Steel service center assessment – problems and opportunities Essay

In an annual “state-of-the-industry” address, Andrew G Sharkey, president of the Steel Service Center Institute, Cleveland, OH,
recently assessed the industry. He characterized it as one facing
problems no different than those faced by other segments of US industry,
but with unique opportunities.



According to Sharkey, the general economy showed a strong
performance last year with GNP up 6.7 percent and a relatively low rate
of inflation at about 4 percent. In the face of this, the service
center business is on a wide roller coaster ride, with a record high and
low occuring within a 24-month period between 1982 and 1984. This has
created uncertainty, making planning difficult. Moreover, low
inflation–or deflation–means a decline in inflation-hedging assets,
plus a sharp drop in the price structure. In a business where inventory
appreciation historically is a sure bet, deflation creates a problem.



This is aggravated by a strong dollar that increasingly is
attractive to foreign investors. A strong dollar leads to cheap
imports. In the past four years, the dollar gained over 50 percent
against the average of other major currencies, translating as a
50-percent tax on US exports and a 50-percent subsidy for imports.
“The single most important thing that has transformed the steel
industry is the currency issue.” says Sharkey. “The price at
which foreign producers can sell in this market and not be dumping is
strictly currency related.”


Another factor is the trade deficit. In 1984 it was $113 billion,
double 1983’s $61 billion. “Low inflation, cheap imports, a
strong dollar, and a large trade deficit are all things that we must
live with. Service centers with a plan to make money will fare well in
spite of these conditions,” observes Sharkey.



In addition to general economic conditions, service centers are
challenged by what is happening to their suppliers–the mills. Massive
restructuring and down-sizing are occurring–a dismantling of an
industry that built capacity for a world market that no longer exists.



He lists three major aspects of down-sizing and restructuring that
have implications for service centers:



* A continuing pattern of mergers and acquisitions.



* More companies going under, then surfacing as reconstituted
competitors (use of Chapter 11 allows reorganization on a lower cost
basis).



* Further evolution in technological development and an all-out
drive for minimills to get into the flat-rolled business. (For more
information on minimills, see Dec ’84, Metalworking Economics.)



Moreover, as more domestic mills move away from primary production,
a fragmented market will become even more fragmented, and domestic
suppliers will produce smaller annual tonnages.



Such changes make it tough for service centers because they are
facing schizophrenic market strategies. Mills move in and out of
products as they seek niches. Another factor impacting domestic supply
is that general deflation, a strong dollar, cheap imports, and steel
users struggling to survive in a world market combine to create a new
set of “revenue realities.” Sharkey remarks, “Sadly, the
significant productivity increases (cost reductions) achieved by most
domestic mills last year are offset by even bigger declines in
transaction prices (revenues). This means that suppliers of some
products are no longer competitive. While most mills are moving
quickly, the path to survival will be in cost reduction rather than
revenue growth.”



He also points out that relationships between mills and service
centers are deteriorating. Changes are also taking place between
service centers and their customers. Large service center accounts are
diminishing, and those remaining don’t buy like they used to. Steel
intensity (steel consumption in tons divided by real GNP) is declining
and imports of steel products are causing the loss of important
customers.


Sharkey also faults the “bid and buy” process introduced
by General Motors as rippling throughout the metalworking community.
“We see more long-term contracts with a smaller numbers of service
center suppliers. Companies that dealt with 15 or 20 service centers in
the past, are now dealing with only three or four,” says Sharkey.



Service centers are also forced to make more capital investments as
quality standards tighten and the need for more expensive, closer
tolerance processing equipment becomes mandatory. Further, customer
demands for frequent deliveries, custom packaging, etc, are leading to
rising costs that, in many cases, can’t be recovered.



According to Sharkey, a survey of major service centers reveals the
following trends:



* Dramatic consolidation. Eighty percent of the business done by
service centers companies will be done by companies grossing $20 million
or more by 1990. Fewer companies will be doing more volume. And mergers
and consolidations of service centers will continue.



* More specialization, especially in flat-rolled, tubing, and large
beam products.



* More foreign penetration. By 1990, between 15 and 20 percent of
steel service center business will be by foreign mills and foreign
trading companies. Worldwide economic conditions are driving foreign
investors into the US market.



* Service center overcapacity. There is too much square footage,
processing equipment, and inventory for a shrinking market situation.



Sharkey maintains that the industry shares these same problems with
at least 75 percent of the wholesale-distribution commodity businesses
in this country.



His assessment of the service center industry concludes with a
listing of opportunities and accomplishments. For example, 1984 was a
record year; 21.2-million tons were shipped. a 3-to-4-percent increase
is expected this year, to about 22-million tons. Also, the industry
enjoyed a record market share of 31 percent of carbon industrial steel
products, as well as the second best return-on-sales (after tax) since
1974.