Forecasts for construction and automotive hold promise for strong sales of galvanized and Galvanneal products in 2005, but the supply-demand balance is cause for concern.

By Corinna C. Petry,
Managing Editor

Although hot-dip galvanized steels proved popular last year, some observers question plans to build new domestic capacity in a market that has more than enough, especially counting imports.

The American Iron and Steel Institute reports that U.S. mill shipments of hot-dip galvanized sheet and strip totaled 15,236,282 tons in 2003. From January through October 2004, AISI reported shipments of 13,900,196 tons, which represented a 6.1 percent increase over the first 10 months of 2003.

Some experts estimate that U.S. hot-dip galvanizing capacity exceeds 20 million tons, and that imports may account for up to 30 percent of domestic consumption.

Although hot-dip galvanized sheet products have a wide range of applications, the two dominant end users are the automotive and construction industries. Market participants cite several concerns for the balance of 2005.

New capacity
International Steel Group, now Mittal Steel, announced last August that it would add a 500,000-ton automotive-quality hot-dip galvanizing line by converting an idled continuous anneal line at its Cleveland Works, for about $40 million. Startup is expected during the fourth quarter of 2005.

Although ISG declined to comment on the galvanized market for this story, during the company’s third-quarter conference call President and CEO Rodney B. Mott said the objective of this project is to enhance business with automotive suppliers.

ISG has become more focused on each coating line, Mott said. “Our Columbus Coatings line is now totally committed to the Galvanneal product that is in so much demand by automotive. In turn, the Burns Harbor hot-dip galvanized line is now focused specifically on hot-dip, no longer making the changeover to Galvanneal. This has enhanced the operation of each facility and provides higher quality product to the marketplace.” (Galvanneal is a hot-dip coated product in which the galvanized zinc coating is changed into a zinc-iron alloy for improved paintability.)

Automotive quality hot-dip galvanized sheet from Cleveland Works will be developed for use in 2006 model year vehicles, Mott said.

Last April, Dofasco Inc. announced it would build a galvanizing line in the Southern United States, in a joint venture with Arcelor of France. Dofasco spokesman Jay Robb says Arcelor has since decided to seek opportunities outside North America, but that Dofasco is in talks with other potential partners. No timeline has been drawn up for a start to that project, which proposes to make 500,000 tons of automotive quality hot-dip galvanized steel per year.

Automotive demand
Galvanized steel sales account for 40 to 45 percent of Dofasco Inc.’s product mix, and automotive companies are the biggest customer. “Dofasco wants to do business where our customers are doing business, in the southern states,” Robb says. The company sells the Big 3 and the “new domestics” such as Honda and Toyota.

Dofasco’s galvanized steel inventory was tight throughout 2004. “We make it as fast as our customers can have it shipped to their plants. If we could make more, they would buy more.”

Robb says Dofasco is continually developing new products for customers, and has solid relationships with them, especially in auto manufacturing. “We are making them the galvanized product they want today and anticipating what they want tomorrow.”

Dofasco’s leaders are confident the company won’t be derailed by increased competition. Robb forecasts that 2005 demand for galvanized steel and Dofasco’s own sales will echo 2004, which was a boom year. “We see that demand picking up a notch,” helped by a slight uptick in automotive production and a larger increase in nonresidential construction in Canada and the United States.

Roy Platz, marketing director for Mittal Steel at Indiana Harbor Works, is certain that North American vehicle production and sales will keep galvanized steel producers busy this year, especially with the new domestic automakers continuing to expand their plants in the South—Nissan in Mississippi and Tennessee, Toyota in Texas, Hyundai in Alabama, and potentially BMW in South Carolina.

“The nontraditional U.S. manufacturers are expanding their presence with increased production capacity,” Platz says. Over the next five years, Mittal expects foreign carmakers to continue increasing their market share, building more vehicles in North America. “The last five or six assembly plants placed in North America were all built in the southern United States.”

At the current rate of vehicle production around 16.5 million units per year, automotive-quality hot-dip consumption will increase as more automakers specify the material for additional uses, Platz says.

He notes that galvanized steel imports grew dramatically in the last months of 2004, but automotive-grade steels were still in tight supply worldwide, especially in Japan. “Longer term, there could be some concern if imports continued to increase in market share.”

Just like Dofasco, Mittal Steel will continue to develop new grades of steel—those that are higher strength, lighter weight and more formable—to meet automakers’ more stringent applications.

“There is a whole series of new products being developed, some of which are now being commercialized and won’t see their first use until the 2006 or 2007 model year,” Platz says. “We are preparing to be able to make all of the new grades that will be going into those vehicles. A major portion of what we’ll sell in 2008 doesn’t look anything like what we’re selling today.”

Construction demand
Steve Sorvold, vice president-commercial at Wheeling-Pittsburgh Steel Corp. and chief operating officer for Wheeling Corrugating Co., says that although the “white hot” steel market of 2004 cooled down in the fourth quarter, “there will be a flurry of activity in the first quarter” as distributors and customers work down their inventories.

Stable economic growth and solid steel demand will move the market in 2005, whereas last year’s buying activity was driven by supply constraints, Sorvold says. However, the capacity to produce galvanized steel products—including steels for construction applications—surpasses the U.S. market’s ability to absorb it.

Excess capacity could be expected to dampen prices, Sorvold notes, “but there is a lot greater pricing discipline in the domestic market than we’ve ever seen before. Clearly, that’s a function of the consolidation. Pricing is going to get better [stabilize] when there are only four salespeople calling on a customer rather than 10.”

Rick Blume, national sales and marketing manager for Nucor Corp., reports that Nucor’s galvanized order book was fairly strong last year. “Looking forward, we expect 2005 to be another solid year. Galvanized is probably the fastest-growing product among hot-rolled, cold-rolled and galvanized.”

Citing healthy plant utilization rates, he says continued annual growth in demand should allow new capacity additions to be absorbed without much disruption.

In the past 20 years, galvanized steel demand has increased at an annual rate of 4 to 5 percent, he adds, “so as long as there’s no rash of new projects—the announced galv lines are brought on line in a disciplined way–—I don’t think we should be overly concerned about it.”

Most of Nucor’s galvanized product goes into nonresidential and residential construction. Nucor is looking to expand applications for galvanized steel, especially in building products. A large portion of Nucor’s output goes into the company’s own building products unit, for steel framing and steel studs.

“Construction represents the strongest growth. Longer term, residential construction presents a good opportunity, which we are developing internally with our own divisions,” Blume says.

West Coast demand
Between June and September, the West Coast saw 284,000 tons of galvanized steel imports arrive, according to a spokesman for California Steel Industries, Fontana, Calif. During the previous two years, imports totaled less than 180,000 tons each. In the 10 years before that, galvanized imports to the West Coast averaged 100,000 tons.

In the first half of 2004, he says, construction-related manufacturers did some panic buying. “Everyone was scared to death they wouldn’t get material for steel studs, so they bought material well in advance of when it was going to be consumed on the job.”

Then imports surged in the third quarter at up to $140 per ton below West Coast mill prices. Customers on allocation with the local mills naturally found these imports very attractive. Strong second-half buying resulted in a buildup of finished goods and excess inventory on factory floors, which will negatively impact purchases for most of the first quarter, the spokesman says.

It always takes longer than anticipated to eliminate excess inventory, he adds. “If people say they have a 30-day extra inventory, it will take them three months to get it resolved. They still buy, but they won’t buy at previous levels.”

A market correction will take place in January, he predicts, “so it will be late February or early March before customers try to get into the mill order books.” As a result, CSI cut back capacity in December to reflect the slowdown in consumption.

As the second quarter begins, he expects the market to become more demand driven. “One of the stud manufacturers told us their inquiries were at a very, very high level. They expect 2005 to be a very good year. If that’s the case, we will see commercial building projects getting approved—schools, hospitals, and retrofits—and then there’s all that growth in Las Vegas.”

Mexico’s demand
Mexico’s total galvanized steel capacity is 1.5 million metric tons per year. During 2005, production is expected to increase to 1.75 million tons as one new line is commissioned, according to Guillermo Robles Arriaga, vice president of marketing for Galvak S.A. de C.V., a division of Hylsamex.

In Mexico, approximately 25 percent of galvanized steel output goes to construction and metal buildings, 25 percent is exported, 20 percent goes direct to hardware retailers and the do-it-yourself market, 15 percent ends up in vehicles, and 15 percent goes to appliances and other big-ticket consumer goods.

Mexico is a net importer of galvanized steel, with a trade deficit of about 400,000 tons a year. Arriaga says this discrepancy “is mostly driven by the automotive industry, which needs metal substrates that are not produced in Mexico.” Mexico’s automotive assembly plants satisfy their steel needs primarily through imports.

Falling into a gap
A couple industry experts say that apart from imports and excess capacity, galvanizers face another issue: the narrowing gap between the cost of cold-rolled and the selling price for galvanized sheet.

“The price differential between cold-rolled sheet and galvanized has shrunk year after year after year,” says John Anton, steel service director at Global Insight Inc., Washington, D.C. “Whereas you used to get a $40 to $50 premium, the premium is now down to $20 a ton. There’s no reason to make galvanized if you’re not making a premium over cold-rolled.”

Sorvold, at Wheeling-Pittsburgh, argues that the narrow gap between cold-rolled and galvanized prices is an issue, but primarily for independent galvanizers that buy cold-rolled at market prices.

“It makes it hard to be a galvanized converter who is not a steel mill,” he says. “People that are buying cold-rolled and making galvanized out of it do see the spread shrinking dramatically. They make a little money, but nowhere near where it was.”

After the consolidation of domestic capacity, mills that used to sell to converters are now in the galvanized business themselves, he says. “There are four companies left and all of them make galvanized. Why would they sell cold-rolled to a converter and have it come around and compete against them in the
marketplace?”

Although converters did reasonably well last year, he says, “I think their future—without a [domestic] supplier—is fairly evident. What’s the likelihood of mills dumping full-hard cold-rolled on converters? There’s no world shortage.”
Charles G. “Chuck” Kennedy, president of Winner Steel Inc., an independent converter in Sharon, Pa., agrees that galvanized capacity generally exceeds demand, but he is bullish on the market for both galvanized and Galvannealed product.

Last year, the company produced above its rated capacity and shipped over 500,000 tons. He says many customers overbought, especially due to long lead times for mill deliveries. Customers are also influenced in their buying by the ups and downs of the global market, especially the pull of China.

Winner Steel—which sells into automotive, construction and metals distribution—is doubling its capacity this year, to over 1 million tons, with the addition of a new line it started up in the fourth quarter of 2004.

Kennedy says the added Galvannealing capacity should bring Winner Steel into some new markets such as culverts and grain bins and some heavier-gauge applications. Galvanneal is becoming more popular because it is easier to paint and more formable. “You can make some difficult parts without fear of flaking,” he explains.

Winner Steel was able to pass along most of the mill price increases on the cold-rolled steel it purchased during 2004, but Kennedy agrees with Anton and Sorvold that his company “has had a problem with the spread” between cold-rolled and galvanized. He said the spread has shrunk from $100 some years ago to $20 a ton today. “That’s tough, but it will get better,” he predicts.