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Toll Processing Outlook: Cruising on ‘Auto’ Pilot Despite the second-half 2012 slowdown and some still-unresolved fiscal issues in Washington, North America’s toll processors see the year ahead no worse than the one they left behind. By Dan Markham, Senior Editor North America’s toll processors, buoyed by a resurgent automotive market, enjoyed a solid year in 2012 and project a similar outcome for 2013. “If everything remains as good as 2012, or a little better, this year should be just fine,” says Tobey Cauffiel, president of Granite City Pickling & Warehouse, Granite City, Ill., echoing the consensus view. “Last year was a little better than we expected. We’re about 50 percent automotive, so that’s a big factor in our numbers,” says Angela Gagel, general manager of purchasing for outside processors at Louisville, Ky.-based Steel Technologies. “We don’t see any reasons for 2013 to be a negative year. We expect to grow.” Metal processors, like others in the industrial segment, were hopeful that resolution of the fiscal cliff issue would provide a jolt to the economy. But ongoing debate over taxes and the U.S. debt ceiling have kept customers wary. “Based on what I’ve seen, people are apprehensive, not willing to buy until they absolutely have to,” says Dave Ackerman, president and chief operating officer of Metal Processing Corp., Gary, Ind. The automotive sector may be the exception. John Grossheim, national processing manager for Toledo, Ohio-based Heidtman Steel Products/Fulton County Processing, says mill customers that supply automotive told him to expect vehicle production to rev into high gear once Congress reached a deal to avert the fiscal cliff. In fact, he says, his company got busy in December in anticipation of the deal and has remained that way since. That attitude is consistent with auto industry forecasts. The U.S. automotive market, which fell to record lows during the depths of the recession, erupted in a big way in 2012, the product of a better economy, more favorable credit and pent-up demand. J.D. Power & Associates and LMC Automotive expect light vehicle sales to top 15 million this year, about 3-4 percent more than 2012’s 14.5 million units. “The U.S. light-vehicle sales market continues to be a bright spot in the tremulous global environment,” Jeff Schuster, senior vice president of forecasting at LMC Automotive said in December. “Assuming [the fiscal cliff] hurdle is cleared, 2013 is one step closer to a stable and sustainable growth rate for autos, with volume above the 15 million unit mark.” “When you consider that in 2009 it was down around 9 million vehicles, it’s seen a remarkable increase in the past four years,” adds Dave Detzel, sales manager for Voss Industries, Taylor, Mich. The surge is evident for processors across North America, whether in the Detroit area or the southeastern U.S., home of several transplant companies such as Honda and Toyota. “The overall market is picking up. The New Domestics in the South are just pumping out cars,” says David Pettigrew, general manager of All Metals Service & Warehousing, Cartersville, Ga. In addition to the sales growth, the auto industry is also being transformed by demand for improved fuel efficiency. The drive to meet rigorous new CAFE standards for auto mileage is driving increased use of new, higher strength steels, which the processing community must equip itself to handle. “We’re getting more communication from our steel mill sources about the chemistries they’ll be producing in the next few years, the ultra-high-strength stuff, and the need they’ll have for outside processing of this product,” Detzel says. “They don’t anticipate their hot mills will get better at producing the shape on this material, so they know that more of it is going to have to go outside.” Such changes will fuel demand for processing services, but will also require processors to beef up equipment. That’s a trend many of them have been anticipating for quite some time. “As you get better equipment, updated equipment, you tend to get more of the business,” says Grossheim. “If you can get an edge on your competitor by putting in the latest and greatest equipment, you’re going to get the business until someone else matches it.” Other processors also see a need to stay out front on capital investments, both to satisfy existing customers and to attract new ones. McEver Metal Processing, Acworth, Ga., finished a 13,000-square-foot addition in 2012, complete with a new shear. “We added the shear to do some jobs we were missing out on,” says Jeff Raimonde, vice president of marketing for McEver. “There are certain things that make more sense for the end user to do than us. But if there’s something worthwhile we can all benefit from, by all means we’ll give it a shot.” Toll picklers point to a few recent trends, neither of them positive. To his dismay, Cauffiel has seen a recent decline in demand for pickled steel. The quality of hot band, coupled with advancements in painting and die technologies, has resulted in fewer coils that need to be run through a pickler. “It’s not a huge trend, but there are a couple of spotty places where I think it’s occurring,” he says. An unrelated development in another market also is causing problems for picklers, Detzel says. The growing use of fracking in natural gas recovery has tightened the market for hydrochloric acid, a key product in both processes. Given the limited supply of hydrochloric acid in North America, the price of this raw material has jumped significantly. As a result, some picklers have added a hydrochloric acid surcharge, while others are forced to absorb the additional cost. On the other hand, some trends are favorable for toll processing. During the recession, some companies brought jobs back in house as part of the necessary budget-tightening. Now that their business has improved, their attitude is loosening. “They’ve figured out when it makes sense to do it themselves and when it makes logistical sense to use an outside processor. Asset utilization is one calculation, but it’s not the only one,” says Pettigrew, who also serves as president of the Outside Processors Council, the toll processing group of the Fabricators and Manufacturers Association. Since getting burned in the downturn, nearly all members of the supply chain are less interested in carrying inventory, an attitude that is both a burden and a blessing to outside processors. Shorter lead times put added pressure on processors to deliver products more quickly. “Thirty years ago, if you could do something in a week, that was fairly quick. Now, if you didn’t do it yesterday, they ask ‘what’s taking so long?’” says Derek Hallyburton, president of Custom Coil Slitting, Mississauga, Ont. On the other hand, such demands can play to a processor’s strength, which is providing quality service with a quick turnaround. “I’m not complaining, because it does play into why we’re here in the first place,” Hallyburton says. “Now if I could get paid a premium on an ongoing basis for the delivery expectations that are required in today’s marketplace, that would be something else.” It isn’t just improved turnaround that customers require, says Jeff Hansen, president of Pro-Coil, a Santa Fe Springs, Calif.-based processors. “Customers are a little more demanding today. They don’t necessarily expect more services, just better quality.” The compressed delivery schedule and quality demands explain why Grossheim sees a growing trend toward more processing “megacenters”—single facilities with multiple lines, often located on-site or near domestic mills to cut down on freight costs. “They put multiple processing lines in one facility so it all stays there and they don’t have to ship it from Point A to Point B,” he says. The reverse is also true. In 2012, when RG Steel’s bankruptcy resulted in the idling of several mills, including Sparrows Point in Maryland, Heidtman responded by shutting down its processing facility there. For many processors, freight continues to be a chief concern. “For toll processors, the biggest issue is logistics,” says Gagel. “Your freight can cost as much or more than your processing. Depending on where you’re located, you may be out of the picture because you’re not in a desirable place.” Besides freight costs, availability is also a concern. “I haven’t called a trucking company and not been able to get a truck, but I’m waiting for that to happen,” says Bob Demyan, vice president of sales and marketing of Flat Rock Metal, Flat Rock, Mich. “As volumes pick up, it’s going to get a little bit difficult.” Depending on the location, rail can also be essential. Granite City Metals, near St. Louis, and the West Coast’s Pro-Coil, are both heavily dependent on rail freight to support their businesses. Both Cauffiel and Hansen report smooth sailing in that regard. “Rail is more important than ever, and it is available,” says Cauffiel. While some factors have changed in the tolling industry, one fairly steady feature is the cast of characters. It appears most players survived the downturn with relatively few bankruptcies and closures. “For a couple of years we thought: if it stays this bad for much longer we’re bound to lose competitors,” Hallyburton recalls. “But everybody’s still hanging on to their piece of the pie.” Pettigrew says doing more work with fewer people increased productivity and helped the industry get through the recession. The lessons learned will not soon be forgotten. “We saw the moves we had to make, and we’ve prepared ourselves if the economy falls again,” says Pettigrew, whose OPC group will gather in Palm Harbor, Fla., later this month to discuss further survival strategies during the annual FMA Toll Processing Conference.