Big steel sees profits in small processors

Two of the largest steel companies in the United States recently fought over a small Georgia steel firm that has something special in this troubled business. It has profits -- and a direct line to crucial steel markets.

Bethlehem Steel and Inland Steel, with combined sales last year of almost $9 billion, engaged in a takeover battle for Tull Industries Inc., a Georgia company with 1984 sales of less than $200 million. Bethlehem won, at a cost of $97.5 million.

The episode dramatically underscores the growing interest of big steel in one area of the steel business that is profitable: Tull is a service center, one of a score of companies across the country that process and distribute steel and other metals.

Unlike the big steelmakers, which use coke batteries, blast furnaces, and other equipment to melt steel and then roll it into semifinished products, distributors buy it as it comes off the rolling line, cut it, and store it in sizes and quantities sought by customers.

Although metal distribution is small by big-steel standards -- the top four companies had sales last year only half of Bethlehem's $5.5 billion -- they have been profitable at a time when steel producers have been floundering in red ink.

Their profitability is mainly the result of manufacturers' concern with the cost of holding inventory.

If a service center can stock the right metal, cut to order, why should the appliancemaker or stamping plant tie up expensive capital?

Kasle Steel Corporation, for example, has become involved in General Motors' ``Buick City'' project. Kasle's plant has been set up to deliver material on an as-needed basis as part of GM's effort to reduce inventory.

Some service centers have broadened their services by investing heavily in expensive equipment that finely slits steel for computer manufacturers or stamps parts for automakers.

Others, like Anixter Brothers Inc., in Skokie, Ill., which started out in the 1950s as a wire and cable distributor, is selling its software and skills in inventory management and is well on its way to becoming a billion-dollar-a-year company.

No matter what their niche, their role as middlemen between the steel mill and the consumer is mushrooming. Their share of the most common grade of steel shipped by American mills, carbon, has grown from an average of around 20 percent in the 1970s to almost 30 percent last year.

That figure does not include a tremendous influx of foreign steel, much of which passes through distributors' warehouses.

With growing market share come healthy profits. All of the major distributors -- Joseph T. Ryerson & Son Inc., Edgcomb Metals, Central Steel & Wire -- have enjoyed healthy earnings over the past few years.

To steel producers laden with tax credits available from several years of losses, this is a boon to their bottom lines.

Peter Marcus, first vice-president of PaineWebber Inc., flatly states: ``Service centers are profitable and steel companies have huge tax losses.'' Bethlehem, the eager purchaser of Tull, lost $113 million last year.

The big steel mills are drawn to the service centers for another reason.

In an increasingly cutthroat market, with American and foreign companies dropping prices way below previously comfortable ``book'' values, a built-in distribution network is a good way to improve sales.

Bethlehem implicitly acknowledged this when its chairman, Donald H. Trautlein, said after buying Tull: ``We are moving to make our entire corporation market driven.''

Finally, labor costs in nonunion service centers are lower than in mills. Any preparation of steel coils for customers that is now performed by mills could be done much more cheaply by the service centers.

A number of mills already own their own distributors.

Ryerson, the country's largest, is a subsidiary of Inland; United States Steel Corporation owns US Steel Supply.

Armco Inc., a large and financially troubled steelmaker, announced several weeks ago it will build a processing center near Dayton, Ohio, with the Japanese trading company C. Itoh & Co.

This is Armco's first move into the processing end of the steel business.

Whether these far-flung networks will significantly improve the mills' earnings is not yet clear. Certainly, Ryerson's 1984 operating profit of $45 million narrowed the $42 million loss of its parent, Inland.

But the domestic steel producers are fighting an uphill battle against structural changes -- low labor costs and advanced technology overseas, among others -- that are perhaps too deep to be dealt with so quickly.

And service centers are threatened by their own problems. A glut of steel and a multitude of service centers have kept prices low and margins slim.

One of the centers' main drawing cards -- their ability to hold inventory -- is being mercilessly used by manufacturers eager to pass their costs elsewhere along the supply chain.

Andrew Sharkey, president of the Steel Service Center Institute, the industry's principal organization, cautioned that the big steel companies that acquire their smaller cousins will have to learn how to manage them.

``Their success depends on how well they can manage growth and flexibility,'' he said, which are the hallmarks of the successful distributor.

Despite potential problems, interest in service centers by the mills, including some Japanese companies, continues unabated. These centers are one of the few growth areas in a steel industry beset by high unemployment, financial losses, overseas competition, and a decrease in demand for their products.

Mr. Trautlein at Bethlehem told reporters after the annual meeting in April, ``We wouldn't expect to just own Tull. We expect to expand that network.''

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