy market has done to the steel industry, it’s really eye-opening, especially when you have a solid automotive market.” While toll processors—companies that provide various services to mills and service centers for a fee—did not suffer directly from the declining commodities prices that hammered mills and service centers in 2015, they still felt its effects in a number of ways, executives acknowledged. The declining price of steel and aluminum prompted customers to postpone or cut back orders, hoping for a better price the following month. “Customers were just sitting on the sidelines, only taking what they needed,” says Wells, whose company saw its business levels decline by 10-15 percent last year. “If a guy who normally orders 20,000 pounds and pays 3-4 cents [per pound for processing] decides to order just 1,400 pounds, it takes me just as long to put the coil on the line, take it back off and do the work. I don’t save any time, but I get less in revenue,” says McAvoy. Derek Hallyburton, owner of Custom Coil Slitting in Mississauga, Ontario, says toll processors and their mill and service center customers essentially come at the work from different perspectives. Metal suppliers are interested in the price per pound, while a processor’s unit of measurement is time. “If I need five cents in July, I need five cents in January. It’s fixed.” Customers who think nothing of paying five cents when the material is at 40 cents haggle harder when the price of the material is 20 cents, and the processing fee represents 25 percent of the cost of the material, he adds. “It affects us,” says Dave Ackerman, president and CEO of Metal Processing Corp., Gary, Ind., of the volatility in metals prices. “Distributors have so much pressure on them, and their margins are so restricted. They come at processors to pick up that extra dollar or two. We all feel it.” Processors are often tied to specific producers, with many locating their facilities in the shadows of North America’s largest mills. Pricing issues that make a mill less competitive, often caused by cheap imports, directly affect the processor next door. “If the mill loses business, we lose business a lot of the time,” says Habermel. His company operates several mill-adjacent facilities, including one next to Nucor Gallatin and another by Nucor’s Crawfordsville, Ind., operation. Processors also feel the effects of this lower overall pricing environment when material exits the building as scrap. “Scrap is worth half of what it was a year ago. That has hit us hard,” Ackerman says. So toll processors were among those excited to see North America’s mills push through a recent round of price hikes, and call for another, giving hope the industry is exiting the trough. “Starting into the new year, with pricing moving the right way and scrap having gained $20 a ton, things have really broken loose,” says Wells. Ackerman just hopes the mills exercise discipline on the way up and don’t overproduce. “I think this year will be a little better. I just hope we don’t see the mills go crazy and try to get it all back in one day. If they exercise good rationalization, they’ll get some back.” Sensing that prices are on the uptick is not just limited to the steel industry. McAvoy has a similar outlook for the nonferrous materials he processes. “If we’re not exactly at the bottom, we’re so close we can reach out and touch it. I expect 2016 will be better.” The market drivers of 2015 promise to be similar this year, with automotive leading the way, energy trailing, and other industrial markets falling somewhere in the enormous gap in between. The auto dealers association forecasts light vehicle sales will jump to 17.71 million units this year, then tail off modestly over the next three years, but remain above historical norms. Wells, who handles forecasting for Heidtman, conservatively projects a 3 percent increase in sales this year, with 5 percent more tons processed across the company. Ferrous Metal Processing anticipates 5-6 percent growth in business activity in 2016, with other markets offsetting continued doldrums in the energy business. “Oil at $30 per barrel is not good for [energy companies]. I don’t see it rebounding for a long time,” Gonzalez says. There is one upside to the downturn in energy: lower prices at the pump. Less expensive gas leaves more money in people’s pockets and boosts consumer spending. Cheap gas prices also prompt drivers to purchase larger, more metal-intensive vehicles, rather than the smaller, more fuel-efficient ones. Both trends are positive for toll processors. In 2015, light trucks accounted for 56 percent of all North American vehicle sales, increasing 2.5 percentage points from the prior year. Another small uptick is forecast this year, says NADA Chief Economist Steven Szakaly. The current trend toward larger cars and trucks is, of course, not the most notable change in vehicle construction. Even more significant is the move by automotive designers toward the use of lighter aluminum and advanced high-strength steels to help carmakers meet new federal mileage standards. Toll processors have no choice but to pick sides—sometimes even both sides—in the battle between aluminum and steel for a greater share of the auto market. Leading steel processors are taking steps and making investments to either grow market share or hold on to ground they already have in the new automotive landscape. For example, Heidtman has opened a new facility in East Chicago, Ind., to process higher-strength steels coming out of ArcelorMittal. Steel Technologies’ joint venture, Delaco Kasle Processing, processes steel and aluminum coils and blanks for automotive suppliers. FMP has made two large investments in the past few years, first launching Autolume, a separate division that processes aluminum for the auto industry, and more recently HyCAL Corp., which is in the process of installing a continuous anneal line near Detroit. The hydrogen anneal line is being developed for strip cooling of ultra-high-strength and advanced-high-strength steels for automotive customers. “It’s the biggest investment we’ve undertaken in corporate history,” says Gonzalez. “No other processor continuous anneals for anyone. There’s U.S. Steel and ArcelorMittal, but they’re selling their product. We’re selling it on a toll processing basis.” While other processors are making initial investments to handle the material changes, Aluminum Blanking is a long-established player in the automotive supply chain in Michigan, and is naturally growing as aluminum continues to gain market share, says Laura Anderson, president and CEO of the Pontiac, Mich., company. Among the investments it is making to handle the growing demand, Aluminum Blanking now offers edge trimming. The company is also looking to add capacity, whether at its plant in Michigan or in a second location. The ramp-up in nonferrous usage in automotive, which accelerated in 2015 with the Ford F-150’s conversion to an all-aluminum body, has not come without hiccups. Anderson says the automotive aluminum supply chain is a work in progress. “There have been a lot of positive things happening, but we also saw a lot of uncertainty in the sourcing model and direction from the automotive side,” she says. “There’s been some issue with material availability.” Traditionally, her company and other nonferrous processers worked exclusively for the mills, with the mill holding the contract with the OEM and sourcing through the processor. “That’s still mostly the case, but other models such as directed-supplier and distributor models are being examined by the OEMs in order to mitigate the risk of material availability,” she says. “We’re in discussions with the various parties, across mills, OEMs and distributors, with no clear path to which model will prevail in the long run.” Outside automotive, the outlook is positive, but not exuberant. “I think we’ll have a good middle of the year,” says McAvoy. “It will take a few months for people to gain confidence in structured pricing, then we’ll take off.” Hallyburton at Custom Coil Slitting has an additional reason for optimism: a dramatic decline in the value of the Canadian dollar, which dipped from near par with the U.S. dollar to around 70 cents in the past year. “Canada’s economy was based on the petro dollar, but oil and gas has taken such a slide, maybe more attention will be paid to the manufacturing base,” he says. “Based on our dollar losing ground, it’s a little more attractive to export.” Mike Messinger, director of outside processing for Metal Processing Corp., says 2015 was dominated by lower-margin spot-market activity. “As scrap goes up and mill pricing stabilizes, there will be more programs out there. OEMs will be a little more active this year because they’re seeing light at the end of the tunnel. As a salesperson, I’m banking on it.” The alternative is scary. The metals supply chain experienced little shakeout given the tough business conditions in 2015, executives say, except for the scrap sector, where several companies closed yards or shut down completely. “Honestly, that was surprising, because it was such a difficult year,” Wells says of the lack of rationalization among distributors and processors. “But if the upswing doesn’t sustain, there could be more to come.”