| November 2005 |
| Third Quarter Report and Outlook |
| Mixed Results from Mills |
|
Some steel producers were pleased with their third-quarter results, others were frustrated by such uncontrollable factors as declining prices, equipment outages and hurricanes. Most would agree the third quarter set the stage for a solid finish to 2005 and a similar performance for the industry in 2006. Following is a mill-by-mill summary of third-quarter conference calls. By the Staff of Metal Center News Sidebars and Tables:
NUCOR Consolidated
net sales from the third quarter were $3.03 billion, a 3 percent
dip from the $3.15 billion in the second quarter and down 4 percent
from the $3.24 billion in the third quarter of 2004. Average sales
price per ton decreased 15 percent from the third quarter of 2004
and 8 percent from the second quarter this year. Vice
Chairman, President and CEO Daniel DiMicco said that 2004 was a
record year for earnings, with particularly strong performance from
the company’s flat-rolled and plate businesses. “Now 2005
is on track to be our second-consecutive record earnings year for
Nucor.” Putting
pressure on earnings were rising energy costs, which increased approximately
$12 per ton compared to the third quarter of 2004, and $6 per ton
from the second quarter of 2005. Nucor
saw a significant increase in shipments and production in the third
quarter. The minimill shipped a record 5.3 million tons in the third
quarter, an increase of 9 percent over the third quarter of 2004
and a 5 percent hike from the second quarter of 2005. Additionally,
steel production rose from 4.9 million tons in the second quarter
to almost 5.1 million tons in the third quarter. These two factors
reflect strong business conditions in the fourth quarter, Nucor
officials said. “We
see the market in the States and throughout most of North America
continuing to improve as long as our economy does not start sliding
backwards,” said DiMicco. “The demand we see domestically
and the order entry and backlog data is all very supportive of a
strong fourth quarter and extending into the first quarter of next
year.” China
remains a wildcard in the steel industry, DiMicco admitted. “It’s
a situation unique to China because of the massive amount of capacity
they’ve built in that country. How that impacts the global
marketplace, which will affect our marketplace here, has yet to
be determined. There have been a number of conflicting signals coming
out of the China with respect to the Chinese government.” The
Chinese steel industry has expressed a desire to consolidate, which
would be a positive for a global marketplace worried about excessive
Chinese exports. “There is probably an excess of 100 million
tons of very inefficient, antiquated steel production in China that
I’m sure they would like to see eliminated because of their
very inefficient use of raw materials. What they’re doing right
now is encouraging the competitive forces within China to promote
that kind of restructuring,” DiMicco said U.S.
STEEL The
company’s third-quarter net income of $107 million was down
56 percent from the second quarter and down 70 percent from a year
earlier. “But with the third quarter behind us, things look
somewhat brighter on the horizon, with the only exception being
higher energy costs,” he said. Sales
to distributors are already improving. “The service center
inventory build that began about a year ago seems to have receded
and inventories are now at more normal levels. In fact, some of
the recent strength we see in our flat-roll order rate directly
results from stronger demand from this very important customer group.”
In
the third quarter, the flat-roll segment suffered from a combination
of lower shipments, lower spot prices, higher energy costs and inefficiencies
related to the steelmaker operating at only about 72 percent of
capacity. “Given this fairly difficult environment, our flat-rolled
segment actually performed well,” Surma said, “reflecting
improvement in our cost structure over the last few years.” Gretchen
Haggerty, executive vice president and chief financial officer,
said she expects fourth-quarter average realized prices and shipments
for flat-roll to improve compared with the third quarter, although
the effect of that could be more than offset by higher costs for
natural gas. “We
are beginning to see positive signs from the construction market,
which is a very important sector for our industry and our company,”
Surma continued. The market for tubular goods has also been very
positive, especially in the energy sector, causing U.S. Steel to
run its three seamless mills at full capacity. The
story is similar in Europe, where an inventory correction led to
lower shipments and spot market prices in the third quarter. “But
things look better now,” Surma said. “Our outlook for
both volume and prices in Europe is positive, including strong demand,
strong prices and good margins.” U.S.
Steel is making progress on its ongoing blast furnace infrastructure
improvement projects, including the A blast furnace at Granite City,
Ill., and the No. 14 blast furnace at its Gary (Ind.) Works. The
Granite City furnace was brought down for repairs in May and was
kept idle until August due to weak market conditions. It has been
running full out since then. Following
a construction mishap in September, Gary’s No. 14 blast furnace
project is nearly ready to go again. The furnace, which has been
down since May, should be back online in December and up to full
production early in 2006. The
company’s No. 2 blast furnace in Slovakia, which was offline
for the entire third quarter, is now back on-stream and making iron.
U.S. Steel commissioned the second blast furnace in Serbia late
in the second quarter, and after a difficult restart it was finally
running well in September, Surma said. Due
to these outages, U.S. Steel’s production is a little tight.
“We could stand to make a little more steel,” Surma said,
which will happen once its large Gary furnace is back in production.
Its steel inventories now are low, and the company intends to keep
them that way, even after the No. 14 furnace is up and running. “We
don’t like to make iron and steel to put it on the shelf,”
Surma said. “If the market takes it away, fine. But if the
market doesn’t, we are not going to build inventory. We are
going to gear our iron and steel production to what the market will
take.” With
continuing reductions in service center inventory levels and firming
spot prices, Surma expects fourth-quarter market conditions to show
improvement over the third, but results will remain well below those
of the first two quarters of the year. “Our order book remains
strong across all industries, but we will continue to be affected
by high natural gas prices and by reduced domestic raw steel capability
for the duration of the Gary blast furnace rebuild.” STEEL
DYNAMICS Year-to-date
net sales for 2005 increased 5 percent to $1.615 billion, compared
to $1.545 billion in the first nine months of 2004, but year-to-date
2005 earnings of $157 million were 26 percent lower than the first
nine months of 2004. “Overall
our third-quarter performance was solid, in spite of a variety of
challenges, including higher natural gas and electricity costs and
disruptions in production indirectly caused by Hurricane Katrina,”
Busse said. SDI’s
third-quarter 2005 consolidated shipments totaled 924,000 tons,
up 3 percent from the third quarter of 2004, and also up 3 percent
from the second quarter of 2005. SDI’s average consolidated
selling price was $540 per ton, however, down 24 percent from the
third quarter of 2004 and down 11 percent from the second quarter
of 2005. “On
the positive side, compared to the first six months of this year,
steel imports have slowed and steel service center inventories have
adjusted to more normal levels, resulting in stronger factory order
bookings and greater backlogs for our flat-rolled and structural
steel divisions,” Busse said. Since
bottoming out in June, order entry for flat-rolled steel has been
robust, he added. “At the end of the second quarter, our backlog
was in trouble. We were probably operating off a two- to three-week
backlog. Today we are able to see out two months, which is a dramatic
improvement. That speaks for steady and stable conditions out there
in the marketplace today.” Busse
expects fourth quarter conditions to remain strong for the steel
industry in general and SDI in particular. “Demand has improved
for beams. But more importantly, nonresidential construction activity
is up and has positively affected our New Millennium Building Systems
backlogs,” he said. Healthier nonresidential markets might
finally provide an opportunity to increase structural transaction
values, he said. SDI’s
structural and rail division also has seen improved backlogs, says
Richard Teets Jr., division vice president and general manager.
“Currently our rollings are closed to year’s end, and
we are actually filling the rollings for January at a fair clip.
Visiting with customers in the fabricating arena, I’m pleased
to see that their backlogs are also into the first quarter and that
their bookings are strong.” SDI
has focused on meeting structural demand for the last two months
rather than producing rail. “We will resume producing and shipping
rail in November and December,” he said, noting that the company
has run two successful trials with its new rail bloom molds. Given
the strength in the construction market, SDI plans to move forward
early next year with plans to expand its structurals and rail facility
by 500,000 to 600,000 tons. That would allow the company to shift
production of smaller beams from the larger mill to a smaller mill,
making room for additional large-beam production. “In addition
to increasing our penetration into the light beam marketplace, we
would contemplate rolling products such as channels and angles—a
diverse array of products that we think could bring that mill to
capacity quickly,” Teets said. About
300,000 tons of the new capacity would be used to produce rail,
100,000 tons for small beams, 100,000 tons for big angles and the
remaining 100,000 tons for large channels and flats. SDI does not
currently produce channels, flats or angles. SDI
executives remain fairly optimistic about the market for the fourth
quarter and at least early next year. Prices for the fourth quarter
could increase by $70 to $80 a ton from a year earlier. They anticipate
up to a 20 percent increase in fourth-quarter earnings. Imports,
at least through the fourth quarter, should pose little problem.
“Right now there is a calm out there,” Busse says. But
if prices do increase, import competition could heat up. “When
pricing is under $500, we are not likely to invite imports, but
if it gets above $600, it becomes much more likely.” AK
STEEL AK
Steel reported a third-quarter 2005 net loss of $29.0 million, which
included $29.5 million in costs for scheduled maintenance outages
at the company’s Middletown and Ashland, Ky., facilities. AK
Steel suffered losses despite an all-time record shipment level
for the quarter, pushed up by continued strong demand for carbon
flat-roll and electrical steels from contract customers, improved
spot market prices and increased shipments to service centers. Net
sales in the third quarter were $1.393 billion on record quarterly
shipments of 1,687,000 tons, or approximately 4 percent and 9 percent
higher, respectively, than the year-ago period. The company’s
average selling price was $825 per ton in third-quarter 2005, however,
down from $866 per ton in third-quarter 2004. “Hurricane Katrina was more than an unusual event, it was the single most destructive disaster in American history,” Wainscott said. “In addition to the human impact and the property devastation, it has been financially destructive as well, due to supply disruptions and rapidly escalating prices of commodities. We
saw natural gas prices nearly double in the third quarter, and it
appears that we will feel the effects of this for quite awhile.
In AK Steel’s case, add scheduled maintenance outages (including
one to install a new vacuum degasser at its Ashland Works) to the
cost mix, and that’s a recipe for a tough quarter.” The
new vacuum degasser should eventually help the steelmaker contain
costs, as it should virtually eliminate AK’s need to purchase
premium-priced degassed slabs. Wainscott
maintains that over the past two years AK Steel has been unrelenting
when it comes to controlling costs. “To date, we have obtained
annual repeatable cost savings of more than $400 million, or more
than double the original target, and we are not finished yet. Unfortunately,
it is the uncontrollable cost increases, including iron ore and
natural gas, that have overshadowed much of our progress.” Wainscott
is very upbeat about steel demand. Automotive consumption, which
accounts for about half of AK’s business, looks solid. “Following
the summer’s incentive-based sales program, inventories of
light vehicles stood at just 3 million units, a 25 percent decline
from six months earlier. As a result we have been experiencing very
strong pulls for carbon steel from our automotive customers as they
look to replenish depleted inventory levels with 2006 vehicles,”
he said. By all indications, the automotive market will remain strong
for the balance of 2005, and North American light vehicle production
will finish the year at a nearly identical level to 2004, he added. In
the aftermath of this year’s hurricanes, demand for steel for
the appliance, construction and manufacturing market should strengthen
further in 2006, Wainscott said. Officials estimate that 160,000
to 300,000 homes and buildings will need to be repaired or rebuilt
as a result of the storms, homes that will need 1 million new appliances.
It also has been estimated that at least 350,000 vehicles were destroyed
and will need to be replaced. The
electrical steel market also remains strong, both domestically and
internationally, Wainscott said, as developing countries, particularly
China, build their infrastructure. He noted that AK Steel is one
of largest suppliers in the world of grain-oriented electrical steels,
which are used for power transformers. Looking
forward, he expects AK Steel to benefit from improved pricing. “We
expect to generate an operating profit and solid cash flow in the
fourth quarter. As we have done all year, when possible, we will
continue to reduce controllable costs. But those savings are expected
to be largely offset by higher natural gas costs.” OREGON
STEEL Third-quarter
2005 operating income was negatively affected by approximately $5
million of pretax costs related to the new electric arc furnace
installation and caster rebuild, and related equipment outages,
at the company’s majority-owned subsidiary, Rocky Mountain
Steel Mills. Sales
for the third quarter of 2005 were $299.7 million, down from 2004
third-quarter sales of $348.3 million. Total shipments for the third
quarter of 2005 were 381,800 tons compared to 2004 third-quarter
shipments of 457,700 tons. “With
the completion of the new single furnace installation at RMSM and
the restarting of the large-diameter pipe mill at Camrose, we expect
operations throughout the company to return to normal,” said
Jim Declusin, Oregon Steel’s president and CEO. “We
believe that inventory levels at the service centers bottomed during
the third quarter, and we have begun to see some pickup in our plate
market both in terms of price and volume. At the same time, market
conditions for our energy related products continue to gain momentum,”
Declusin added. “As we anticipated, the price of slab is declining
and is now 30 percent off its high of earlier this year. Accordingly,
we expect that fourth quarter 2005 operating income will be significantly
higher than that realized in the third quarter.” IPSCO IPSCO’s
favorable sales performance was driven by record energy tubular
sales volumes, which were partially offset by declines in steel
mill product sales related to a planned maintenance outage at its
Montpelier Steelworks and unplanned outages at the Mobile Steelworks
due to Hurricanes Dennis and Katrina. Total
third-quarter shipments were 848,000 tons, virtually flat compared
to last year, but 44,000 tons greater than the prior quarter due
to record energy tubular shipments of 216,000 tons and large-diameter
pipe shipments of 45,000 tons. Energy tubular shipments increased
46 percent and 39 percent, respectively, over last year and the
prior quarter. IPSCO’s
average third-quarter product price was $832 per ton, inclusive
of surcharge, comparable to $760 per ton a year ago and $830 in
the second quarter. The impact of higher energy and large-diameter
pipe shipments offset a decline in steel mill product pricing. “IPSCO
withstood the impact of planned and unplanned outages at our U.S.
steelworks as well as a temporary decline in demand from service
centers early in the quarter. Our third quarter operating income
of $235 per ton remains among the highest in the industry,”
said David Sutherland, president and CEO. “We are well positioned
to take advantage of strong end-user demand for our steel mill products
and anticipated record activity in the energy tubular sector in
the fourth quarter.” ALLEGHENY “Third-quarter
results demonstrate both the growth potential and transformation
of Allegheny Technologies,” said L. Patrick Hassey, chairman,
president and CEO. “ATI operating profit reached $134 million,
or nearly 16 percent of sales.” In
ATI’s High Performance Metals segment, sales and operating
profit again hit record levels. While shipments in the Flat-Rolled
Products segment were the lowest since the first quarter of 2004,
the segment still recorded an operating profit of more than $33
million. The
company’s Engineered Products segment had another strong quarter,
as well, realizing an operating profit near 13 percent of sales,
an all-time high. “Total
flat-rolled shipments were low due to ongoing service center inventory
adjustments for certain stainless commodity products,” he said.
“On the other hand, we saw strong demand for our flat-rolled
high-value products from the oil and gas, electrical energy, aerospace
and chemical processing markets.” ATI
forecasts continued strength in the fourth quarter in demand for
high performance metals and engineered products. It expects increased
orders from service centers as they bring inventories better in
line with demand. “So far in 2005, we have announced strategic investments totaling almost $150 million for our titanium, nickel-based alloy and tungsten products and expect over $300 million in annual sales growth when these investments are fully implemented in 2007,” Hassey added.
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