Experts see recent weakness in plate as only a temporary gap between the record year of 2004 and a promising 2006.

By Myra Pinkham,
Contributing Editor

While carbon plate mills have seen their order books soften recently—especially for commodity grades—experts say it is not due to weakening market fundamentals, but rather to inventory buildups at both service centers and original equipment manufacturers. In fact, mill executives are optimistic, in light of resurging end uses, that business will pick up again by the fourth quarter and continue strong into next year.

“Overall, plate demand remains healthy at the end-user level,” says Pat McFadden, sales manager of Nucor Corp.’s Hertford, N.C., facility.

John Tulloch, senior vice president for steel at Ipsco Inc., Lisle, Ill., agrees that the markets for plate continue to be steady or growing, including railcars, shipbuilding, barges and heavy equipment.

Railcar demand has not only been bolstered by increased rail shipments due to the strength of the U.S. economy, but because many railcars, particularly tank cars, were taken out of commission or scrapped during the economic downturn.

They now need to be replaced or retrofitted, says Shelby Pixley, director of plate sales for Mittal Steel USA, East Chicago, Ind., who estimates railcar demand should remain strong for the next three to five years. He notes that the next generation of tank cars will use more heat-treated plate.

Demands on the nation’s capacity to transport goods also have spurred ship and barge building. Most U.S. ports have banned single-hulled tankers, increasing the need for construction of safer double-hulled tankers. Less clear is how much funding Congress will approve for defense-related shipbuilding, he says.

Heavy equipment makers remain among the strongest consumers of steel plate. Mark Breckheimer, chief operating officer of Primary Steel Inc., Middletown, Conn., says sales of new construction equipment have been driven by both demand from export markets and by highway infrastructure work in the United States.

Seasonal construction activity remained strong even though Congress had not yet reauthorized the federal infrastructure-spending bill. The Transportation Equity Act for the 21st Century expired Sept. 3, 2003, but current project funding has been kept alive by a series of stopgap extensions. At press time, new legislation was in conference committee and expected to reach President Bush’s desk sometime this month. The new infrastructure bill was expected to include up to $291 billion for road and bridge construction, vs. $218 billion in the old bill, even though the president had threatened to veto spending over $284 billion.

“Mining equipment is also very strong with raw materials so much in demand,” Pixley says. Mittal’s sales to the military also remain brisk, especially with the well-publicized need to retrofit Humvees with plate to protect the troops. “We expect that to remain strong for the rest of the year at least,” he adds.

Sales of plate used to make energy-related pipe also look positive, given the recent high crude oil and natural gas prices bumping up rig counts. “We’re told by pipe producers that the fourth quarter of this year and the first half of 2006 will be very busy for pipe, particularly oil country tubular goods and line pipe,” Nucor’s McFadden says.

Scott Montross, vice president of sales and marketing for Oregon Steel Mills Inc., Portland, Ore., says it looks as if some long-awaited large-diameter line pipe projects are finally ready to break and pull that segment out of the doldrums. “Oil and gas transmission is like chasing ghosts,” he says. “You quote a lot of projects that haven’t been let yet, but this time it seems as if some are close.”

Should large projects, such as the proposed Alaskan pipeline, finally get off the ground, the plate market could tighten up considerably, Montross says. The Alaskan pipeline alone will use 2 million tons of plate. “I think it will eventually be built. You just have to look at the energy needs of emerging countries such as China and India. There is not enough oil to support those countries and U.S. demand now.”

Even with the pipeline projects already on the books, demand for large-diameter transmission pipe should reach 1.3 million tons in 2006 and 1.5 million tons in 2007, up from only about a half million tons this year. With predictions of even higher oil prices, Montross expects pipe demand to remain robust for at least the next several years.

Wind power towers represent an emerging and promising plate application. According to industry sources, demand for wind towers has been strong this year and should increase considerably next year—and not just on the West Coast where wind energy is popular, but in regions across the country taking a more environmental approach to power generation.

Oversupply a concern
Though demand for plate seems steady and likely to grow, some remain concerned about overcapacity and oversupply, especially in the commodity end of the market.

Since 1995, the number of carbon plate mills in North America has shrunk from 11 to five, contributing to the tightness in the market last year. Certain producers have added production capacity in the past year, though, most notably Mittal Steel, which restarted its 110-inch plate mill in Burns Harbor, Ind.

With Mittal and the other mills producing at full capacity, it became apparent by early second quarter that last year’s short supply situation and allocations had given way to oversupply of commodity grades and lead times as short as three to four weeks, according to various sources.

The story is different for heat-treated plate, where July lead times extended well into the fourth quarter, and lead times for quench and tempered plate were out to the end of the year. There is no relief in sight, observers say, until Ipsco opens its new heat-treated plate facility in Mobile, Ala., in late 2005 or early 2006.

Some mills still report weakness in commodity plate orders, pointing at inventory overhang, especially at the service center level. One mill executive explains that due to the tight supply last year, service centers ratcheted up their buying levels to make sure they had enough plate on hand to meet customers’ needs, causing some false demand. Then, early this year when availability began to loosen up, service centers continued to buy at 2004 levels while shipping at more moderate 2005 levels. “It took a while for them to adjust.”

Jim Hudson, president of Grammer, Dempsey & Hudson Inc., Newark, N.J., says that service centers are paring back their inventories. “Stocking distributors are just buying what they need or are in the mode of inventory reduction. If they perceive that business is going down, they don’t want to have high-priced inventories on hand.”

“We are definitely buying less than we used to,” says Lourenco Goncalves, president and chief executive officer of Metals USA Inc., Houston. “Access to plate is easier than it was before. We don’t need to carry a lot of inventory.”

Supply has been further loosened by an increase in imports, though Montross does not consider it a surge. “Imports are definitely up from 2004 (about 20 to 30 percent), but last year they were exceptionally low,” he says. With the dollar strengthening slightly and China not consuming as much of the world’s steel, mills in many countries are looking to sell their extra capacity in the United States.

“The United States is the strongest market for plate,” says John A. Campo, vice president of sales and marketing for Jindal United States Steel Corp., Bay Town, Texas. So far, imports have not pressured domestic prices to a great degree, he says, selling for about $650 to $700 a ton vs. a domestic price of $675 to $700.

Imports have already started to moderate, Montross adds. “A lot of distribution customers are nervous about buying imports in case the domestic price drops while [foreign product is] on the way to them.”

“We try to stick with domestic mills as much as we can,” Goncalves concurs. “Right now there is no point in bringing in imports, as we are having no trouble getting plate from domestic mills. A pricing war would have no winners, just losers.”

Plate prices have held up well, especially compared with other steel products such as hot-rolled sheet. Transaction prices generally have only declined along with scrap surcharges, which most producers had reduced to zero by July. Mills attempted to keep transaction prices steady by raising base prices, observers say, but the increase did not hold.

Plate base prices reportedly have declined only about 5 percent—which is a claim that flat-rolled coil cannot make. Transaction prices for flat-roll have fallen to the mid-$400s while plate has remained in the $700s, Montross says, which is a far wider differential than normal. This could add to the downward pressure on plate prices, especially if the price of hot-roll continues to decline.
Not everyone is fearful about plate pricing,
however.

“I don’t expect that plate will follow the flat-rolled coil price,” says Ipsco’s Tulloch. “I think prices will stabilize. Plate has held up more than flat-roll, and I think that should continue.”

Bert Tenenbaum, president of Chatham Steel Corp., Savannah, Ga., is not so confident. He sees prices dropping and squeezing service center margins, which will make management of plate inventories more critical. “As long as we are convinced that demand is there, we aren’t going to run our inventories to the ground. I don’t think plate is weak as far as industrial demand, it’s just that there is more availability and capacity.” Plate mills should follow the lead of sheet mills and take some capacity out of the market, he adds.

Oregon Steel and certain other mills have been doing just that, Montross says. “We feel we are doing the right thing. We can be very profitable by running less. Unfortunately this is an idea that some of our brethren are not following.”

Many are optimistic that plate order books will fill up again once service centers get their inventories in line, hopefully by the fourth quarter. “This has just been a little bump in the highway,” says Paul Labriola, president and chief executive officer of Robinson Steel Co. Inc., East Chicago, Ind. “We might not be at the beginning of the cycle, but we are not at the end either.”

“I think 2005 will be a good year. The fundamentals are still strong. The only questions are how fast service centers will go through their inventories and what happens with imports,” adds Mittal’s Pixley.

“If it weren’t for 2004, everyone would be jumping up and down,” maintains Montross. “2005 is still one of the best years we’ve had, it is just that 2004 was off the charts. And if large-diameter pipe goes the way that people think, 2006 will be a pretty good year, too.”