Metals service center executives are as frustrated as buyers by the current metals marketplace. That's partly because of the tension that comes from the current spike in prices during a period of weak demand and partly because of their inability to implement assured supply and cost saving opportunities for their customers

In a recent Purchasing survey, managers of metals distribution companies say they must intensify inventory control programs; guard against speculative buying that would again boost supply beyond market needs, seek out marketing opportunities at home and abroad and work to earn sufficient profits to retain credit worthiness.

“We would like to communicate as much as possible about the metals' price increases so customers understand the dynamics of what is happening,” says Jeff Watson, sales vice president at Worthington Steel in Columbus, Ohio. Lately, that has become difficult though, since North American steel suppliers have announced five consecutive months of price increases through March to offset higher costs and nonferrous prices have remained at near-record highs because of global supply/demand concerns.

Executives such as James Barnett, CEO of Grand Steel Products in Farmington Hills, Mich., and Rob Loveman, vice president of Loveman Steel Corp. in Cleveland say they try to keep buyers informed about steel-market business conditions, scrap and energy costs, mill production outages, mill-delivery leadtimes and other factors that impact steel prices. In that way, they can work with buyers to develop supply strategies that benefit the end users and their distributor suppliers.

However, in 2008, “the issues facing the distribution industry are much more daunting” than they've been in previous years when prices were increased, frets David Bazzy, president of Kenwal Steel Corp. in Dearborn, Mich. Scott Fishkind, CEO of Standard Tinsmith Supply in Brooklyn, N.Y. points out that's because “strategy and reality are two greatly different approaches,” noting that despite the buying and warehousing strategy the service center had planned, “reality appears to be dictating otherwise.” That's because the firm specializes in building products and such news as collapsed residential construction creates problems.

In fact, he says, “after assessing the last couple of years of price trends, interest rates and new and projected construction projects, we have found it crucial to make our purchasing department buy differently than had been planned.” Fishkind says that “prices have been fluctuating for the last several years, but now are in a steady, monthly increase while construction seems to be slowing down, reducing demand.” And all this has caused his purchasing personnel to become market analysts—reviewing inventory movement histories, flow charts on real estate transactions, and the economic structure and stability of the U.S. “The idea is to gather all the material we need, without over-purchasing or being caught short,” Fishkind says, “or to be stuck with metals that underwent vast price increases.”

And the marketplace price issues aren't just related to steel, says James Basta, sales vice president at aluminum service center company Erickson Metals Corp. based in Cheshire, Conn. “We will remain as flexible as we can in our total price presentation to our customers,” he says, “but they have to be made aware of the operating costs involved in producing a pound of aluminum—running the gamut from raw materials and energy to insurance and environmental-related expenses.”

Copper and brass products specialist Farmer's Copper in Galveston, Texas, is facing continued price increases from the mills “due to high energy, high health care, and increased insurance costs, as well as high red metal prices,” says Richard Farmer, co-president. “The distributors and our customers are faced with the same scenario; we all have to live with the price increases and try to make the best of it.”

All this is happening in a marketplace where manufacturing is buying fewer tons of metals. “Underlying consumption in the U.S. and Canada has weakened even more from the sluggish pace of the past year,” says Corrado De Gasperis, CEO of Novamerican Steel in Laplace, Quebec. That's evidenced by a 7% crash in service-center shipments to 57.4 million tons in 2007, the lowest annual tonnage since 56.4 million tons in 2003. At the same time, metalworking firms are operating in a recessionary environment caused by weak demand from automotive, housing, appliance and other key steel-using sectors.

“The key to any good relationship is communication,” agrees Ron Whitely, president of Ranger Steel in Houston. “By sharing accurate information with our customers in a timely fashion, we can both avoid being blindsided by the market and continue to move forward intelligently and profitably.”

The problem this year is that while the mills are boosting prices with regularity, they are providing buyers at service centers and original equipment manufacturing (OEM) firms with few specific details about higher cost or lower margin factors.

Also, there is growing disenchantment among OEM buyers about their reliance on service centers to protect their interests in the current turbulent market. “Unfortunately, service centers are caught between two masters: the mills and the end users,” says John Chirikas, CEO of Horizon Steel Co. in Shelby Township, Mich. “There is little we can do to absorb any additional cost in lieu of our already shrinking profit margins, although we completely understand and sympathize with our clientele with regards to the depressed economy. In most cases, we will pass along the increases only for material purchased at the higher numbers.” He also pledges to reduce market prices when the mill prices decline again.

In the meantime, “to maintain our competitive margins, mill price increases must be passed along to our customers,” says Donald McNeeley, president of Chicago Tube & Iron Co. in Romeoville, Ill. “Industry dynamics and cost volatility require distributors to price on a replacement-cost basis out of fairness to all stakeholders.” He also points out that buying also has become more difficult for service centers this year since “more astute inventory management” has become an essential.

“We will not overstock in 2007,” says Steve Sikes, president of Amsco Steel Co. in Fort Worth, Texas. He is concerned that any demand surge ahead “can come crashing down, as fast as it went up,” and doesn't want to see a repeat of 2005 and 2006 when it took months for the distribution industry to eliminate excess stocks. “Just because the mills have gone up in prices doesn't mean our customers are busy, or even need steel at any price.”

De Gasperis of Novamerican Steel suggests that “stronger demand and pricing in markets outside of North America, as well as the weaker U.S. currency, has kept most imports for our market subdued since mid-2007. The combination of low imports and low inventory levels tightened North American supply and, when combined with higher raw material costs for our suppliers, has resulted in higher prices from steel mills in early 2008.” Stephen Hooks, president of Castle Metals (A.M. Castle & Co.) in Franklin Park, Ill., which supplies all kinds of metals—from steel to superalloys, from brass to titanium—says he “expects pricing to remain at historically high levels due to strong global demand for raw materials.”

This is the kind of information that Industrial Metal Supply Co. is trying to explain to its customers, says Megan Humpal, marketing development manager for the San Diego-based service center. “It is our ongoing goal to try to keep our customers informed about price hikes from mills, why they are occurring, and encourage them to place orders before the increase.” That's also the goal of Fred Callahan, vice president of sales and marketing at Sabel Steel Service in Montgomery, Ala., who says the idea also is “to communicate timely announced increases so our customers can plan.” The company also tries “to buy ahead of increases to protect pricing for our core group of loyal customers.”

Timothy Doherty, sales vice president of Almetals in Wixom, Mich., argues that the firm's “primary focus is to educate our customers and to make them aware of all pricing trends that we see developing, as well as leadtimes from the producing mills. With this information, we can work together to align metal commitments most effectively with projected needs.”

“We will manage our inventory as carefully and as efficiently as possible while keeping clear and regular communications with our customers,” says Roy Berlin, CEO of Berlin Metals in Hammond, Ind. “As always, we will work to be our customers' best supplier.”