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 facingproblems no different than those faced by other segments of US industry,but with unique opportunities. According to Sharkey, the general economy showed a strongperformance last year with GNP up 6.7 percent and a relatively low rateof inflation at about 4 percent. In the face of this, the servicecenter business is on a wide roller coaster ride, with a record high andlow occuring within a 24-month period between 1982 and 1984. This hascreated uncertainty, making planning difficult. Moreover, lowinflation–or deflation–means a decline in inflation-hedging assets,plus a sharp drop in the price structure.

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In a business where inventoryappreciation historically is a sure bet, deflation creates a problem. This is aggravated by a strong dollar that increasingly isattractive to foreign investors. A strong dollar leads to cheapimports. In the past four years, the dollar gained over 50 percentagainst the average of other major currencies, translating as a50-percent tax on US exports and a 50-percent subsidy for imports.

“The single most important thing that has transformed the steelindustry is the currency issue.” says Sharkey. “The price atwhich foreign producers can sell in this market and not be dumping isstrictly currency related.” Another factor is the trade deficit. In 1984 it was $113 billion,double 1983’s $61 billion.

“Low inflation, cheap imports, astrong dollar, and a large trade deficit are all things that we mustlive with. Service centers with a plan to make money will fare well inspite of these conditions,” observes Sharkey. In addition to general economic conditions, service centers arechallenged by what is happening to their suppliers–the mills. Massiverestructuring and down-sizing are occurring–a dismantling of anindustry that built capacity for a world market that no longer exists. He lists three major aspects of down-sizing and restructuring thathave implications for service centers: * A continuing pattern of mergers and acquisitions. * More companies going under, then surfacing as reconstitutedcompetitors (use of Chapter 11 allows reorganization on a lower costbasis). * Further evolution in technological development and an all-outdrive for minimills to get into the flat-rolled business.

(For moreinformation 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 domesticsuppliers will produce smaller annual tonnages. Such changes make it tough for service centers because they arefacing schizophrenic market strategies. Mills move in and out ofproducts as they seek niches.

Another factor impacting domestic supplyis that general deflation, a strong dollar, cheap imports, and steelusers struggling to survive in a world market combine to create a newset of “revenue realities.” Sharkey remarks, “Sadly, thesignificant productivity increases (cost reductions) achieved by mostdomestic mills last year are offset by even bigger declines intransaction prices (revenues). This means that suppliers of someproducts are no longer competitive. While most mills are movingquickly, the path to survival will be in cost reduction rather thanrevenue growth.” He also points out that relationships between mills and servicecenters are deteriorating.

Changes are also taking place betweenservice centers and their customers. Large service center accounts arediminishing, and those remaining don’t buy like they used to. Steelintensity (steel consumption in tons divided by real GNP) is decliningand imports of steel products are causing the loss of importantcustomers. Sharkey also faults the “bid and buy” process introducedby General Motors as rippling throughout the metalworking community.”We see more long-term contracts with a smaller numbers of servicecenter suppliers. Companies that dealt with 15 or 20 service centers inthe past, are now dealing with only three or four,” says Sharkey. Service centers are also forced to make more capital investments asquality standards tighten and the need for more expensive, closertolerance processing equipment becomes mandatory. Further, customerdemands for frequent deliveries, custom packaging, etc, are leading torising costs that, in many cases, can’t be recovered.

According to Sharkey, a survey of major service centers reveals thefollowing trends: * Dramatic consolidation. Eighty percent of the business done byservice centers companies will be done by companies grossing $20 millionor more by 1990. Fewer companies will be doing more volume. And mergersand consolidations of service centers will continue. * More specialization, especially in flat-rolled, tubing, and largebeam products. * More foreign penetration. By 1990, between 15 and 20 percent ofsteel service center business will be by foreign mills and foreigntrading companies.

Worldwide economic conditions are driving foreigninvestors 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 withat least 75 percent of the wholesale-distribution commodity businessesin this country. His assessment of the service center industry concludes with alisting of opportunities and accomplishments. For example, 1984 was arecord year; 21.2-million tons were shipped. a 3-to-4-percent increaseis expected this year, to about 22-million tons.

Also, the industryenjoyed a record market share of 31 percent of carbon industrial steelproducts, as well as the second best return-on-sales (after tax) since1974.

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