With little challenge from imports, domestic steelmakers expect that flat-roll supplies will tighten and prices will rise again this year, though more modestly than in 2004.

By Corinna C. Petry,
Managing Editor

Sidebars and Tables:

• All Eyes on Mittal Steel
• Steelmakers' Results
• Steel Shipments, Selling Prices

Coming off a record year for shipments, revenues and earnings, U.S. and Canadian steel producers say they are poised to meet the many challenges of the steel market in 2005. The major players of the carbon flat-roll market—U.S. Steel Corp., Nucor Corp., International Steel Group, AK Steel Inc., Steel Dynamics, Dofasco Inc. and Ipsco Inc.—all gave investors a positive outlook for 2005 during recent year-end conference calls.

Demand trends
Based on their order books and customer comments, steelmakers are confident that demand will regain its earlier strength, once the inventory glut works it way through the supply chain.

“We continue to see good demand across virtually all end markets, and inventory levels are being worked down,” says U.S. Steel Corp. President and CEO John Surma. “In the flat-roll segment, first-quarter shipments should be 3.6 million tons. We expect full-year flat-roll shipments of 15.4 million tons, a slight decline from 2004 levels due to the reduced operating levels that we expect during the No. 13 blast furnace reline.”

Vice President and CFO Gretchen Haggerty adds that U.S. Steel’s outlook “reflects what we’re seeing right now in terms of how material is shipping. We are seeing strength across a wide range of our customers. We think the inventory will clear out in the near term.”

The inventory is mostly in the intermediate market—service centers and converters, Surma notes. Most end-users—automotive, equipment and appliance OEMs—are already providing solid shipment and order rates.

President and CEO Dan DiMicco and other executives at Nucor Corp. report that last year’s strong business conditions appear to be carrying over to 2005. “We expect the second and third quarters to be stronger than the first quarter,” says Terry Lisenby, Nucor’s chief financial officer
J

oe Rutkowski, Nucor executive vice president-plate, says the plate market remains very strong. “The heavy equipment OEMs are improving their outlook in 2005,” he adds, noting that Nucor was able to collect $30 per ton more on January plate shipments.

“The coil plate market has been affected somewhat by the inventory overhang of sheet products, but we are confident [orders in] the first quarter will fill up, with additional strengthening in the next couple months,” Rutkowski says.

For Nucor’s sheet products, fourth-quarter softness continued into the first quarter as a result of large customer inventories. Nevertheless, says John Ferriola, executive vice president-sheet, “we expect to run full through the first quarter, and we expect the second quarter to improve over the first. Increased demand will result as the inventory reduction by our service center customers is completed.”

Strong end-use demand and the expected reduction in imports during the first quarter “will add to the market tightening during the second quarter. We are hearing reports of automotive gaining momentum and we expect construction demand to increase in a typical seasonal economy,” Ferriola says. “We have high expectations for the remainder of 2005.”

While 2004 treated AK Steel well, 2005 is shaping up “as a substantially better year, one in which we begin to hit our stride as a company and regain our winning form,” says President and CEO James Wainscott. Markets remain robust, he says, and the outlook for the U.S. economy and customer end markets is upbeat.

“With prices for steel rising around the world, and imports declining, we expect supply lines to tighten once again,” he says. “We have already seen a pickup in demand, especially for high-quality cold-rolled and automotive-quality galvanized products.”

Global demand for electrical steel products continues to outpace supply, with prices heading in one direction: higher, Wainscott says. “Our production and sales of electrical steel products during 2004 set all-time company records, breaking marks that had stood for 30 years. The outlook for electrical steel products looks even better for 2005.”

The market for electrogalvanized automotive-grade coated products also remains strong. “If we would open the order book, we would probably sell a significant portion into the second quarter,” Wainscott adds.

International Steel Group President and CEO Rodney Mott believes underlying demand remains fairly strong in most market segments. “There has been talk out there about automotive business slowing down, but we are not seeing that in our facilities. We have increased our total volume with most of our major automotive accounts. It seems to be holding up through the first quarter.”

Business from pipe and tube converters has started to pick up as well, Mott adds, noting that the only down market early in the first quarter was service center distribution.

For Steel Dynamics Inc., the first quarter is expected to resemble the fourth quarter, but President and CEO Keith Busse forecasts a fairly strong first half overall. “The second quarter will exceed the first quarter. The conditions in the marketplace, coupled with the cost of resources and increased volume, will probably give Steel Dynamics a pretty good year.

“Hot-rolled is in good shape, pickled and oiled is in good shape, painted products, cold-rolled—we have decent order input in all of these. If there is a softness in the market,” Busse says, “it was related to coated products. That market got soft with a lot of imports from India in the fourth quarter. [But] we believe we’re rebounding.”

January 2005 was SDI’s best booking month since April 2004, says John Nolan, vice president of sales and marketing. “Admittedly, prices are a bit off their peak in September, but you have to attribute that to the second-half import surge. We see lead times moving out. Prices are firming up now and moving up again for late first-quarter and early second-quarter deliveries.”

He adds that first-quarter prime orders at SDI’s Butler mill actually exceed the plant’s defined capacity.

If the North American market shows reasonable demand for the next several months, he says, “I think we are going to get back to a ‘what the market will bear’ pricing scenario. The floor is where you can buy an offshore product, f.o.b. U.S. port of arrival.”

He estimates that hot-band prices must be sustained here at 31 to 32.5 cents per hundredweight ($620-$650 per ton) before the U.S. market will strongly attract imports again.

Dofasco is tracking solid activity from buyers. “We are seeing relatively strong demand across our end-users. But this inventory in the system has certainly put a bit of mush into the overall demand...in Canada and the U.S. We could see demand tighten [supplies] up again if imports are low, especially in the second quarter,” remarks President and CEO Don Pether.

First-quarter results at Ipsco Inc. are expected to be lower than fourth-quarter results, yet “the fundamentals of our business remain steady,” says David Sutherland, president and CEO. “With the January steel price increases [on plate products] fully implemented and continued strength in first-quarter bookings, Ipsco is off to a good start in 2005.”

Pricing trends—contract vs. spot
Spot prices have increased in major markets around the world, ISG’s Mott says. “As a result, the spread between domestic price and world export prices has narrowed. Coupled with the relatively weak dollar, high ocean freight rates and growing world demand for steel, this lull in steel imports should keep domestic steel prices at relatively high levels for the foreseeable future.”

The Jan. 1 price increase announced by many hot-rolled sheet producers did not hold, however. U.S. Steel’s Surma remarks: “We did not see price move up during January. We are looking for what the market will offer. When you’re selling [in a market with] high inventory, it’s a tough sell. There’s a good chunk of inventory in the system; it’s taking some time to work out. We see fewer import offerings and at relatively high prices, because of the value of the dollar and other issues.”

Surma adds that pricing in the European Union “has come in quite a bit closer” to North American prices since last summer. Hot-roll imports are being quoted in the $650 per ton range, he notes.

U.S. Steel achieved price increases in its supply contracts with major buyers and boosted the tonnage covered in its contracts.

Ferriola says Nucor’s sheet group ended the year with 65 percent of its capacity under firm pricing contracts. “These provide us with a constant margin while providing customers the benefit of decreasing transactional price as raw material pricing unfolds.”

AK Steel ‘s Wainscott is bullish about his company’s contract business this year. “Nearly 90 percent of our 2005 contract sales will be at higher prices than in 2004,” he says. “On average, we achieved double-digit price increases, which we expect will result in 2005 revenues that are at least $600 million higher than we generated in 2004.”

International Steel Group’s contract business will represent about 70 percent of its total sales this year, Mott says.

SDI’s Busse says orders and pricing for galvanized and painted products are very good and “we will see pricing move ahead slightly late in the first quarter or early in the second quarter. That, coupled with falling scrap costs in the second quarter, will produce margin spreads better than we enjoyed more recently.”

Nolan adds that although SDI is seen primarily as a spot market player, it has increased its long-term sales contracts to about 50 percent of all shipments.
Pether expects Dofasco’s steel operations to remain strong through the first quarter, but overall selling prices will remain flat. Although new-contract prices increased by double digits, these will be offset somewhat by easing spot market selling prices and the negative impact of exchange rates, he says.

Raw material costs, surcharge trends
At U.S. Steel, executives anticipate the negative effect of higher coking coal costs, which will mostly offset the benefit of the company’s reduced merchant coke position. The company also hired consultants to work on scrap optimization to get the most cost-effective blends to produce the proper metallurgy. “We’ve had a big improvement in our cost position. On scrap buying, there’s no better way to do it,” Surma says. The company is also taking a longer position on natural gas and is hedging gas prices on the futures market.

At AK Steel, Wainscott says that any negative in terms of the company’s 2005 earnings and cash flow will “arise from the increased costs we will incur for raw material purchases. But we have secured the necessary steelmaking inputs for 2005, including coal, coke, iron ore, HBI, scrap and purchased slabs.”

Last year, he says, AK Steel paid iron ore price hikes of almost 25 percent. “We expect that raw material prices will go up again. The process of developing and implementing our long-term raw materials strategy is under way—we are in talks with some of our current suppliers and a host of other potential suppliers.”

According to SDI’s Busse, surcharges will move lower but base prices will be adjusted to reflect market conditions. “Therefore, I don’t see the price drifting much further south. We could see some [upward] movement as soon as this quarter.”

Pether says surcharges “have come down to the $190 range and may drop another $60 as we move into March, to about $130. We are seeing scrap come down. There is a lot of alternate material brought in by certain mills, and we see fewer exports of scrap to places like China and Turkey. Of course, iron ore is being watched closely.”

He predicts the unit costs on coking coal are going to go up “probably in the 25 to 30 percent range from what they are today,” depending on length of the contract and the volume commitment.

Ipsco Inc. lowered its scrap surcharge from $100 in December to $55 per ton in February.

Capital projects in the works
At Gary Works, U.S. Steel will shut down the No. 13 blast furnace for a major rebuild during July and August. Nick Harper, manager of investor relations, estimates the company will spend $475 million on capital projects domestically. That includes the blast furnace reline, the acquisition of mobile and mining equipment, and coke oven repairs at both Clairton and Gary Works.

Nucor’s Castrip team in Crawfordsville, Ind., has fully commercialized the direct casting of sheet steel, DiMicco reports. “They have now proved the technology is commercially and economically viable and can be successfully sold in the market.”

In fact, the process of selecting a location for Nucor’s second Castrip production facility in the United States is under way. The company estimates that building a second plant—on the West Coast or in the South Central states—will cost about $100 million.

Nucor’s 2005 capital expenditure program of $415 million includes more than $150 million for greenfield projects. At the program’s core is a raw materials strategy to control about one-third of the company’s iron unit consumption. Completing three separate projects this year and next should give Nucor control of at least 2 million tons per year of high-quality scrap substitutes, DiMicco says.

First is the HIsmelt joint venture with Rio Tinto and other partners in western Australia. Cold commissioning of about 75 percent of the plant is in progress, and production should start in the second quarter. The plant converts iron ore fines and coal fines into liquid metal as both a blast furnace replacement technology and as a metal source for electric arc furnaces. Annual capacity initially will be 800,000 metric tons.

Second is the green pig joint venture with Brazil’s CVRD, called Ferro Gusa Carajás, which will cultivate eucalyptus trees as a charcoal source. The first module will use two conventional mini-blast furnaces to produce 380,000 tons of pig iron per year. “Construction continues on the furnaces,” DiMicco says, and iron production may begin in the third quarter.

Last September, Nucor purchased an idled direct reduced iron plant in Louisiana, and is moving it to Trinidad—which has low-cost supplies of natural gas and favorable logistics for receiving iron ore from Brazil and shipping DRI to the United States. The DRI project’s capital budget is about $200 million; operations should start in the first quarter of 2006.

International Steel Group is ramping up its Cleveland West operations and plans to add a 500,000 tons-per-year automotive-quality hot-dip galvanized line there. Production is expected to begin in the fourth quarter.

ISG will also begin production, early in the second quarter, at its 110-inch-wide plate mill at Burns Harbor, which has been idle since 2000.

Mark Millett, vice president at Steel Dynamics, says the company will spend about $6.5 million on caster modifications, beginning late in 2005 and through 2006, to bring the capacity at Butler Works up to 2.7 million to 2.8 million tons by 2007.

Iron Dynamics is negotiating a partnership through Mesabi Nugget LLC to produce iron nuggets and is pursuing environmental permits in two states. “We expect to begin construction this year and have an operating plant open by next summer,” Millett says.

Capital expenditures for Dofasco this year should total $450 million. “We are revamping the pickling and cold-rolling lines, which will be completed in July,” reports Walter W. Bilenki, vice president, finance. “We’ve started to revamp our galvanizing facilities. Later, we’ll start to see the improvement in throughput, quality and a reduction in costs from $20 to $25 a ton.”

Ipsco Inc. is building a $45 million steel plate quench, temper and normalizing heat-treat facility at Mobile Steel Works in Alabama. Normalizing operations will begin in the fourth quarter, followed by quench and temper operations in the first quarter of 2006. Sutherland says customer interest in the products that will come out of the heat-treat facility has been very strong.