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Mill M&A Takes a Toll on Processors Mergers and acquisitions among major mills last year altered the prospects for toll processors—some for the better, some for the worse. By Dan Markham, Senior Editor Depending on where they were located and who they did business with, some toll processors suffered collateral damage last year when a few major mills changed hands. Others enjoyed a collateral advantage as they found themselves in the right place at the right time to service the new owners. How much these ownership swaps affect the toll processing community still remains to play out, but it is certainly cause for concern among tollers big and small. Early in 2014, ArcelorMittal and Nippon Steel assumed ownership of ThyssenKrupp’s carbon steel production facility in Calvert, Ala. The joint venture spent much of the year integrating the new 5.3-million-ton flat-rolled mill into its operations. Consolidation sped up in the second half when Russia’s Severstal exited North America, selling its Dearborn, Mich., facility to AK Steel and its Columbus, Miss., operation to Steel Dynamics. Finally, minimill giant Nucor purchased Gallatin Steel’s flat-roll mill in Ghent, Ky. With annual capacity of 1.8 million tons, the mill on the Ohio River broadened Nucor’s footprint in the important Midwest market. Toll processors—companies that process others’ metal for a fee—have long been close partners with the mills, either as direct service providers or by working with the OEMs or service centers that purchase from them. Processors are watching closely to see how the new ownership structure affects the market’s existing relationships. “It changes the supply chain for some processors,” explains Peter Adamski, sales manager for Taylor Coil Processing, Lordstown, Ohio. “If you shift production from one mill to another, the logistics on where material goes can change. Where you once might have had an advantage given your location, now a couple of other processors may have a better location to process the material.” All of the moves have the potential to shift opportunities for individual processors, though the ArcelorMittal/Nippon Steel venture may be the most noteworthy. The company has already idled the No. 2 galvanizing line at its Indiana Harbor facility, with reports of plans to close the electric arc furnace and aluminizing lines at the site. “ArcelorMittal still has the orders, but they’re moving them around to take logistical advantage,” says Brian Habermel, sales manager of outside processing for Steel Technologies, Louisville, Ky. “I don’t blame them; that’s why you buy these types of facilities. But that’s having an impact on processors in the northern part of the U.S.” In the other cases, it’s too soon to tell how the ownership changes might affect the processing community. Dave Detzel, sales manager of Voss Industries, Taylor, Mich., has yet to see much meaningful change since AK Steel assumed control of the Dearborn operations. Yet, he knows it’s probably coming. “A deal like this is put together for synergies in where the steel is produced, where it’s shipped and the best way to get it processed. Right now it’s business as usual, but it would not be surprising to see changes on the horizon coming up in 2015.” In 2016, the domestic playing field will be further tipped when Big River Steel comes online in Osceola, Ark. TMW, the Red Bud, Ill.-based processor, has already committed to construct a facility to handle processing for the new mill. As Big River ramps up, it could also take tons away from existing producers and the processors who serve them. Ultimately, Adamski says, “you’re probably looking at a shift with some people taking on more work and, unfortunately, some people losing work. It’s not a question of quality, and bad processing or good processing. It just comes down to the overall cost, and freight is a big component of it.” Changing mill ownership is just one of the major storylines affecting toll processors. Another is the ongoing tug-of-war between steel and aluminum for a larger share of the North American automotive market. While aluminum makers tout the inherent weight advantage of their material, and steel producers counter with each new development in cheaper high-strength steels, the processing community watches with great interest to see how the materials mix will shake out. “The whole industry is all about the aluminum/high-strength steel balance,” says Ed Gonzalez, president and CEO of Ferrous Metal Processing, Cleveland. Automakers are on a quest to dramatically lighten their vehicles in order to meet aggressive new fuel-efficiency targets mandated by the federal government over the next decade. Aluminum makers have made major capital investments in extrusion and sheet production facilities in anticipation of increased consumption by the auto industry. Meanwhile, steelmakers have been busy developing lighter, advanced high-strength steel alloys, which they claim will enable the auto companies to meet the miles-per-gallon targets without switching to more costly aluminum parts. Ultimately, both sides agree, the automotive material mix will include less mild steel and more aluminum and high-strength steel. That means many toll processors will have to step outside their comfort zones and learn how to handle unfamiliar metals. For some, it also means they will have to make major capital investments in new equipment. “We’re all feeling our way through this, doing trials on advanced high-strength steels and trying to understand how they’re going to react on our lines. So far, so good. We haven’t run into a lot of major issues,” says Detzel at Voss. One of the issues involves acid pickling, which can stain some high-strength steel grades. Conventional pickling’s alternative, The Material Works’ Eco-Pickled Surface, hopes to gain additional traction with the market’s move to these new materials. The creator of EPS, TMW President Kevin Voges, says there’s only a slight time tradeoff between running mild steel and AHSS through the EPS system. Leveling, slitting and recoiling advanced high-strength steels can be another matter. The lines must have the power to apply a lot more force to the material. Operators run the risk of overworking the metal and changing its characteristics. Some experts say processors can run thin-gauge high-strength steel on their existing heavy-gauge slitting lines with some minor modifications, but those who intend to process all gauges of AHSS will need new equipment with oversized arbors, more powerful motors and hydraulics, and new types of tooling. Those that plan to process both steel and aluminum may be able to use existing equipment, but will have to take steps to avoid cross-contamination. “Your standard equipment for slitting might not be capable of handling high-strength steel,” says Habermel. “You need to make sure you have the right tools or you’re going to blow through knives quickly.” “You’re dealing with materials at higher yields and tensile strengths, so your equipment has to be set up to slit or rewind or cut that type of product,” says Adamski. “And the material is very work sensitive, so if it’s handled improperly it can change the intended properties.” Equipment manufacturers have developed new processing technologies to handle these tougher materials, but they come with a significant price tag, which worries Derek Hallyburton, president of Custom Coil Slitting, Mississauga, Ontario. “The big service centers can afford that, but how many mom and pop shops are going to spend that kind of money to handle the advanced high-strength steels. Steel to aluminum is not so bad. But AHSS is going to require more horsepower, bigger arbors. The little guys can’t change their equipment that quick, and it’s very expensive.” In some cases, companies will be able to slit aluminum coils on the same lines they use for slitting mild steel, but it calls for careful procedures, explains Detzel. “The material is pretty similar in the way it reacts on the slitter. The shear and brake ratio is similar,” he says. “But it all comes down to handling scrap and making sure you have a procedure for cleaning the machine of debris. Any steel pieces left in the unit can scratch the aluminum.” Ferrous Metal Processing is trying to hedge its bets by being prepared for both materials. The company has an aluminum slitting and inspection facility in Wayne, Mich., to process nonferrous sheet products for the auto industry. In addition to its existing steel facilities, the company will soon announce the location for a new continuous annealing line in Northwest Ohio or Southeast Michigan to handle advanced high-strength steels. “I’m not taking chances,” says Gonzalez. “We’ve made a big investment in ultra-high-strength steels and we have an investment in aluminum in the event aluminum becomes a big deal.” Steel Technologies also now offers some aluminum processing. “You’d be remiss if you didn’t at least dip your toe in the water to see what’s going on,” Habermel says. New materials call for new standards, but the benchmarking seems to be lagging the new-product development. Processors complain they are often left to guess just how good is good enough when it comes to tolerances for high-strength steels. “The biggest challenge we’re having is for the industry as a whole to come up with standards of what’s acceptable for advanced high-strength steel processing. Everybody’s concerned with flatness, but nobody knows what they really mean when it comes to flatness with AHSS. Probably the biggest concern I hear as president of the Toll Processing Council is there isn’t a good set of parameters that tell us what targets we’re going to have to hit going forward.” For suppliers of both ferrous and nonferrous materials, the outlook for automotive production is a positive one. Most forecasters expect the U.S. to produce 17 million vehicles in 2015. Auto’s strength is not limited to the U.S., says Hallyburton. Toyota’s Canadian operations are ramping up production. And while plans for GM’s Oshawa plant remain in flux with the wind down of the Camaro and loss of the Buick, he believes the carmaker will remain a fixture at the Ontario facility. Though automotive is the largest market for toll processors, others include construction, appliance, and containers, all of which are improving along with GDP. The notable exception is energy. Oil prices have plummeted by half to under $50 per barrel, slowing drilling activity and demand for oil country tubular goods across North America. Ferrous Metal Processing’s Wilder, Ky., operation services the OCTG markets, and Gonzalez is already seeing the signs of the downturn. “I just got back from Houston and everybody there is anticipating a 40-50 percent reduction in volumes,” he says. The healthy U.S. economy and the strong dollar will continue to attract imports of OCTG and other products from all over the world, some of which will end up in the hands of toll processors. Contributing to the influx of imports are lead times from domestic producers that are nearly as long as those from overseas mills. Will Thomas, president of Colonial Metal Products, Hermitage, Pa., says that puts the squeeze on the processor. “When it hits our door, the phones start ringing and they want to know when they can get it.” Gonzalez says imports are not a big fact or at his company. “The only imported steel we process comes from a service center. They’ll bring it to us whether it’s foreign or domestic. I don’t care much about the level, though I always want the domestic mills to be healthy.” Regardless of the various market forces at work today, toll processing’s role in the supply chain is secure, executives agree. “There is a home for toll processors, and some places we shouldn’t be. But the more a company is tuned in to cost controls, the more toll processing is a justifiable alternative,” he says.