Metal Wholesaling: A Fast Growing Industry
By IBISWorld Lead Analyst Brian Bueno
As seen in the ABA Journal
The Metal Wholesaling industry is one of the largest industries in the United States. Metal wholesalers and service centers supply metal products to almost every manufacturing and construction market. And so none of its downstream industries escaped the recession unscathed, with construction taking the biggest hit. Since 2007, metal wholesaling revenue has declined at an average annual rate of 2.1%. Nevertheless, in 2010 and 2011, the manufacturing sector recovered strongly from the downturn, though residential and commercial construction projects experienced ongoing weaknesses. Demand for metal products has continued increasing over 2012, with estimated revenue growth of 6.3%. Revenue is expected to total $204.2 billion in 2012, having gained about $45.4 billion since 2009.
In combination with supply trends, demand from downstream industries and international markets guide the price of metals sold by the Metal Wholesaling industry. Steel products account for a majority of industry revenue; therefore, the price of steel determines the fortunes of many industry players. Steel prices rose dramatically through 2008, declined sharply in 2009 and rebounded in 2010 and 2011 alongside rising consumer spending and automobile purchases. In 2012, the prices of steel and other metal commodities have continued increasing on the back of strong and growing international consumption of metal-based products, particularly in growth economies such as China. Over the five years to 2012, the price of steel is estimated to increase at an average annual rate of 3.6%. This year, rising demand and prices have benefited industry profit, because wholesalers have been better able to pass down inventory costs.
Industry risk methodology
IBISWorld uses industry drivers and revenue projections to compile risk scores, which reflect the level of operational difficulty that a company encounters within its industry. Risk scores also include the industry’s life cycle. Low-risk (i.e. safe) industries are characterized as being in the growth stage of their life cycle, since they typically face low competition and have high barriers to entry. Overall risk in the Metal Wholesaling industry is forecast to be low over 2012, with a level of 3.4 on a nine-point scale.
Despite its low risk level, the Metal Wholesaling industry is in the mature life cycle phase. Over the 10 years to 2017, industry value added, or its contribution to the overall economy, is expected to grow at rate of 1.3% per year. This figure represents slightly slower growth than that of US GDP, which is projected to grow at an annualized rate of 2.1% over the same period. The industry is slowly losing its share of the US economy, but remains a key supplier of metal for a variety of industrial and construction markets. Soft demand has increased competition and forced many operators to merge and consolidate operations or to exit the industry completely. The limited prospects for organic growth have led stronger players to pursue growth through acquisitions. As such, the number of firms has steadily declined for more than a decade and will continue to do so over the next five years. The range of products and processing services offered by metal wholesalers has changed little in the past five years. They are not expected to change drastically in the coming years either, with downstream markets demanding these products from this industry for the foreseeable future.
High level of competition
The Metal Wholesaling industry is highly competitive. Metal wholesaling firms compete with each other as well as large manufacturers with internal distribution divisions. Firms compete on price, turnaround time, processing capabilities, quality and availability of products. Competition is generally based on a firm's geographic region, with most customers located within a 200-mile radius of the wholesaler servicing them to minimize turnaround time.
Price competition within the industry is predominantly determined by the cost of metal supplies. Firms able to obtain supply contracts at favorable rates can undercut competitors on the basis of selling price. To obtain cheaper inventory supply, many firms purchase from foreign metal producers. These firms can benefit from favorable exchange rates or other economic or regulatory factors that may result in a competitive advantage. This competitive advantage may be offset somewhat, however, by higher transportation costs and less dependable delivery times associated with importing metals into North America.
The industry also competes with primary metal producers (e.g. mills), which typically sell to very large customers that require regular shipments and large volumes. Many industry customers prefer to deal exclusively with wholesaler and service centers, though, because the quantities of metal products that they purchase are smaller than the minimum orders specified by mills or because they require intermittent deliveries or fast turnaround.
Moderate barriers to entry
Barriers to entry into the Metal Wholesaling industry vary depending on the service a new firm is planning to offer. Overall, barriers to entry are moderate, but the industry has historically lacked appeal because of its low profit margins.
For general line service centers that primarily focus on distribution rather than processing, barriers to entry are relatively low. This nature eliminates the need for investment in expensive processing equipment. These firms operate on low margins, though, meaning high sales volumes are advantageous—if not necessary. So a moderate level of capital investment in stock is required to enter the industry as a general line service center.
Firms that focus on adding value through processing tend to face higher barriers in terms of capital investment requirements and technical knowledge. The premise of these establishments' existence is the fact that the specialized equipment required for metals processing is only cost effective if high volumes are produced. Therefore, the scale required to compete necessitates large capital outlays for the purchase of equipment and construction of large-scale facilities, creating a significant deterrent to entry.
Wholesale bypass immunity
The industry is a key supplier of metal for a variety of industrial and construction markets. This industry is less susceptible to wholesale bypass than many other wholesaling industries due to its niche position in metals processing. Metal producers generally prefer to outsource the distribution function because production is centralized at mills while distribution and processing needs to be located close to customer markets. Metal wholesalers' primary customers are generally unable to purchase metal directly from the production mills due to either their small order sizes or abnormal delivery requirements. Purchasing from a wholesaler allows customers to have large inventories of metals readily available while only paying for the materials they need when they need them. This convention reduces or eliminates the need for end users to tie up capital in materials storage, preprocessing equipment, processing personnel and transportation.
Additionally, these processing services reduce customers' overall manufacturing costs. Specialized equipment used to process the metals requires high-volume production to be cost effective. Many manufacturers are not able or willing to invest in the necessary technology, equipment and inventory to process the metals for their own manufacturing operations. Metal wholesalers and service centers purchase, process and deliver metals to end users in a more efficient and cost-effective manner than the end user could achieve by dealing directly with the primary producer. Service centers comprise the largest single customer group for North American mills, buying and reselling almost 50 percent of all the carbon, alloy, stainless and specialty steels, aluminum, copper, brass, bronze and superalloys produced in the United States.
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