Sidebars
and Tables:
Despite some late-2006 weakening, and perhaps a slow start to 2007, demand for special bar quality products should remain strong next year. 2008, however, is more questionable, say the experts.
“If all the capacity that is being discussed comes to fruition in 2008, the market will be glutted. There will be a tremendous excess supply,” says Joe Druzak, president and chief executive officer of Kreher Steel Co. LLC, Melrose Park, Ill. “It is a recipe for disaster.”
Demand for SBQ has been steady for the last few years and remains good, says D. Michael Parrish, executive vice president of Nucor Corp., Charlotte, N.C. “2007 will start off slow but there will be a growth in momentum as the year goes on. There will be a pickup in automotive and agricultural equipment in the second half and maybe in residential construction as well.”
Though industry sales in 2006 will likely remain on par with those in 2005, demand has moderated, says Chuck Jones, director of SBQ and semi-finished sales at Mittal Steel North America, East Chicago, Ind. “Automotive demand, especially from the Big Three, has slacked off. There has been a little softness in heavy-duty trucks, as well as a temporary slowdown because service center inventories are high. People are being a little cautious.” But many sectors, especially the energy and rail markets, remain robust, he adds.
Demand for SBQ in industrial equipment, particularly heavy construction and mining equipment, remains particularly good, says Tim Lafontaine, vice president of marketing for Castle Metals, Franklin Park, Ill.
“Automotive has weakened, but it is a cyclical industry and there will be brighter days there again,” says Keith Busse, president and chief executive officer of Steel Dynamics Inc., Fort Wayne, Ind.
Softening automotive demand is still a concern, given that 60 to 70 percent of SBQ is used for automotive applications. The news on this front has not been very good, says Christopher Plummer, managing director of Metal Strategies Inc., West Chester, Pa. U.S. automotive builds through July totaled 10.2 million this year, down 11.7 percent from 11.5 million during the first seven months of 2005. U.S. output by the traditional Big Three automakers was down about 25 percent, while production by the New Domestics was up 5 percent. For the full year, Plummer says, automotive production in the NAFTA region is expected to be down about 2 percent.
The impact of the well-publicized problems at the Big Three and their parts suppliers is not being fully felt by SBQ producers and distributors yet. Mark Marcucci, president of the MACSTEEL unit of Quanex Corp., Jackson, Mich., says that through October, MACSTEEL’s SBQ demand was actually up about 10 percent vs. a year earlier, though he expects some softening by year’s end.
“Ford, General Motors and Chrysler production rates are going down significantly in the fourth quarter—in the 10 to 15 percent range—with much of that coming from sport utility vehicles and other light trucks. As a result, we will see some reduction in our order books in November and December,” he says.
SBQ demand should be up among the New Domestics, experts say. Not only are their production rates holding steady or even increasing slightly, but the foreign-owned automakers are steadily making moves to increase the domestic content of their vehicles. “They had brought in a lot of SBQ from their home countries in the past,” says John Anton, director of the steel service at Global Insight Inc., Washington, D.C. “But with the dollar stronger and a desire for just-in-time delivery, we are starting to see them do more domestic sourcing.”
One SBQ producer observes that Honda has been aggressively using domestic SBQ in the drive trains and suspension systems of its vehicles produced in the United States. More recently, Toyota and Nissan have been catching up to Honda. The process that domestic steelmakers must undergo to get certified by the New Domestics, however, tends to be a long one, says Marcucci. “You need to be very patient and take a long-term view. It takes two to four years of validation work.” Once accepted, he adds, it provides a nice safe harbor. “We were lucky. Our efforts over the past several years have hit at the right time. Our order book would be down further if we hadn’t had new program growth with the New Domestics.”
Factoring in the New Domestics’ volumes, the automotive market is only down a few thousand units, says Nick Boyan, Mittal’s director of market strategy and business development. “What has changed is the mix, as there are more passenger cars than light trucks,” he notes.
That shift to lighter-weight vehicles is having a significant effect on SBQ consumption, explains Plummer. In general, light trucks use 50 to 100 percent more steel than passenger cars, and that differential is even greater in SBQ than for sheet.
More SBQ is used in heavier-duty truck suspension systems and four-wheel drive transmissions than in passenger cars’ suspensions and two-wheel drive transmissions, explains Ted Thielens, vice president commercial for Republic Engineered Products Inc., Akron, Ohio.
With steel industry efforts to promote the use of steel in auto applications, including passenger cars, the differential isn’t as dramatic as it might have been, says Mittal’s Jones.
In addition, SUV and light truck sales appear to be recovering more quickly than expected, says Druzak. Last month, both Ford and GM announced a bump in their truck sales. “People have a short memory of $3 gasoline when they are paying nearer to $2 a gallon.”
Steel suppliers should be able to weather this correction by automakers, says Jack Lynch, sales and marketing manager for Charter Steel, Saukville, Wis. “Demand is off in the second half, but it isn’t bad. Other sectors, including construction equipment and heavy trucks, are doing better than automotive. They are holding things up.”
Despite pockets of weakness, SBQ remains one of the firmest of the steel markets, Anton agrees.
But even non-automotive applications face some downward pressure for next year, notably heavy-duty trucks. “The last two years have been off the charts for Class 8 trucks,” says Marcucci. In 2006, heavy-duty truck production is expected to hit a record 340,000 units or more. “But a lot of this was due to pre-builds in advance of the new federal Environmental Protection Agency regulations [which take effect in January]. Next year they will take a vacation and fall into the 240,000 range,” he adds.
The setback should be short-lived, says Druzak. “Trucks should start to recover in the latter part of 2007 and then go through the same thing again in 2010 when the next round of EPA standards goes into effect. 2008-09 should be relatively strong and 2010 will be another bad year.”
Class 8 truck declines next year shouldn’t affect overall SBQ sales too much. “It isn’t a huge market,” Marcucci say, “and most other SBQ applications look like they will be holding up.”
“Energy is absolutely booming,” adds Mittal’s Boyan, who notes that road and building construction are also quite strong. While some weakness has been reported in agricultural equipment, most other industrial equipment is expected to do well next year.
That, Plummer says, should make 2007 a net positive year.
SBQ supplies are not experiencing the same degree of inventory correction as is flat-rolled steel. “Demand from service centers is a touch softer as they have been hesitant to build inventories, but they are still in the market and keeping their inventories comfortably high,” says Marcucci.
Most observers agree that SBQ supply and demand remain fairly well balanced, though the recent softening could prompt bar mills to schedule some outages in the fourth quarter, much like announced capacity reductions for flat-roll.
“Industry-wide, there are likely to be slightly more, longer lasting outages than last year,” says Thielens, to help to maintain the stable pricing environment for bar. Prices have fluctuated with surcharges, but base prices have held steady, he notes.
While imports hold a significant share of the SBQ market—about 35 percent of six- to nine-inch rounds and 25 percent of the market as a whole, according to Parrish—foreign shipments have remained level. “We are not seeing the same kind of swings you see in flat-roll or plate,” Thielens says.
Stable prices suggest that SBQ production is matched well with demand. Yet a few players are planning to add production capacity, which concerns competitors. “I think that there is currently plenty of SBQ capacity in North America. Despite that, some people are continuing to build new facilities and reopen old ones,” observes Boyan. “I don’t think the market needs that capacity.”
Charter Steel recently completed a $130 million expansion of its Cuyahoga Heights rolling mill, purchased from the American Steel & Wire division of Birmingham Steel Corp. in 2002. The project added 500,000 tons of melting capacity to the Ohio mill, Lynch says. “This will allow us to enter other parts of the SBQ market that require low levels of oxygen, hydrogen and nitrogen in their products, such as complex automotive and bearing applications and certain high-carbon, high-formability and cold-heading applications.”
Steel Dynamics Inc. may add rolling capacity at its Pittsboro, Ind., bar facility to bring its rolling capabilities more in line with its melting capabilities. That doesn’t necessarily mean the minimill will be rolling more SBQ, Busse says. “We are not sure what we will roll. We have also developed the ability to roll rebar and channels.”
SDI estimates it could increase its bar capacity to 800,000 to 900,000 tons per year from its current level of 500,000 to 600,000 tons by matching its rolling capacity to its melting capacity. Should SDI decide to go forward, Busse adds, the project would not be completed until sometime in 2008.
Most industry concerns are focused on Nucor’s announcement that it will revamp and reopen the Memphis, Tenn., bar facility that it acquired when it purchased Birmingham Steel. The mill can produce 850,000 tons of steel per year—450,000 tons of finished product and 400,000 tons of semi-finished product, including forgings, seamless pipe and tube and large rounds and squares. The mill is expected to begin producing SBQ in first-quarter 2008.
“I think the market can take another 450,000 tons a year of finished capacity,” says Parrish. Nucor believes it will mainly displace imports, especially since the mill will be targeting larger-diameter products that are harder to come by domestically.
Castle’s Lafontaine foresees problems if Nucor’s new capacity comes on stream and demand remains flat. He doubts the market will crash as it did in 2002-03, however, when about two million tons was added, bankrupting Qualitech, now part of SDI, and the melt shop at the Memphis plant that Nucor is reopening. “The fundamentals in the market are much stronger than they were then,” he says.
Druzak questions if this is true. “This is a relatively small market and there are plans for dramatic increases in supply without any commensurate increase in demand,” he says. “If all the capacity that is planned comes on line, then run for cover. There will be a glut of supply.”
Nucor Believes in New Mill’s Mission
While some industry observers question the need for more SBQ capacity, Nucor Corp. maintains that its decision to reopen the Memphis mill it acquired from Birmingham Steel a few years ago is a sound one—both for Nucor and the industry.
“It is a good fit for us and for the marketplace,” asserts D. Michael Parrish, Nucor executive vice president, noting that this move supports his company’s strategy “to build the most diverse, highest quality and lowest cost SBQ offering in North America.”
The new mill would allow the steelmaker to produce larger-diameter products—from 2.25 to 9 inches—commonly used for heavy truck parts, which Nucor does not currently supply from its Norfolk, Neb., and Darlington, S.C., operations. “We also wanted to get into the higher-quality range, including SBQ for axle shafts, crankshafts, wheel hubs and spindles, and we will be able to do that at Memphis,” Parrish says. He maintains there is strong demand for cold-finished and large-diameter SBQ.
When the facility comes on stream in first-quarter 2008, he says, Nucor will be able to offer a good mix of SBQ products, ranging from 7/32 inch (which it currently produces at Norfolk) to 9 inches, including some cold-finished product. “I don’t know of any domestic producer that has that breadth of product in SBQ,” he adds.
Given that the facility would allow Nucor to produce product from 20-inch-diameter round billet, the end result will be a low-cost, high-quality, continuously cast product with one of the highest reduction ratios in the industry for larger diameter SBQ, and a minimum of a 5:1 reduction ratio for all of its SBQ products.
Memphis is also a great location for the SBQ mill, Parrish says, as it is located in the heart of a rapidly growing market for bar. It offers good logistics, including access to a port, four railroads and a great highway network. In addition, some existing equipment and the foundation for the melt shop are already in place, which lowers Nucor’s investment. The expected cost of $230 million, he notes, is substantially lower than the $450 million figure that many analysts forecast in July. The Memphis plant was operated for a short time by Birmingham Steel to make billet that was later finished into SBQ at another facility.
Among the equipment that Nucor will purchase for Memphis will be a new furnace, a new caster, a ladle metallurgy furnace, a new vacuum degasser, a new reheat furnace, several stands for the rolling mill, including a breakdown mill and several finishing stands, as well as finishing, handling and testing equipment.
While the facility will have the annual capacity to produce 850,000 tons of steel, only 450,000 tons of that will be in finished SBQ. “With all of the imported SBQ and the expected increased demand [largely from New Domestic automakers in the South], there is enough demand for another 450,000 tons of finished product,” Parrish says. Even if there is a dip in the market, he adds, “I feel we would be able to compete and survive through that dip.”
But the question is, will others survive as well? “There are some old plants that can’t match the cost advantages of the much newer Steel Dynamics and Nucor plants,” admits Keith Busse, president and chief executive officer of Steel Dynamics Inc., Fort Wayne, Ind.
