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Baltimore Market

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Baltimore at the 'Point' of No Return By Dan Markham, Senior Editor Two years ago, steelmaking operations in Baltimore came to an end when the troubled mill at Sparrows Point was sold to auction company Hilco and later dismantled for parts and equipment. That inglorious end for a once-proud steelmaker merely capped a long, slow slide into irrelevancy. Founded in the late 19th century as Maryland Steel, Sparrows Point was once the world's largest steelmaker, employing more than 30,000 people in the 1950s. At the time of its closure, the facility had steelmaking capacity of 3.5 million tons, with one blast furnace, one BOF, a caster, a hot-strip mill, two cold mills, two tin lines and three coating lines. Since a bankruptcy filing in 2001 by then-owner Bethlehem Steel, the plant changed hands four times before ceasing operations in 2012. Its closure also began a shakeup of the steel supply chain in the Mid-Atlantic, as steel distributors and end users began shifting their focus away from Baltimore to other locations closer to production capacity. In the years since the demise of RG Steel, Sparrows Point’s final ownership group, at least three other major steel distributors, and more downstream manufacturers, have closed facilities in the market. Heidtman Steel was the first to make the move, closing its facility near the Point in mid-2012, shortly after RG filed for bankruptcy. "Increasingly, we are seeing our Northeastern customers reposition themselves geographically. Our primary supplier has struggled to maintain profitable operations for some time and its future is uncertain," Tim Berra, Heidtman president said at the time. "Every link in the supply chain is interdependent and susceptible during an economic downturn; we are responding strategically to evolving market conditions." Earlier this year, Worthington Industries closed its operations in Baltimore, citing the same supply chain issues. That followed a 2011 shutdown of its framing plants in the city. Other smaller service centers and processers also have quietly closed up shop in the past few years. For the companies left behind, the shifting supply chain creates both challenges and opportunities. While Sparrows Point's final exit was obviously hard for certain distributors, particularly those who left the market, its off-again, on-again status over the previous 15 years cushioned the blow for others. The company's constant shuffling--including its steady stream of ownership changes and much time spent idled--demanded that service centers and end users already have alternate sources of material. "The real impact occurred 10-15 years ago, when they started moving production to other facilities. Then the shipyard closed," says Vince Pappas, president of Stone Steel Corp., a master distributor based in Curtis Bay, Md. "For the last 10 years it was a shadow corporation, so the effect of the closing is minimal." 'Under any name, they were up and they were down. They wanted to be in this product, then they wanted to be in another. People figured out how to go around them," says Ken McAvoy, president of toll processing specialist Maryland Metals Processing. Now that local production has ceased, manufacturers and distributors are getting material from other leading mills to the south and as far away as the Great Lakes. Or, just as likely, from offshore, as Baltimore's port makes it ideal for receiving material from other parts of the globe. "The reason we're in Baltimore is largely due to the fact that it continues to be a favorable location from a logistics standpoint," says William Hutton, president and chief financial officer of Titan Steel, a tinplate and flat-rolled specialist. "We buy from different mills in North America and export around the world. If you look at where a company like that should be located, Baltimore still comes up fairly high on the list." But just as some companies see the city as a place with a shrinking supply and customer base, others spy opportunities. BMG Metals, a Richmond, Va., service center, has expanded northward into the Baltimore market in the past five years with a 55,000-square-foot facility in nearby Elkridge, Md. "This was kind of a normal progression for us," says Inside Sales Manager Ron Ross of the company, which also has four operations in Virginia and another in North Carolina. "We are hoping we can serve not only the Baltimore area, but also north, west and east. We have been successful in the last 5-7 years, and we're counting on more in the future. But it's a tough market." Another company that jumped into the void created by one of the departing distributors was MoveTran, a transloading facility that also operates a slitter. The company set up shop in the old Heidtman facility, and even hired some of its former staff. "With Sparrows Point gone, we realized there was a need to get coils into the area. With the CSA program slowly draining trucking [due to increased government regulation], we knew this was going to be an area of great need because truckers are not around anymore," says Damon Gunter, president of MoveTran. "The Heidtman property, having both CSX and Norfolk Southern rail heads, is an ideal location to bring more product into the Mid-Atlantic area." The exit of some distributors from the local scene is opening up opportunities for the remaining service centers to grab new customers or expand their offerings to old ones. "We've been picking up some of the slack. It's not enough to build the business on, but it's enough to fill in," says Pappas at Stone Steel. Just because some of the larger players no longer have a physical presence in the area does not mean they've abandoned their old customers, however. They can still service them, though from a greater distance. "These are very good companies that know what they're doing. They're going to be very careful to try to protect the customer base as much as possible. I have no doubt they've done some pretty careful planning to keep the business they'd like to keep," Hutton says. Ultimately, he adds, service centers and end users will have to absorb some of the higher cost of bringing material into the area. Historically, the region has not been a major manufacturing center. Its primary industry has been the defense/government market, with Washington, D.C., less than 50 miles down the road. Thus the recent slowdown in government spending has been painful. "Traditionally, this has been a big defense market. It’s been a draw for distribution to come here and service the area," says Ross. "Whether it will be at the same level as 10 years ago will depend on what happens overseas." Cutbacks in government spending don’t just hurt those companies that serve the defense market. Because the area is so heavily populated with public sector employees, government furloughs and wage freezes affect all types of spending in the region. "To the extent federal employees have not been getting raises for the past few years, that tends to feed its way into the local consumer economy," says Hutton. "Many times you'll hear during downturns that the Washington metropolitan area careens on as if there’s no recession. Now maybe the shoe is on the other foot a little bit. You had sequestration, you had government shutdowns, so the mood is rather on the cautious side." Pappas believes the slowdown in federal government outlays has left two other forms of nonresidential spending as the dominant end markets for metals. "No. 1 is education and No. 2 is healthcare, and they're probably pretty close to each other. That means more construction, which is good for us." Perhaps a bigger threat to the area's industrial economy is the business climate in the city and state. Executives note that Maryland is the only area of the country that has a "rain tax," a levy to deal with storm water runoff. "The state couldn't have worse business-oriented politics. They've never met a tax they didn't like," McAvoy says. Increases in toll rates are particularly damaging in a metropolitan area like Baltimore split by a large body of water, Pappas adds. "If I’m trying to get a truck in here to load and he's not already on this side of the town, he won't want to come through the tunnel or bridge to get here." Ultimately, the companies that remain after the shakeout of the market must evolve to thrive in the changing conditions, executives say. "People were used to buying from the Point and having delivery a day or two away, but that has changed," says Gunter at MoveTran. "Now people have to rethink how they do business." Stone Steel is a good example. The company had been primarily a wholesale distributor, but grew into a merchant bar and rebar service center in the last six years. Management realized that even through the worst of the recession its rebar business held pretty steady. "The companies that have survived so far are doing pretty well. The key is being able to adapt to what has happened here locally and to the entire economy," Pappas says. "We've changed our customer base to be a little more construction oriented, and the business is doing OK."