3/14/2013 — CHICAGO — The fragmented steel service center industry must consolidate further to combat overcapacity issues, which dilute the sector’s purchasing power, industry executives said this week.

“We are going to wake up and see the overcapacity,” Jeremy Flack, chief executive of Cleveland-based service center Flack Steel Ltd., said March 12 at Platts’ 9th Annual Steel Markets North America Conference in Chicago.

According to Flack, there are too many points of sale and too low barriers to entry. As a result, distributors “are struggling for relevance with mills” and appear to be “creating little economic value.”

Sanford “Sandy” Simon, former vice president of Pacesetter Steel Service Inc. and now a consultant at Sandy Simon & Associates, Marietta, Ga., agreed that the market remains highly fragmented.

“(Fifty) service center operators control only 25 percent of the market,” he said, noting that only 12 of the top 50 distributors have sales in excess of $1 billion.

“The market is inefficient. It has to consolidate,” Simon said.

In February, Los Angeles-based Reliance Steel & Aluminum Co. announced a planned purchase of competitor Metals USA Holdings Corp. (amm.com, Feb. 6), marking the latest in a string of buys, but those deals haven’t been enough to correct the overcapacity problem, Flack said.

Reliance’s series of acquisitions “has not consolidated the industry. They only consolidated cash flow” and left everything else in place, he said.

With mills having so many customers to choose from, service centers have little pricing power in the steel supply chain, Simon said.

“Inventories are the only thing they really control,” said Simon. “They do all the things an original equipment manufacturer (OEM) doesn’t want to do,” saving the OEM money. And they take on the bulk of the risks with inventory in any business model, even under contract pricing and quantities. “They no longer negotiate the buy, and giving up that control helped squeeze margins. If they are lucky, they can net $30 a ton,” he said.

“Seven thousand nine hundred fifty service centers will be in a red ocean (of losses) if all they offer is price competition,” Simon added.

Flack agreed, noting that service centers are always “waiting for prices to rise to save us. It hasn’t happened.” That is “sucking earnings out of the space.”

Flack and Simon both added service centers have to support their customers’ businesses by being highly responsive and by developing specialized knowledge and strength in certain niches to offset price competition.

VIA AMM (Corinna Petry)