Despite one recent notable exception,
domestic steelmakers haven't given much reason for industry to
expect they're looking to move into the service center
business. Still, it's a topic that just won't go away, and few
mill executives are willing to shut the door on a strategy that
has proved more popular in Europe than in the United
"We're not taking a position on this," said
Keith Busse, chairman and chief executive officer of Fort
Wayne, Ind.-based Steel Dynamics Inc. (SDI). Busse, who is also
chairman of the American Iron and Steel Institute, noted that
"there are still some (service center) executives who will tell
you the European model isn't correct for North America." But he
doesn't believe they've made a clear case why it won't
When the topic of domestic mills owning
service centers comes up, the discussion invariably turns to
U.S. Steel Corp., Pittsburgh. In 2003, after losing more than
$100 million in less than two years, the company shut down its
Straightline Source division, a "technology enabled" operation
described as a "virtual" distribution unit that-despite U.S.
Steel's denials-a number of service centers viewed as
Several years before that, U.S. Steel sold
off its former U.S. Steel Supply distribution arm. Even today,
some service center veterans with long memories point to U.S.
Steel Supply as the best example of how a mill-owned service
center shouldn't be run, maintaining that in many cases it
operated not as a profit center but rather as a vehicle to move
the parent mill's output, disrupting the markets of independent
One of the most recent public comments on
U.S. Steel's view toward service center investments came during
an investors' telephone conference call in April last year,
when John Surma, chairman and chief executive officer, was
asked for his views on possible combinations of mills and
distributors. Surma replied that U.S. Steel didn't want to
stray far from its "core business," and there's been no
indication since then that he's changed his mind. Most
outsiders see U.S. Steel's expansion efforts focused on such
areas as tubular production, characterized by its $2.1-billion
acquisition of Lone Star Technologies Inc., Dallas, in
One example of service center ownership
outside the steel industry shows why it still holds some
appeal. Pittsburgh-based titanium producer RTI International
Metals Inc. brought its distribution in-house several years ago
and hasn't looked back. Today it has six distribution locations
in North America and two in Europe.
"It's part of our strategy," said Michael C.
Wellham, RTI's president and chief operating officer. "It gets
us closer to the customers and helps us diversify our business
Moreover, the service centers also "support
the growth" in RTI's mill product business, Wellham said, not
only by adding value to the output of its own plants but also
with products that it doesn't produce, such as nickel-based and
corrosion-resistant alloys, specialty stainless and alloy
steels for oil and gas and aerospace markets. Today, 65 to 70
percent of the products shipped from RTI's distribution centers
have some measure of value added to them compared with about 35
percent five years ago, he estimated.
However, one steel producer with domestic
operations that has actually moved into the service center
business recently is OAO Severstal, Cherepovets, Russia, which
in August completed its $1.25-billion takeover of Esmark Inc.,
acquiring the former Esmark Steel Services Inc. operations and
rechristening them as Northern Steel Group Inc. (AMM,
Aug. 6). The company runs its U.S. operations out of Dearborn,
Mich., under its Severstal North America Inc. division.
Despite speculation that Esmark's former
owners wanted to buy back the service centers, Severstal
insisted shortly after the acquisition was completed that it
wasn't looking to flip its newly acquired centers.
"We're trying to figure out our strategy;
we're new to this business," a Severstal spokesman said about
distribution, noting that the service centers' role in the
company's overall corporate structure "is to be identified."
Severstal is "excited about that business (service centers)"
and had made no decision to divest them. "No, not at all," the
spokesman reiterated when asked whether the company is seeking
a quick sell-off of the centers. "We bought (the Esmark
centers) to run them."
For his part, James Bouchard, former chairman
and chief executive officer of Esmark, told AMM that
he was retired and wasn't looking to buy back the service
Severstal aside, and despite domestic mills'
apparent disinterest today in making big service center
investments, it's unlikely the matter is closed.
Busse expects that sometime in the
future certain producers are likely to think more seriously
about a role in distribution as a way to ensure their place in
the supply chain. "People will probably dip their toes in the
water and test that arena again," he said.