• MSCI Aluminum Panel Hotbuttons:
  Consolidation, China, Substitution
• MSCI: Steel Inventories
  Peaked in September
• AISI: September Shipments
  Down from August
• SSINA: Stainless Import Levels
  Up 18% Through August
• IISI: China Leads Increase
  in World Steel Production
• AIIS: Steel Import Pace
  Cools off in October

MSCI’s panel included: Chairman and CEO Steve Demetriou, Aleris International, Beechwood, Ohio; Martha Finn Brooks, chief operating officer, Novelis Inc., Atlanta; Jay Gratz, executive vice president and CFO, Ryerson Inc., Chicago; David Hannah, CEO of Reliance Steel & Aluminum Co., Los Angeles; and Mike Peterson, president Peterson Aluminum Corp., Elk Grove Village, Ill.

“Consolidation of the mills is not the factor driving consolidation of the service center sector,” said Gratz. “Service center consolidation is to ensure the best supply chain available.”

Though his company, like Ryerson, is a service center behemoth, Hannah feels that a place remains for the smaller distributor. “There may be some perception that the larger the producers get, the larger the service centers and distributors should be in order to maintain the scale producers want,” Hannah said. But as long as small distributors can continue to get the product they need from the mills, they’ll feel no additional pressure to merge. “I think there will always be room for smaller, successful, well-managed service center companies,” Hannah added.

Peterson, whose company represents the smaller side of the distribution sector, said that tracking the consolidation on the mill level is important for service centers. “It puts pressure on us to manage carefully our commercial relationships and make sure what people are likely to be winners in the game.”

Consolidation, Demetriou said, is one part of the equation for reaching the proper supply-demand balance. “Industry consolidation, discipline, employee management is what we should be working toward every day. It was a failure of this industry in 2001-02. A lot of people use excuses of recession or cycles, but we create a lot of our own cycles. We’ll have a very healthy industry going forward if leadership prevails.”

Like most discussions among metals executives, this one eventually turned to China. Predicting what will happen in Asia is exceedingly risky, they said. 

“A great deal depends on what the government policy is with regards to imports/exports, taxes, rebates and what happens with Shanghai ME vs. the LME,” Brooks said. “As those diverge or converge, it dramatically changes the game, and it’s very hard to predict.”

Demetriou said the best defense against China rests with the players in the domestic supply chain. “The relationship in this room is critical to competing against China. The relationship between service centers and producers, coming up with differentiated products and steps to lower costs through the whole supply chain, is one of the best things we can do to prevent China from being a threat here in the U.S.”

Demetriou hopes metals buyers will consider both short-term and long-term implications when sourcing materials from China. “It’s easy in the short term to take opportunistic, low-cost Chinese materials for the profits. That’s the first step toward destroying the partnership [with producers] and the opportunity we have to work together. The first step is sheet and the next step is [manufactured] products.”

That’s Peterson’s fear. “We’ve lost three million manufacturing jobs in seven years. It’s a direct threat to us. If there’s no manufacturing base in the United States, who are we going to sell to?” he asked.

Another concern among aluminum suppliers is the high price of the material and the ever-present threat of substitution.

Brooks said one defense against users switching to a cheaper material is technological innovation in design. Novelis is striving to use less metal to do the same work. “That can help us compete in a world if in fact $2,500 to $2,800 metal is here to stay.”

Substitution of aluminum can be offset, or even improved, by aluminum’s substitution for other materials. Tony Rizzuto, senior managing director of Bear Stearns, who delivered a presentation on the outlook for aluminum earlier in the day, suggested that aluminum is making more inroads as a substitute material than it is losing ground to cheaper materials. He cited HVAC, low-voltage applications and power cable as three markets where aluminum has won some market share.

Overall, Hannah believes that most substitution talk is generally overblown. “There’s a lot more substitution talk than actual substitution. It’s a big commitment for a manufacturer to substitute materials. It’s a huge undertaking, and you’ve got to be convinced that the price disparity that is causing you to think about it is permanent. I don’t think any of us have that much confidence in where prices are going long-term to make that commitment,” Hannah said.

MSCI: Steel Inventories Peaked in September
If historic patterns hold true, steel inventories at U.S. service centers may have peaked and could begin a slow decline in the coming months, reports the Metals Service Center Institute, Rolling Meadows, Ill.

U.S. service center steel inventories reached 16.8 million tons by Halloween, up 32.3 percent from the end of October 2005, but just 1.2 percent higher than at the end of September this year. Expressed in terms of months supply on hand, moreover, U.S. service center steel inventories declined to 3.6 months from 3.8 months in September. On a seasonally adjusted basis, U.S. steel inventories have remained at 3.7 months supply on hand for the last two months.

From peak to trough, steel inventory cycles tend to last roughly two years. Inventories typically grow for about 12 months, then decline for the subsequent 12 months. Since December 2005, when inventories began to build, monthly additions to U.S. service center stocks have averaged 410,000 tons, peaking at 674,000 tons in September. October’s additions to inventory were only 195,000 tons, according to MSCI.

Canadian service center steel inventories declined to 1.38 million tons, down 6.2 percent from the previous month (although 37.1 percent higher than a year ago). At current shipping rates, Canadian steel inventories represent a 4.1-month supply, down 9.7 percent from the end of September.

October steel shipments from U.S. service centers of 4.62 million tons were down 1.2 percent from October 2005. For the first 10 months of the year, shipments of nearly 48.2 million tons represent an increase of 3.9 percent from the same period of last year.

U.S. aluminum product shipments increased 4.7 percent to 106,200 tons. Year-to-date shipments of 1.04 million tons are 3.5 percent higher than during the same period last year. Aluminum inventories at the end of October totaled 392,400 tons, an increase of 10.2 percent from October 2005 and up 1.1 percent from September 2006. At the current shipping rate, this represents a supply of 3.7 months, or 5.2 percent more than last year and 0.9 percent more than last month.

Canadian service centers shipped 337,400 tons of steel products during October, or 6.8 percent less than during the 2005 month. Year-to-date shipments of 3.4 million tons were down 3.1 percent from 2005.

Canadian shipments of aluminum products totaled 10,600 tons during October, or 5.4 percent more than a year ago. For the first 10 months, Canadian service centers shipped 106,000 tons of aluminum, or 3.9 percent more than during the 2005 period. Aluminum inventories of 33,000 tons at the end of October are down 2.6 percent from a year ago and up slightly from September. At the current shipping rate, this represents a 3.1-month supply, down 7.6 percent from last year, but up 1.5 percent from last month.

AISI: September Shipments Down from August
U.S. steel mills shipped 9,199,000 tons in September, up from the previous year but below the amount shipped in August, according to the American Iron and Steel Institute, Washington, D.C. Shipments were up 6.6 percent from the 8,630,000 tons during September 2005, though down 4.1 percent from the 9,591,000 tons shipped in August.

A year-to-year comparison of year-to-date shipments shows the following changes within major market classifications: service centers and distributors, up 4.9 percent; automotive, up 12.2 percent; construction and contractors’ products, up 12.5 percent; oil and gas, up 10.5 percent; machinery, industrial equipment and tools, up 7.5 percent; appliances, utensils and cutlery, down 4.2 percent; containers, packaging and shipping materials, up 3.3 percent; and electrical equipment, up 20.8 percent.

SSINA: Stainless Import Levels Up 18% Through August
Imports of total stainless steel in the first eight months of 2006 totaled 541,631 tons, an 18 percent increase compared to the same 2005 period, according to the Specialty Steel Industry of North America. U.S. consumption was 1,733,593 tons, a 13 percent increase, while import penetration was 31 percent.

SSINA reports the following data comparing year-to-date imports and consumption through August vs. the same eight-month period last year:

• Stainless steel sheet/strip: Imports were 345,869 tons, a 36 percent increase; U.S. consumption was 1,251,050 tons, a 14 percent increase.
• Stainless steel plate: Imports were 67,639 tons, a 21 percent increase; U.S. consumption was 227,638 tons, a 34 percent increase.
• Stainless steel bar: Imports were 76,397 tons, a 12 percent decrease; U.S. consumption was 152,940 tons, an 8 percent decrease.
• Stainless steel rod: Imports were 19,689 tons, a 38 percent decrease; U.S. consumption was 44,275 tons, a 10 percent decrease.
• Stainless steel wire: Imports were 32,037 tons, a 6 percent increase; U.S. consumption was 57,690 tons, a 10 percent increase.

Imports of total specialty steel (comprising stainless steel, alloy tool steel and electrical steel) in the first eight months of 2006 were 657,345 tons, a 9 percent increase compared to the same 2005 period; U.S. consumption was 2,082,047 tons, an 11 percent increase.

• Alloy tool steel: Imports were 69,889 tons, a 15 percent decrease; U.S. consumption was not calculable.
• Electrical steel: Imports were 45,825 tons, a 24 percent decrease; U.S. consumption was 295,016, an 8 percent increase.

IISI: China Leads Increase in World Steel Production
World crude steel production for the 62 countries reporting to the International Iron and Steel Institute, Brussels, Belgium, was 105.9 million metric tons in October—7.4 percent higher than for the same month of 2005.

China produced 37.7 million tons of crude steel in October, 18.0 percent higher than for the same month last year. Indian production reached 3.7 million tons, an increase of 2.6 percent year-on-year. Production in South Korea declined by 5.9 percent year-over-year to 4.0 million tons in October. Japan’s production, at 10.1 million tons, was 4.5 percent higher than a year earlier.

Production in the EU was 17.4 million tons in October. This is 3.5 percent higher than for the same month last year. Crude steel production in Belgium was 1.0 million tons, an increase of 13.6 percent compared to the same month last year. This is the first time Belgium has achieved production of one million tons in a single month. Other major producers in the region include Germany (4.2 million tons, up 4.1 percent) Italy (3.0 million tons, up 5.9 percent), France (1.6 million tons, down 7.0 percent), and the United Kingdom (1.2 million tons, up 5.7 percent).

Crude steel production in North America is estimated at 10.7 million tons in October. This is 1.5 percent lower than the same month last year. Total production in the United States was estimated at 7.8 million tons in October, 4.7 percent lower than October 2005.

AIIS: Steel Import Pace Cools off in October
Imports continued their slow decline in October as the impact of higher inventories appears now to be affecting import arrivals, according to the American Institute of International Steel, Washington, D.C. Total steel imports during the month were 3.8 million tons, a 2 percent decrease from September and 36.6 percent lower than October 2005.

Year-to-date figures for nine months indicate imports increased from 26.8 million tons to 38.8 million tons, a 44.9 percent increase from 2005.

“Non-NAFTA import arrivals in October remained at strong levels reflecting the market conditions in June-August when consumers were concerned about rising prices in a period of high demand. At the end of the period, increased inventories began to be a concern however” said Dave Phelps, president of AIIS. 

The AIIS monthly import survey began to show weakening bookings already in September and that trend continues, indicating that the decline in imports will continue for the rest of the year and into 2007.  Semifinished steel slab arrivals in October remained at healthy levels, reflecting the same market conditions when those products were ordered

The data show that semifinished imported products increased by 0.3 percent in October 2006 compared to October 2005. For the year-to-date period, semifinished imports increased from 5.71 million tons in 2005 to 8.1 million tons in 2006, a 41.8 percent increase.