Supplier Consolidation Can Create Major Problems

The consolidation that has been under way in the steel bar industry isn’t necessarily going to build a healthier supplier base, according to one industry insider. And it doesn’t appear that the drivers of this consolidation are as concerned about the precision machined products industry as they are about their largest market—automotive, says an analyst who follows the industry.

“When you eliminate diversity, the industry isn’t healthy,” says the industry source, who spoke on the condition of anonymity. “You’re stuck with what works in the current economic environment. The question is, ‘what’s going to happen when market conditions change?’ And if you don’t like electric furnace, billet-cast products, where are you going to go?”

Charles Bradford, a New York-based analyst who has followed the industry for more than 20 years, sees the steel bar industry concerned with only one market—automotive. That market takes a large portion of the special bar quality produced each year. That, Mr. Bradford says, is scary, especially if the automotive demand declines, as it is projected to do this year. Such a decline could also lead to less demand from the precision machined products suppliers. And that would weaken the bar industry even more.Lower Demand Is Hiding Supply Shortages.

During the last 5 years, a number of producers of cold-finished carbon bars have gone by the wayside, either through consolidation, shutdowns or bankruptcy. While executives of many of these companies have talked about transforming excess, antiquated capacity into a lean, technologically advanced industry, the industry source isn’t so sure that’s happening. In fact, he says the constraints on capacity are being masked by lower demand levels.

“There have been a number of plant shutdowns,” says the source. “In the case of one big industry player, they’ve gone from 12 cold-finished plants to three, and they’re not doing a lot of cold-finished bar. They’re mostly acting as a processing operation for their hot-rolled division to produce automotive orders.”

The source was referring to Republic Technologies, which, during the course of the last 15 years, has seen a number of transformations. Republic initially was a division of LTV Steel, but it was sold to employees as a way to pay down debt in LTV’s first Chapter 11 bankruptcy.

In the 1990s, Republic was merged into Bar Technologies. The Lorain, Ohio, operations of USS/Kobe Steel were soon added to the Republic mix, giving it plants throughout the country for both hot-rolled and cold-finished bars. Today, Republic has three hot-rolled facilities and three cold-finishing operations, all located in the Great Lakes region.

Republic is an example of what happened overall in the cold-finished bar segment. About 20 cold-finished plants that were in existence in the late 1980s are no longer producing. The result has been fewer choices for the consumer, tighter supply and a move by some purchasing people to look abroad for qualified sources of cold-finished bar.

The “independent” producers of cold-finishing bar with no hot-rolled facilities—companies such as Niagara LaSalle, Baron Drawn Steel and Fort Howard Steel—are able to handle the orders coming in, says the industry source, because demand isn’t what it used to be. “Right now, nobody’s being pressed and the small shops can handle it. But what happens when demand goes back up?” he asks.It’s Not Easy To Start Up Again.

Indeed, Mr. Bradford says that even though there have been moves by investors and former steel industry executives to resurrect shuttered facilities, “it’s not an easy market to get back into. It takes a lot of metallurgical talent, plus a lot of time and money to get approved and get back off the ground.”

It’s true that supply is probably the most critical issue that procurement people are going to face in the coming years, and it will drive prices, according to the industry source. He also contends that when a precision machined products producer cannot get a specific grade, he or she is going to have to specify an alternative. The problem will come when, because of the consolidation and the elimination of product specialists, no one at the supplier will be able to offer specific alternative grades.

The result, the source says, is the precision machined products world will be split into two different buying camps. “There will be the guys who are going to be large buyers and will fill up their pipeline and keep supplies coming, and then there will be the smaller guys scrambling to find something to use.”

The industry analyst, Mr. Bradford, says that as consumers look to their suppliers, while price is a consideration, viability probably will play a much bigger role in vendor choices. “You want a guy who’s going to be there for a while,” he sums up.

— Precision Machined Products Association