Service Centers Cautiously Optimistic on Demand, Bullish on M&A

Demand Outlook

Supply chain issues and inflation remain areas of concern for many customers, but the service centers themselves say they seeing relatively steady backlogs from OEMs and industrial customers. The term “cautious optimism” continues to be used by several of the stockists’ executives—including Reliance’s and Ryerson’s—regarding demand trends.

“The outlook for North American manufacturing for the second half of 2022 remains cautiously optimistic,” said Ryerson COO Michael Burbach. “However, we expect headwinds of rising interest rates, continuation of supply chain issues as well as a slowing in demand. Our discussions with customers led us to believe that supply chain issues such as component shortages and tight labor continue. And while some backlogs remain healthy, there is evidence of customer destocking, moderating quoting activity, and smaller size spot transactional purchases.”

Olympic Steel, meanwhile, was not quite as cautious with its outlook. President and COO Andrew Greiff said his company remains “optimistic about the underlying demand,” noting no “significant pullbacks in any market.” Infrastructure funds should begin to flow more freely late this year and early next, “which could bolster future demand,” he said.

Reliance is cautiously optimistic on non-residential construction demand, including infrastructure, which is the largest end market the company serves. Demand in the sector improved steadily in Q2, and the company thinks activity will remain steady going into Q3.

SMU’s Latest Market Survey

Service center executives surveyed by Steel Market Update are not quite as optimistic as executives on earnings conference calls.

SMU’s market survey last week revealed that 57% of surveyed service center executives reported that manufacturing customers are reducing their orders, and 43% said customers are maintaining their order flows. “For the first time in a long time, our tonnages are noticeably lower. I chalk that to smart buyers sitting on the sidelines and waiting to see a floor,” one executive noted. “Our backlog has not been this low since May 2020,” another said. Inventory reduction and slowing demand was noted by another executive.

When asked “How do you see your customers’ releases (demand) for the products your company provides this year compared to this time last year?” A large majority (72%) said customers are releasing less steel than one year ago. Approximately 24% said customers are releasing approximately the same amount as a year ago, and just 3% said customers are releasing more steel.

M&A Opportunities Abound

2021 and 2022 have been strong years for the steel industry. Service centers have posted record-breaking sales and earnings. Below is a snapshot of the sales and income figures for Reliance, Ryerson, and Olympic, showing the increasing figures for the companies for 2021 and the first half of 2022. Strong results mean strong cash flow, supporting the landscape for mergers and acquisitions moving forward.

“In terms of the M&A environment and consolidation, there’ll be more consolidation in our industry,” Ryerson president and CEO Edward Lehner said on the Q2 earnings call on Aug. 6. He explained that many owners of smaller companies that they speak to would like to do more business development rather than handle the back-office functions that can be handled at scale as part of a bigger organization. Additionally, many owners are just ready to retire.

Reliance Steel’s CEO Jim Hoffman commented on the company’s July 28 earnings call that, “The M&A pipeline remains robust,” with a “high volume of potential opportunities.”

Olympic Steel CEO Rick Marabito said on Aug. 5 that his company is still actively seeking additional acquisitions. Earlier this year on an SMU Community Chat, Marabito said the opportunities out there are the most they’ve seen since at least 2018 and that they are evaluating opportunities in carbon metals, pipe and tube, white metals, aluminum, and downstream operations.

The companies’ comments are in line with what SMU has reported in the past. In April 2021, investment banker Dan Sullivan, founder and managing director of Chicago-based Montrose Advisors LLC, told SMU there was pent-up demand to get businesses sold. And in an October 2021 exclusive interview with SMU, Marabito talked about Olympic’s move to expand beyond its traditional Midwestern carbon flat-rolled business.

Los Angeles-based Reliance has grown itself to be the largest service center chain in North America, having made more than 70 acquisitions since 1994 and now operating a network of more than 300 locations around the world. Its most recent acquisitions include Brooklyn, N.Y.-based Rotax Metals, Inc., Massachusetts-based Admiral Metals and Nu-Tech Precision Metals Inc. late in 2021, and tubular master distributor Merfish United in October 2021.

Ryerson most recently added to its portfolio of companies Ford Tool Steels in June 2022, FreeFORM Technologies in May 2022, Mississauga, Ontario-based Apogee Steel Fabrication Inc. in March 2022, and Stow, Ohio, toll processor Specialty Metals Processing in Sept. 2021. It is nearing the 100-mark on the number of its operating locations.

Olympic now operates more than 30 locations across North America. In October 2021, Olympic acquired the assets of Georgia-based Shaw Stainless & Alloy Inc., and in late 2020, it added Dallas-based Action Stainless & Alloys Inc. to its portfolio. In September 2021, it sold its Detroit-based flat-rolled metal operations to Venture steel Inc.

By Laura Miller, Laura@SteelMarketUpdate.com