Executives of publicly held companies provided insights on current market conditions as they released their first-quarter 2005 results in late April and early May. Though upbeat about their performance, service center operators are being cautious about making steel buys.

By Corinna C. Petry,
Managing Editor

Sidebars and Tables:

• Integris Integration is Transforming Ryerson Tull
• Metal Center 1st Qtr. Earnings
• Steelmakers' 1st Qtr. Earnings
• 1st Qtr. Shipments, Selling Prices

Sales and earnings among North American steel producers and metals distributors rose again in the first three months of the year. The market continues to feel the effects of a stubborn inventory overhang, however, which is still working its way through the supply chain. Meanwhile, spot prices—particularly for carbon flat-rolled—have slipped, raising questions about what to expect for the rest of the year.

“Purchase prices are declining in all products, and selling prices for most of our products are also down. There are no shortages of any products domestically or internationally, compared with this time last year when we were starting to see shortages,” says Brian Hedges, chief financial officer of Canada’s Russel Metals, in Mississauga, Ontario.

President and CEO Edward “Bud” Siegel claims the much-ballyhooed pricing discipline among steelmakers is “slacking a little bit. The producers convinced themselves that after consolidation, it was a new world and there was no more cyclicality because they were in control of the process. Yet, cyclicality remains [post 2004]. Some producers have already forgotten.”

Mills were making steel at a 90 percent capacity utilization rate in late April, he continues, which “makes no sense when service centers say they need another three to four months of inventory reduction before they come back as major buyers. Mills are trying to sell by lowering price instead of rationalizing capacity. That’s where the problem always lies.”

Russel will live off its inventory, Siegel says. “If we think prices are going to be lower in a week or two, why would we buy today? Our customers are skeptical about where pricing is going and no one wants to make long-term commitments.”

The president of Houston-based Metals USA Inc. expects the U.S. economy to remain healthy and notes that end users outside the automotive industry are buying at normal levels.

“With adequate material supplies, good demand from the domestic economy, and strong metal prices, 2005 is shaping up to be another good year for our business,” says President and CEO Laurenco Goncalves. “Steel price increases have yet to materialize, although we expect an increase later this year.”

He says most foreign and domestic mills will pass along their added expenses—especially for high-cost iron ore—in the form of base price hikes and surcharges. Higher oil prices continue to force freight prices up, too.

“I am sympathetic to the economic impact that steel prices have had, and most likely will continue to have, on our customers. Global forces are in place to keep price levels high in relation to those prevailing in 2003 and before. The existing conditions will not change anytime soon. Our customers will have to pass along the increased costs, as none of us in the supply chain are able to absorb these by ourselves,” Goncalves says.

Although its shipments declined between 8 and 12 percent during the first quarter, compared with the same period in 2004, Metals USA has reduced its flat-roll inventory 10.9 percent and its plates and shapes inventory 3.6 percent since December. Goncalves forecasts “a second quarter at least as good as the first quarter.”

Reliance Steel & Aluminum Co., Los Angeles, saw record average daily sales during the first quarter in spite of softening carbon steel prices, although that did lead to a slight margin contraction. CEO Dave Hannah says the company’s product mix—with a declining portion of carbon steel—helped to achieve a strong operating profit.

Reliance reports that its average carbon steel selling prices during the first quarter were down 2 percent from the previous quarter, though up 44 percent from 2004’s first quarter. Average selling prices for stainless steel were up 6 percent vs. fourth quarter 2004 and 30 percent vs. first quarter 2004. Average selling prices for aluminum were up 5 percent and 26 percent, respectively, compared with those same periods.

“Customer demand in the aerospace industry is the main driver of the increases in volume and pricing of our aluminum and stainless products,” Hannah says. “We are not seeing any significant changes in demand, either up or down, in the other industries into which we sell.”

Reliance President and COO Gregg Mollins says the construction market was weak during the first quarter. “We hope to see an improvement in demand in spring and summer. The industries that are performing well are semiconductors, railcar and truck trailers, heavy machinery, and machine tool trades, particularly in the Midwest.

“Aerospace—commercial, defense and the private jet sector—are all doing well, outperforming all other industries. We expect this to continue,” he says, “and we are well positioned to take full advantage of this on a global basis.”
In stainless products, “flat-rolled has become much more available while demand is still relatively strong. Surcharges are still in place and serve as an effective tool for passing nickel and molybdenum increases through to the trade in a timely manner month to month. Overall supply and demand fundamentals for this product look relatively stable.”

On carbon products, prices are restrained by a competitive environment, Mollins says. “The service centers are over-inventoried, the mills are over-inventoried, and demand is not the greatest, so people are looking to move inventory for cash flow purposes.”

Hannah agrees: “There is a lot of liquidation-slash-dumping going on out there.” Some resellers “are even being reckless,” he says.

Reliance’s inventories have bucked the industry-wide trend this year, with a mere 2.5 months on hand in April, compared to 2.4 months at the end of 2004.
Steel Technologies Inc., the Louisville, Ky.-based processor, reports that average transaction prices continue to remain at very high levels by historic measures, but its own average selling price will likely drop by about 5 percent in the June quarter, compared to March. Tons sold in the next quarter should equal those of the previous period (325,000 tons), according to President and CEO Brad Ray.

The joint venture Mi-Tech Steel provided record quarterly results in sales, volume shipped and profits. Mi-Tech continues to enjoy strong growth—a 64 percent increase in sales and a 38 percent increase in tonnage shipped in the March quarter—benefiting from strong transplant automotive growth. Ray expects Mi-Tech’s revenue to grow 40 percent during the June quarter.

The Big Three automakers cut back their production schedules through March. Some other customer segments were not quite as robust as last year, including HVAC, and lawn and garden products. Construction was slow to start due to inclement weather, Ray says.

“Some of the heavy truck segment has been strong. The rail segment has been very strong. We continue to diversify our book and have a lower percentage of auto-related business, but it still represents about 55 percent of our overall volume—the bulk of that in light vehicles. The transplant companies are still in growth mode.”

As of April 19, Steel Technologies was carrying about 65 days of raw inventory and 15 days of finished inventory, which Ray says is about five days above target.

He reports that the spot price trend for carbon steel products is down.

“Announced price increases for the second quarter have not taken hold. The price trend has been gradual, however; no free fall. It has the potential later in the year to firm up.”

Ryerson Tull Inc., the metal center industry leader with $1.5 billion in first-quarter revenues, is among the many with too much material on hand. The combined inventory of Ryerson and the recently acquired Integris facilities at the end of the first quarter was $80 million above the level seen on Dec. 31.

“We have excess inventory levels that we are actively working down. The bulk is in carbon flat-roll and stainless steels. Those are the products for which demand has softened and for which mills have caught up on their rolling,” says Jay M. Gratz, executive vice president and chief financial officer.

Regarding market conditions, Gratz says that consumer goods-related demand, including cars and appliances, have slowed, while non-consumer durables such as truck trailers, agricultural and construction equipment, have strengthened.

“Pricing and demand appear slightly less favorable [now] than in the first quarter. But the environment looks very different depending on the product category.”

Carbon sheet demand and pricing are down but solid on a historical basis. “Aluminum fundamentals remain very strong. For stainless, mill schedules have opened up, in part due to excess inventory in the pipeline and some weakening in demand. For carbon steel plate, mill schedules have begun to open up for some grades. Demand and pricing remain strong, but off their peaks.”

What Ryerson Tull expects from the North American economy overall “is moderate to very slow growth,” Gratz says, in other words, “a more typical long-term cycle.”

Steelmakers’ forecasts
At the major carbon flat-roll steel mills, executives say their earlier forecasts for very high demand were unrealized. Prices have declined since late last year, while some raw material costs increased, squeezing producer margins.

According to Gretchen Haggerty, senior vice president and treasurer at U.S. Steel Corp.—which posted very positive first-quarter results—a portion of the company’s contract business, which was re-priced at the beginning of the year, was offset by lower spot pricing.

“Flat-rolled shipments declined 212,000 tons from the prior quarter, and costs increased $33 per ton due to higher coking coal and coke production costs,” she says.

Nonetheless, there is hope for the rest of the year.

U.S. Steel President and COO John Surma says service-center inventory levels are expected to move down toward traditional levels, and that North American pricing is “reaching relative parity with Asian and European prices. We are optimistic that the current positive steel cycle has plenty of room to run. We anticipate a profitable year with significant contributions from all our major business segments.”

U.S. Steel forecasts that its second-quarter flat-roll shipments will reach 3.5 million tons, with average selling prices falling a bit due to lower spot prices.

The company anticipates full-year shipments of 14.5 million tons, a decline from the 15.4 million tons shipped last year. This is attributed to both a blast furnace outage at Gary Works, and to lower purchases by metal distributors, who are fully stocked in the first half.

Nucor Corp., Charlotte, N.C., which made strong revenue and income gains during the first quarter, also reports that links in the flat-roll supply chain are working off excess inventories and that spot pricing has softened this year.
Since the fourth quarter, Nucor’s average selling prices for sheet products fell $42 per ton and average selling prices for plate declined $16 a ton.
“Despite a weaker-than-anticipated market in the first quarter, we remain optimistic about the strength of the market for the remainder of 2005,” says John Ferriola, executive vice president for Nucor’s Sheet Mill Group. In the first quarter, the inventory overhang “did not dissipate as quickly as expected.”

However, “demand from service centers is reported stable. We expect their inventories will continue to decline and return to normal levels late in the second quarter. Meanwhile, pricing pressure will continue.”

Both of Nucor’s plate mills operated at capacity in the first quarter, Ferriola says. Pricing for that product remains strong. “Second-quarter bookings are open and business conditions remain positive. We are seeing mild inventory adjustments at our distributors. Yet demand remains strong with OEM customers.”

Mittal Steel Co. NV., which also showed higher revenues and income in the March quarter, cites the inventory glut as one reason for accelerating its planned 2005 outages.

Lakshmi Mittal, chairman and CEO, acknowledges there has been some softening of prices “but there is still good global demand. Price realization remains flat and cost of goods per ton increased by 5 percent.”

The company’s focus during the second quarter will be to integrate the recently acquired International Steel Group and capture all available cost savings, estimated at $200 million per year. For the June quarter, Mittal says, “we expect higher prices, but we expect lower shipments. We are taking production cuts or outages to adjust to the changing market environment. Our operating income is expected to be lower by $25 to $30 per ton.”

First-quarter earnings at Steel Dynamics Inc., Fort Wayne, Ind., nearly doubled from the year-ago period, but costs rose, too. “Our scrap forecast was not as accurate as it could have been,” says President and CEO Keith Busse. “We had contract scrap that was delivered at higher prices as the spot price was going down.”

SDI’s average selling price, “which we thought [in January] would remain stable, dropped by nearly $40 a ton. That was the single biggest factor affecting performance,” Busse says. “We had excellent bookings in January and thought any softness in the marketplace was already vetted, and thought the inventory overhang was coming down. The resurgence in demand did not materialize.”

Momentum is upward for the second quarter, however, as SDI’s backlog for flat-roll orders has improved slightly since March. Busse forecasts shipments through June will rise by up to 100,000 tons over the prior quarter.

“By the time we get to late May or early June, we expect lead times to move out somewhat. We might see prices start to rise midsummer,” he adds, especially as imports are expected to decline from last year. “As inventories get worked off little by little, there is reason for some optimism in summer.”

Until then, “many mills have substantial inventory on hand. We certainly do. And we have a lot of scrap, especially compared to what we had last year at this time. We have quite a stockpile of pig iron, too. We won’t be pushed very hard with regard to resource costs.”

Generally, Busse believes steel demand will stay fairly strong this year and next.

“I think the industry is better managed than it had been in many years. I think consolidation matters, domestically and globally. I think we’re looking at certain regions of the world to expand consumer demand—but not so much in the U.S. Hopefully we won’t have overbuilt capacity.”