Automakers Take Tollers Along for the Ride
By Tim Triplett, Editor-in-Chief
Business is booming, say toll processors, but how long will that last? Much depends on what happens to steel prices in the second quarter.
The auto industry in North America has made a surprisingly strong comeback from the depths of the recession—and it’s taking the toll processing industry along for the ride.
Auto is the single biggest market for toll processors. CSM Worldwide forecasts North American light vehicle production of 12.9 million units in 2011, a million more than were built in 2010 and a big jump from the 8.6 million produced in 2009.
“We tend to live and die on the fortunes of automotive,” says Dave Detzel, director of outside sales at VOSS Taylor in Taylor, Mich. VOSS Taylor and sister company VOSS Clark in Jeffersonville, Ind., offer pickling, slitting and first-operation blanking services to automotive suppliers, as well as some in the construction and appliance industries.
|MCN Toll Poll:
Toll Processors on the Leading Edge of Recovery
After suffering through two dismal years as the economy floundered, toll processors appear to be on the leading edge of the recovery heading into 2011.
After watching their businesses decline by an average of nearly 18 percent in 2009, most toll processors say they made up that ground, and more, in 2010, according to the latest toll market survey by Metal Center News.
Indeed, three out of four respondents to MCN’s survey say their business increased by over 30 percent in 2010, and they are forecasting further gains in 2011 averaging 17 percent.
Fueling much of this recovery is the surprising rebound in North American automotive production. Auto is the single biggest market for toll processors. CSM Worldwide forecasts light vehicle production of 12.9 million units in 2011, a million vehicles more than in 2010.
Surveying this market is challenging because it is difficult to define a toll processor. Some companies are dedicated tollers that derive 100 percent of their revenues from processing customers’ metal. Many are service centers that process other companies’ coils, as well as their own.
To conduct this poll, MCN e-mailed a link in mid-January to about 1,000 subscribers who have identified themselves as toll processors. That number included the 183 companies in MCN’s Directory of Toll Processors included in this issue. The link took them to an online questionnaire. In total, the survey netted 71 usable responses.
No doubt the results of the survey were affected by sampling the subscriber list of a service center magazine. Less than a quarter of the respondents are dedicated toll processors. The average respondent to the survey had 2010 revenues of about $23.2 million, half of which was from toll processing and half from conventional service center sales.
Who are their customers? Based on this sample, 19 percent primarily serve the mills, 34 percent OEMs and 47 percent service centers.
Most tollers are flat-roll processors. The top five services and the percentage who offer them are: slitting, 73 percent; cut-to-length, 63 percent; leveling, 41 percent; blanking, 39 percent; and shearing, 33 percent.
Like most businesses, toll processors were forced to reduce their labor costs during the recession. According to MCN data, tollers cut their workforces by more than 20 percent in 2009. In 2010, the vast majority (82 percent) made no further layoffs, and most have begun rehiring.
A sign of how much the market has recovered, toll processors appear ready to begin investing in new capital equipment. The average capital budget among respondents is $356,600, up 16 percent from last year’s survey.
Toll processors are even more optimistic about their prospects for 2011 than Metal Center News readers in general with an average Optimism Index of 4.6. (Respondents were asked to rank themselves on a 1-to-6 scale with 6 the most optimistic). This compares to the average index of 4.3 in the January Outlook Survey.
Peter Adamski, general sales manager at Taylor Coil Processing, Lordstown, Ohio, describes a similar experience. “We’ve recovered nicely. There is still some room for growth to get back to previous years, but we have experienced a nice bounce back compared to 2009.” Taylor offers blanking, slitting, tension leveling and inspection services primarily in the Midwest.
Thanks largely to automotive-related orders, many toll processors saw their production double last year, albeit from a low level. “Many went from running one shift to two shifts, if not more,” says Brian Habermel, sales manager of outside processing for Steel Technologies in Louisville, Ky. Automotive is forecast to grow a further 15 percent this year, he adds. “If they stick with that, I think most toll processors will be pretty busy throughout the year.”
There is no guarantee that carmakers will continue production at a uniform pace, however. Automotive could easily experience a down quarter, which would have a ripple effect throughout the steel industry. With the continuing weakness in the construction and appliance sectors, toll processors are more dependent on and vulnerable to swings in auto production, say toll executives.
Detzel’s company saw a 40 percent increase in its total shipments last year and is forecasting a further 12 to 15 percent increase in 2011. That forecast has some downside risks, however, including the rising gas prices. “If the price of gas gets up to $3.50 or $4.00 a gallon, that may put a wet blanket on the forecast for North American auto sales,” he says. The persistently high unemployment rate and continuing concerns over job security may also have a chilling effect on new-car purchases.
Tollers keep tabs on prices
Even if they don’t purchase steel themselves, toll processors keep a close eye on steel prices. The pricing trends are directly relevant to customers’ buying decisions and serve as a predictor of toll business to come.
A series of price hikes by major mills has raised the price of hot-band by nearly 50 percent since October, to over $800 per ton, prompting a flurry of buying activity by customers hoping to beat the next increase. The marketplace is now holding its collective breath to see if the prices stick or begin to recede for lack of enough real demand to sustain them.
“Steel buyers will really look to see where pricing is going and, ultimately, that will directly affect the volumes we see in our business,” Adamski says. “As we head into the summer months, demand will either start to catch up with prices or perhaps we’ll see a downward turn. The second quarter will really dictate what’s going to happen for the rest of the year.”
Another reliable indicator of improving business is a pickup in orders from tubular products makers, says John Grossheim, national processing manager for Heidtman Steel Products, Butler, Ind., and sister company Fulton County Processing, Delta, Ohio. “Tubers are usually our first sign that the markets are changing. We can’t keep enough stock on hand right now,” he says.
Not far behind are customers in the oil and gas and industrial racking sectors, which have all seen a big upturn in recent months. High commodity prices also are boosting sales to the agricultural markets, including farm equipment, trucks, irrigation systems, and the like.
Like other processors, Heidtman saw 30 to 40 percent gains in 2010, with activity particularly strong near the end of the year. Fulton County and several Heidtman facilities have been running seven days a week since November, Grossheim says.
“It picked up with a vengeance in November and December from the mills unleashing off their floor to customers trying to beat the price increases. We are full with inventory all over the place,” he says.
Steel demand has rebounded so rapidly it has caused a shortage of rail and trucking capacity. “Everything is logjammed. When you have that kind of a logjam all over the place, you know everyone is busy,” he says.
How long will the good times last? Impossible to tell, Grossheim says. “January [might have been] our best month ever. February and March will be strong. But I cannot forecast into April. It’s a crapshoot right now.” Customers are hesitant to invest in inventory for fear prices are poised to drop. “No one wants to get caught with expensive inventory like they did a few years ago,” he adds.
Meanwhile, toll processors have hired back most of the workers they were forced to lay off during the downturn as they have added shifts to keep up with their surging orders. Some are even contemplating strategic capital investments in new equipment. But with the market’s recovery still so fresh, and so fragile, toll executives wonder if such steps are premature.
“We are at the crossroads where you start making those choices,” Adamski says. “Requirements for production seem to be relatively steady. But looking out a couple of quarters will be the key to our decision making. The second quarter seems to be the big mystery for us now.”
“We’re so busy, it’s tough to keep up right now. But I wish I had a crystal ball to see the second quarter,” Grossheim says. “If the mills don’t quit raising their prices, they could put the brakes on everything.”
OPC Teams with FMA
The Outside Processors Council, which represents toll processors throughout North America, is in the process of merging with the Fabricators & Manufacturers Association, based in Rockford, Ill. Brian Habermel, OPC chairman, will head the organization for a second term as it makes the transition to FMA.
OPC has contracted with FMA for administrative services for some time, but will seek further management support as part of the larger trade group, Habermel says. FMA’s Toll Processing Council will continue to organize the association’s annual toll processing conference.
Like many trade groups, OPC has seen its membership dwindle due to industry consolidation and the poor economy. It now represents about 40 companies, down from a peak of 70, Habermel says. With the additional support from FMA, the group hopes to expand its recruitment efforts, as well as networking and educational opportunities.
“Standing alone probably is not the best strategy for the Outside Processors Council, the way the market is going,” he says.