While domestic mills seek trade relief from "unfair" imports, domestic users of wire rod products fear a potential shortage of supply.

By Myra Pinkham,
Contributing Editor

In a time when most other steelmakers are doing quite well, North American producers of carbon and alloy steel wire rod have continued to struggle. The problem, mill executives say, is not so much the underlying demand, but the burgeoning import penetration that has limited their ability to raise prices to cover increased operational costs.

“Wire rod has been the most dysfunctional sector in the steel industry,” says Christopher Plummer, managing director of Metal Strategies Inc., West Chester, Pa. “It has been one of the most fragmented of the steel sectors, and there has been a lot of distress.”

Domestic producers are hopeful that recent trade action against three major wire rod importing countries will allow them to recover some profitability. But some of their customers question this move, maintaining that it could decimate the North American wire and wire products industry, which is itself fighting tooth and nail against imported product.

“It is hard to get a clear picture of demand for wire rod because there have been a number of disruptions as far as supply,” says Philip Casey, president and chief executive officer of Gerdau Ameristeel, Tampa, Fla. For one, Gerdau’s Beaumont, Texas, rod mill, which it acquired last year from North Star Steel, has been shut down since May 26 due to a labor lockout.

In addition, a lengthy strike at Heico Cos. LLC’s L’Orignal, Ontario, wire rod and steel billet mill (formerly owned by Ivaco Rolling Mills), has taken an estimated 100,000 tons a month (or about 1.2 million tons a year) of wire rod production out of the market. The Heico mill hasn’t totally ceased production, but reportedly is meeting some of its customer requirements by tolling through other rod mills.

The situation is further muddied by what seems to have been a strong inventory buildup at both service centers and wire drawers. “Because of the shortages in 2004, people overcompensated and overbought product, which resulted in large inventories once demand for wire products went down,” says Robert A. Simon, vice president and general manager of Rocky Mountain Steel Mills, Pueblo, Colo. According to another domestic wire rod producer, the inventory buildup started last October. While stocks have been worked down some, “a lot of people still have high inventories of both wire rod and finished goods, especially in the construction sector. Some companies have been living off their inventories and could continue to do so through January without buying anything,” he says.

It is difficult to get a handle on just how much inventory remains in the supply chain, says Plummer. While perhaps one-third of wire rod is handled by distribution, much is sold on consignment (meaning that the mills retain ownership of the product until the service center sells it). This leads to more problems with inventory management. “Wire rod has been just as impacted by inventory corrections as other forms of steel, maybe more,” Plummer says.

This significant inventory buildup explains why both industry shipments and apparent consumption have been down this year, experts say, even though end-use demand has remained relatively firm. Plummer estimates that domestic shipments will decline 27 percent in 2005, with apparent consumption down about 31 percent. Meanwhile, says David Phelps, president of the Washington-based American Institute for International Steel, demand actually has been quite strong for wire rod end uses, which are quite expansive. They include wire mesh for construction applications, various types of wire for automotive, tire cord and tire beads, springs, coat hangers, wire rope, wire strands, appliance racks, fencing nails, shopping carts, steel wool, fasteners, screws and bolts.

Phelps notes that demand for all of these products remains high given the stronger-than-expected third-quarter GDP growth. Next year appears particularly promising for construction applications when reconstruction of the Gulf region begins in earnest.

One weaker sector, Plummer says, is automotive, where builds through August were down about 3 percent from a year earlier. Automotive steel consumption overall is down about double that percentage, as there has been a larger decline in production of light trucks, which use considerably more steel than passenger cars.

All construction sectors had shown modest growth through August, Plummer adds: public works, up 0.7 percent; nonresidential, up 2.4 percent; and housing, up 6.5 percent. Fixed industrial capital equipment demand was up 5 to 7 percent.

Looking forward, Plummer expects a modest improvement in automotive demand in 2006. Construction will be mixed, with public works and nonresidential improving a bit, while homebuilding will dip modestly. Industrial capital equipment should gain another 5 to 7 percent.

Certain sectors of wire rod are showing stronger demand than others, experts note. For example, one executive at Kreher Steel Co. LLC, Melrose Park, Ill., notes that demand for cold heading quality wire rod remains fairly strong, though that strength is “tentative,” given the uncertainty in the automotive market. Demand for industrial quality wire rod is lagging.

Simon says that while Rocky Mountain Steel customers are starting to work down their inventories, he hasn’t seen demand pick up yet. “We had hoped that we would see some improvement by now, but we haven’t seen it at all,” he says.

Simon and other domestic wire rod producers say the combination of lackluster demand and burgeoning imports, which have captured 55 to 65 percent of the domestic market, have caused serious problems for the domestic industry. Even with all the capacity that has been at least temporarily removed from the market in recent months, domestic mills continue to run at only about 75 percent of capacity.

Simon says Rocky Mountain Steel has tried to increase production, but “China has built too much wire rod capacity, and it is easy to dump that capacity into the United States.” According to Plummer, China has recently commissioned over 20 million tons of wire rod capacity.

Wire rod producers also have been losing a certain portion of their customer base, Casey observes. “A lot of end-use applications, such as nails, coat hangers and barbed wire, are now manufactured in China and elsewhere in the Third World, then imported into the United States. Our customer base is under additional stress to compete with low-priced imports, just as we are. The whole food chain is under duress.”

Because of this duress, and continued pressure on pricing even after 100,000 tons a month of production was taken out of the market, domestic producers have filed a trade case seeking relief.

Gerdau Ameristeel, Rocky Mountain Steel Mills, Connecticut Steel Corp., Keystone Consolidated Industries Inc. and Mittal Steel USA filed the trade action Nov. 10 charging that three major importing countries—China, Germany and Turkey—have dumped imports of wire rod products causing material injury to the domestic industry. The petitioners allege antidumping margins of 330 percent for China, 42 to 85 percent for Germany, and 31 to 78 percent for Turkey.

“Imports from these three countries doubled during the last three years and it has hurt the domestic industry,” says Paul Rosenthal, lead trade counsel with the Washington-based law firm Collier Shannon Scott PLLC, which represents the coalition of carbon and alloy steel wire rod producers. “Last year when much of the steel industry was doing well, wire rod producers didn’t do as well as they could have. Now with the market down, the pain is even more obvious. Except for the imports, they would be doing better,” he maintains.

According to Plummer, wire rod prices did improve from $360 a ton in January 2004 to a peak of $597 a ton in October 2004. But then the price fell to $469 a ton in August of this year, recovering only modestly to around $492 a ton in October.

China, Turkey and Germany accounted for 1.8 million tons of imports in 2004 compared with 958,000 tons in 2002. They have similarly captured an increasing share of the U.S. market, reaching 28 percent in the first half of this year, compared with a 23 percent share in 2004 and a 12 percent share in 2002, Rosenthal says.

A preliminary injury determination by the International Trade Commission is expected sometime before Dec. 27, followed by the preliminary finding of the U.S. Commerce Department by April 2006.

Rosenthal is optimistic the trade action will be successful, pointing to a similar unfair trade petition filed in 2001 against Brazil, Canada, Indonesia, Mexico, Moldova, Trinidad and Tobago, and Ukraine that raised both prices and volume for domestic producers in 2002.

If the suit is successful, Casey agrees, it should result in a more stable and disciplined market. “We wouldn’t go to this expense and effort if it wasn’t important for the health of this industry,” he says.

He emphasizes that Gerdau and other wire rod producers aren’t just relying on the trade laws to solve their woes, but are constantly assessing their cost structure, labor efficiencies and capital investments. He admits there is need for additional consolidation of the industry, though he is doubtful much will occur through mergers and acquisitions. “With no one making much money with their current assets, they are not inclined to buy additional capacity.”

Rationalization of capacity is more likely, he says, especially if trade cases are not successful. “We are being constantly hit with high scrap, energy and alloy prices and cannot recover these costs in our selling price because of cheap imports. We can’t keep on manufacturing at a loss. If the trade cases aren’t successful, some capacity could be shuttered. We can’t continue running a money-losing operation.”

Not everyone agrees that filing trade cases is the answer. Kimberley Korbel, executive director of the American Wire Producers Association, Alexandria, Va., was particularly vocal in her opposition of this move.

“I don’t think that imports have hurt the wire rod industry. They have lost capacity steadily in the last number of years (one of the more recent companies to exit this business was Stelco Inc., which closed its rod mill last fall) and they need imports to meet customer demand. If they try to prevent imports from coming in, there is no way they will be able to meet the needs of wire producers,” she said.

Wire drawers’ options are already limited with past trade case victories, Korbel adds, including the 2001 case. “These three countries (China, Germany and Turkey) are major suppliers. If they stop importing, then we would have to find other suppliers. We are running out of places to go.”

She maintains that China largely produces the low-cost, low-carbon product that many domestic producers shy away from due to its low margin. “They would prefer to make higher margin products, so we need to go offshore to get this product, primarily to China and Turkey,” she says.

“At this moment, we are having no issues with availability,” she adds, “but it is our experience that shortly after trade cases are filed—whether they are successful or not—imports from the countries involved stop.”

Phelps called this phenomena part of the “inherently protectionist” nature of U.S. trade laws. “Merely filing a trade case could disrupt the import market for about a year,” he says, raising the specter of shortages.

Domestic producers, however, argue there will be no shortage of wire rod, even in the low “commodity” end of the market, should the trade cases be successful. “Not when you have a domestic industry running at only 75 percent of capacity,” Simon says.

Korbel is also concerned about the trade case’s impact on wire drawers’ cost. “Our members have been adversely impacted with both wire and wire product imports skyrocketing, and now our cost will likely go up with these trade cases for our raw material. Wire rod accounts for 30 to 90 percent of our cost.

“If that increases, it could decimate the wire industry,” she asserts, adding, “The wire rod producers will have no customers left if they continue to file trade cases, as they have been doing since the early 1990s.”

Even if the trade action is successful for the domestic industry, Simon says, the future of the U.S. industrial quality wire rod market remains a question mark. “We’re fighting hard, but the outcome is still uncertain,” he says.

Prospects for higher-end wire rod products appear more positive, but a lot depends on demand for cold heading quality wire rod by the automotive industry, which is facing its own challenges. “There is a direct correlation between our business and automotive,” notes one executive.