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A healthier auto industry is piloting toll processors toward prosperity. By Dan Markham, Senior Editor The health of the toll processing segment of the metals supply chain is tied inextricably to the condition of the automotive industry. Thus, for most of North America's processors, the prognosis is outstanding. Most toll processors—companies that provide processing services for mills and end-users for a fee—are gaining strength right along with their automotive customers. Since needing life support in 2009, carmakers have boosted production of cars and light trucks dramatically. In 2011, light vehicle production in North America was just short of 13.0 million units, a figure that is projected to increase to more than 14.0 million units in 2012. The number is far short of the 16-million unit peak at mid-decade, but it's up more than 50 percent from the 8.6 million vehicles produced three years ago. “Being a toll processor in the Detroit and Louisville areas, we're heavily dependent on the automotive market. 2010 and 2011 have been very good for us, and we expect more of the same in 2012," says Dave Detzel, sales manager for Voss Industries, Taylor, Mich. Unlike the trend before the recession, the automotive rebound is taking place with all automakers and in all parts of the country. The domestic automakers, which lost ground to their transplant counterparts for almost two decades, have regained market share since the Big Three's well-documented troubles of 2008-09. Now, their streamlined supply chains and improved products have made for a healthy steel processing environment in the Midwest, where many of the nation's toll processors are located. "I think the marketplace finally understands that Ford, GM and Chrysler are pretty good car builders," says Eduardo Gonzalez, president and CEO of Ferrous Metal Processing, Cleveland. "They've gotten a lot smarter with consolidation of production. I love what's happening." Steel Technologies, Louisville, Ky., serves both the traditional Big Three and the foreign-owned New Domestics. Brian Habermel, sales manager of outside processing, says conditions are good for both sets of automakers. "It's good to see what the domestics have been able to do. The only issue over the last year was the natural disaster [tsunami in Japan], which caused a hiccup with Toyota and Honda, though not so much with Nissan," says Habermel. "That caused a bit of a backlog of inventory, but it has worked itself through." Beyond automotive, however, the outlook is not as robust. “All of the other markets, primarily construction and converters, are showing little evidence of rebounding," says Peter Adamski, general sales manager for Taylor Coil Processing, Lordstown, Ohio. That sentiment was shared by a couple of Southern processors less heavily tied to automotive. "Nothing would indicate a strong increase from our current customers, with the exception of our automotive accounts," says Ed Panek, senior executive vice president for All Metals Service and Warehousing, Spartanburg, S.C. Further west, the outlook is similar. "We're off to a better start this quarter than we were from the second quarter on last year. I'd like to think it's going to hold, but I really don't expect it," says Ben Kalb, director of operations for Ameristar Coil Processing, Tulsa, Okla. The company, which is owned by Ameristar Fence Products, does a lot of processing for the fencing market, plus some for automotive and appliance. "There are too many things going on that are going to impact the markets we serve," Kalb says, noting the election year uncertainty, oil prices, and political and economic turmoil overseas among them. "I'm just not that optimistic, and normally I am." That kind of pessimism is tough to shake, particularly when memories of the brutal recession are still fresh in the minds of so many in the supply chain. Even as conditions improve in a lot of markets, both mills and end-users continue to make decisions with one eye on the past. Though dedicated toll processors don't directly buy and sell steel, they feel the effects of those who do. "You will find people who don't want to play the market anymore," says Steel Technologies' Habermel. "It's almost to the point where people are saying, 'I don't care what the price of steel may be next month, I don't want to keep it on my floor this month.'' The end result of that inventory-is-evil attitude is a supply chain with very little cushion, which puts pressure on processors to get material in and out as quickly as possible. "The biggest pressure it puts on us is to make sure we can minimize the unscheduled downtime," says Detzel. "You have to make sure your maintenance program will keep your units in operation and reduce the number of unplanned outages." Calls from customers' for quick turnarounds can be seen as an opportunity for processors equipped to meet the new demands, Adamski says. "If you have the ability to coordinate your internal production to meet those needs consistently, you start to build a level of confidence. Suppliers learn they can count on you to get material turned around and off to their customers in a timely manner." Fortunately for processors, more exacting demands from their customers have also been accompanied by a trend toward more information sharing. Having ready access to current and expected demand levels from their customers is crucial to reducing the time material spends in transit. When the economy stalled, in an attempt to expand their business, some toll processors began buying steel for inventory. Similarly, some service centers began marketing themselves as toll processors. Consequently, more players are directly affected by the volatility of steel prices today. FMP is a toll processing purist, selling only its services, not steel. "The only thing we worry about is the overall economic activity in the United States, and in particular the metalworking community. The only thing that affects us is volume. Our prices are based on costs, rather than the vicissitude of the price of steel," Gonzalez says. Gonzalez questions the wisdom of service centers that have decided to expand their processing capacity. "There are very few service centers that can justify employing a new piece of equipment. You need to have a lot of processing at $25 per ton to pay the bills," he says. Once a dedicated toll processor, Main Steel Polishing Co. entered the service center business in 2011. The Tinton Falls, N.J.-based company, which specializes in polishing coils in addition to other services, now generates most of its revenue through its metal sales, though it has maintained its toll processing offerings. "Our philosophy, which we were very open about, was to turn Main Steel into a service center. We told our customers [some of them service centers] they could stay with us if they chose. We weren't kicking anybody out," says Keith Medick, CEO of Main Steel. Habermel, whose company has both service center and toll processing operations, says the trend of distributors adding processing equipment has slowed in recent years. "Right now, the market is still dealing with a hangover from 2008, where a lot of companies are not sure they want to put in equipment and add people," he says. Other trends are just now emerging, most notably demand for flat memory-free steel. "It started 10 or 15 years ago, and now everyone is demanding it," says Gonzalez. "Not everyone needs it, but everyone is demanding it." To satisfy that demand, some companies are investing in new stretch leveling or temper pass equipment. For example, FMP is installing a mammoth stretcher leveler at its FerrouSouth facility in Iuka, Miss. Olympic Steel, a service center that does extensive toll processing, has just completed installation of a temper mill at Gary, Ind., and plans to build another. Detzel at Voss Industries says the growing demand for flawless material prompted his company to install a Parsytec electronic surface inspection machine. "Every year, the level of detail that customers want to identify on flat-rolled coil increases. They are continuing to press on what they expect, to stop imperfections from going to their customers," Detzel says. Another trend that will intensify over the coming years is the use of advanced high-strength steels, especially by the auto industry. Processors will need more high-powered equipment to level, slit, cut and coil this stronger steel, Adamski says. Extensive communication between the mills, the processors and the equipment manufacturers will be imperative. "As we've gone through the last year, the mills are learning more and more about how the product is performing and the requirements of the auto industry," he says. "With the composition of that material, it's really going to drive change in the way some of the equipment is laid out and operated."