Despite more moderate prices for steel products, demand remained strong enough for most mills to sustain healthy revenues and profits in 2005. In their fourth-quarter and year-end conference calls for investors and analysts last month, mill executives reported positive momentum carrying the market into 2006.

By the Staff of Metal Center News

• NUCOR: Another Record Earnings Year
• U.S. STEEL: Outages Don’t Spoil Good Year
• ALLEGHENY TECHNOLOGIES:
  High-Value Focus Accelerates Profitability
• AK STEEL: Record Revenues, Small Loss
• STEEL DYNAMICS INC.: ‘Excellent’ 2005 Despite Price Dip
• CARPENTER TECHNOLOGY:
  Earnings Reflect Demand for Higher Value Materials

NUCOR
Another Record Earnings Year
Nucor Corp.’s diversified steel product line helped the Charlotte, N.C., mill deliver its second straight record earnings year. Nucor announced 2005 earnings of $1.31 billion, an increase of 17 percent from its $1.12 billion posted in 2004.

“Our ability to set a second-consecutive annual earnings record proved the value of our position as the most diversified steel company in North America,” said Daniel DiMicco, Nucor vice chairman, president and CEO. “The combination of Nucor’s unique culture and product line diversity go a long way to explaining why our company has been profitable, every year, every quarter, since 1966.”

Nucor’s record year in 2004 was driven by the performance of its flat-roll and plate business, he said. In 2005, the company’s success was fueled by the bar mill and plate groups, with additional improvements in joints and beams.

“Nucor’s product diversification is very significant in that our short-term performance is not tied to any one steel product market. Through a number of steel industry cycles, relatively better conditions in some markets have cushioned the effects of more severe conditions in others,” DiMicco said.

Nucor posted its 17 percent gain despite a flat fourth quarter. Earnings in the final quarter of 2005 were $341.0 million, just a shade below the $341.4 million earned during the fourth quarter of 2005. The figure was up, however, from the $291.9 million registered during the third quarter of 2005.

Net sales for 2005 increased 12 percent to $12.70 billion from the $11.38 billion in 2004. Fourth quarter net sales of $3.21 billion were up 4 percent compared to the fourth quarter of 2004.

The company also set new records for steel production and steel shipments. Steel production was 20.3 million tons, up 3 percent from the 19.7 million tons in 2004. Total shipments increased 6 percent to 20.6 million tons.

Despite the figures, the company still has room for increased capacity. Nucor envisions a potential increase of 700,000 to one million tons in its sheet business in the next two years and 300,000 tons in its plate business through incremental growth. “We are only running at 82 percent of our current achievable capacity,” DiMicco noted.

DiMicco also told investors he did not see any significant import threat in the coming months despite reports of increased steel arriving from China.

“We’re not saying there isn’t going to be an increase in imports, we just don’t see where they’re going to be significant enough to have a negative impact on pricing or operations of our mills—or for that matter the flat-rolled industry,” he said.

U.S. STEEL
Outages Don’t Spoil Good Year
United States Steel Corp. worked through two significant outages to deliver profitable fourth quarter and yearly results.

“Our fourth-quarter operating performance contributed to making 2005 a very good year,” said President and CEO John P. Surma. “Our annual earnings were the second highest on record, and we had another year of solid return on capital employed.”

Capital spending and maintenance expenses were higher than anticipated, however, primarily because of delays related to the Gary No. 14 blast furnace upgrade, he added. “We are proceeding through the start-up process and expect to be producing at full capacity of 9,200 tons of hot metal per day in a relatively short time.”

U.S. Steel reported net income of $109 million for the fourth quarter and $910 million for the year. Quarterly net income was up 17 percent from the $93 million earned in the third quarter, but well behind the $451 million reported in fourth-quarter 2004. Net income for the year was 20 percent behind the $1.1 billion U.S. Steel reported in 2004.

Net sales in the fourth quarter were up 8 percent from the third quarter to nearly $3.5 billion, though 11 percent behind the same period in 2004. Net sales for the year totaling $14.0 billion were fractionally better than the total in 2004.
Though outages are always part of the schedule, U.S. Steel had two particularly large ones in 2005 that affected profitability. Its Gary Works No. 14 blast furnace and a second furnace in Slovakia were both idled during the second half of the year. Despite that, flat-rolled products delivered a profitable quarter.

“The flat-rolled segments earned $36 million in the fourth quarter while operating at 80 percent of capacity,” Surma said. It was the third consecutive quarter the flat-rolled segment delivered profits despite operating below optimum levels.
The outages were not without impact, however, Surma said, estimating the additional cost at $50 million. “We’ll have a diet of more moderate outage jobs this year,” Surma said. “It will be more of a level kind of load in 2006.”

Asked about the prospect of increased steel exports by China, Surma was relatively unfazed. Slowly increasing prices there, consolidation among Chinese mills, and China’s return to status as a net importer of steel are all positive indicators, he said. “There’s excess [production], which we’re concerned about, but the overall supply and demand balance seems like its moved in a more favorable direction.”

Additionally, the domestic market is likely to be able to accommodate a spike in imports, he added. “We watch the imports very carefully, both the actual imports and the import monitoring systems. While we see some move up on imports, it’s not a torrent and could be needed to balance the market given the demand we have in North America.”

Surma said the first quarter of 2006 looks good for U.S. Steel’s domestic and European markets. Service center and end customer inventories are balanced, while the company expects continued strength in the energy markets served by its tubular segment.

“For flat-rolled, first-quarter 2006 shipments are expected to improve compared to the fourth quarter of 2005 due to the restart of the Gary No. 14 blast furnace, and prices should remain at about the fourth-quarter level,” he said. “We expect higher raw material costs to be partially offset by reduced outage costs.”

ALLEGHENY TECHNOLOGIES
High-Value Focus Accelerates Profitability
Allegheny Technologies Inc., Pittsburgh, capped off a year of “accelerating profitability” with another substantial quarterly increase. In the fourth quarter of 2005, Allegheny reported net income of $120.4 million, an increase of 244 percent.

The full-year figures were even better, as Allegheny reported net income of $361.4 million compared to net income of $19.8 million in 2004.

The company recorded sales of $894.4 million during the final quarter of 2005, up 14.9 percent from the same period in 2004. For the year, sales increased from $2.7 billion to $3.5 billion, a 30 percent increase.

The company also enjoyed significant cost-savings, registering $125 million in cost reductions. That surpassed the planned $100 million in savings expected for the year.

“ATI’s fourth quarter 2005 results were strong, concluding a year of accelerating profitability,” said L. Patrick Hassey, chairman, president and CEO. “Notably, over 70 percent of operating profit and approximately 45 percent of sales were generated by our High Performance Metals and Engineered Products segments, demonstrating the transformation of ATI to a high-value-products driven company.”

High Performance Metals sales were up 57 percent for the year and 31 percent in the fourth quarter.

For 2006, Hassey forecast strength in the aerospace, defense, chemical process, oil and gas, electrical energy and medical markets.

Allegheny’s service center customers reported lower inventories of commodity stainless sheet. The mill expects shipments to improve as 2006 progresses.

The company’s Engineered Products division is positioned for a strong 2006. “Demand from the oil and gas market is at a record level, and demand from the transportation, construction and mining markets remains strong. In addition, demand for our titanium precision metal processing capabilities from the aerospace market is at a record level,” Hassey said.

The company has targeted $225 million of capital investments in 2006.

AK STEEL
Record Revenues, Small Loss
Though AK Steel Corp., Middletown, Ohio, posted a net loss of $2.3 million last year after special charges, the company’s annual revenue hit a record $5.65 billion on record shipments of 6,418,200 tons.

ames L. Wainscott, the company’s chairman, president and chief executive officer, says he was pleased with the company’s “outstanding operating and sales performance in 2005.” The company generated an adjusted operating profit of $245.8 million, or $38 per ton, for the year.

“Due to a variety of factors, including record increases in raw material and energy costs and a significant decline in spot market selling prices, it was certainly not the year that we had anticipated some 12 months ago,” Wainscott said, noting that the company incurred nearly $400 million in higher costs for natural gas, iron ore, hot briquetted iron, slab and coal vs. 2004.

Nevertheless, he maintained that the company “performed very well on those items that we could manage,” such as safety, quality, customer service, productivity and controllable costs. In fact, he said, the company set performance records in the areas of safety, quality, productivity, shipments and revenues. The company shipped more than 6.4 million tons in 2005 and expects to ship nearly 1.6 million tons in the first quarter of 2006, which is more or less on par with the shipment rate in the fourth quarter of 2005.

AK Steel has made great strides in the cost-cutting program it initiated two years ago, he continued. “We further reduced controllable cost by nearly $100 million in 2005. Since we initiated this program in the fall of 2003, we have achieved cumulative cost reductions of nearly $400 million.”

However, Wainscott said, the continued volatility in energy, raw materials and spot-market pricing underscores AK Steel’s need to further lower its operating costs to achieve sustained profitability.”

One important step in that direction, will be the achievement of competitive, “new era” labor contract agreements at its facilities, such as last year’s labor pact at AK Steel’s Ashland (Ky.) Works.

“What we obtained and what we seek with other (agreements) is pretty simple—fewer workers, fewer job classes, more flexibility and employee benefit packages that we can afford. We are asking all of our employees to do more with less because that’s what our competitors have done—and that is what we must do to compete in the steel business.”

Wainscott will soon turn his attention to two of the company’s largest plants—Middletown, Ohio, and Butler, Pa.—where labor pacts expire this year. The contract at Middletown, which represents more than 40 percent of AK Steel’s hourly employees, expires first, on Feb. 28. “We are absolutely committed to achieve labor deals in Middletown and Butler that enable us to compete effectively with our peers,”—mills with smaller work forces, more flexible union contracts and little or no legacy pension or retiree health care costs.

AK Steel is also making capital expenditures to help increase its profitability. This includes the installation last year of a new vacuum degasser in Ashland, which has allowed the company to meet all of its requirements for degassed slabs internally, rather than purchasing them from other producers. This year AK Steel plans to invest $8.5 million at its AK Tube LLC subsidiary in Walbridge, Ohio, for large diameter stainless tube-making equipment. This will help the company meet market demand for more efficient diesel exhaust components required for Class 8 trucks when new federal emissions standards take effect in January 2007.

AK also plans to expand its production capacity for high-quality grain-oriented electrical steel by about 20 percent through a combination of small, targeted capital investments at existing production lines and by introducing innovative operating practices.

“In the past two years we have come a long way, but our journey has just begun,” Wainscott said. “We still have a lot of work ahead of us, and 2006 will indeed be a defining year for this company.”

STEEL DYNAMICS INC.
‘Excellent’ 2005 Despite Price Dip
“We had a really solid year in 2005, and we are looking forward to another solid year in 2006,” said Keith Busse, president and chief executive officer of Steel Dynamics Inc., Fort Wayne, Ind.

Steel Dynamics posted a net income of $221.8 million on $2.18 billion in net sales in 2005 vs. a net income of $295.3 million on $2.14 billion in net sales in 2004. However, 2004 was “one of those years that come around just every so often,” Busse said.

Shipments for the year hit 3.6 million tons in 2005, up about 4 percent from 3.4 million tons in 2004. But the average selling price in 2005 was only $608 per ton vs. $625 the year earlier.

The year started off with fairly weak results in terms of market activity and product demand, Busse said. Prices fell sharply from highs near $700 per ton to the low $400s early in the year, recovering to the $500s by year’s end.

Service center and other customer inventories played a role in this price recovery. “I think inventories are fairly well managed by our clients. I don’t think there are excess inventories out there. Buying patterns are fairly steady.”

Steel Dynamics’ flat-rolled division, which accounts for about 67 percent of the company’s shipments, continued to do “just excellent” in 2005, Busse said.

Mark Millett, vice president and general manager of that division, noted that flat-roll shipments totaled around 2.4 million tons on production of 2.5 million tons, even with the soft market in the second and third quarters of the year.

Iron Dynamics, while still struggling a bit, saw some improvement through the year. Steel Dynamics is in the process of finalizing its partnership agreement, which is expected to give the steelmaker a 30 to 35 percent ownership stake in the alternative iron venture, slated to start up this spring.

Steel Dynamics’ structural and rail group ended 2005 in a strong position regarding sales, production and shipping, said Richard Teets Jr., vice president and general manager of that division. December was a record production month. “We entered 2006 likewise as strong, and we are positioned to break our rolling mill production record again in January while taking one and a half days off for rail trials,” he said.

Last year the division made progress with its rail production, making rail sections from blooms produced by its new caster moulds that were “free from the defects that plagued us for the last two years,” Teets said. “In the first quarter we will continue to refine our casting techniques and improve our rolling efficiencies. When our quality is verified, we will begin the qualification process with Class I railroads.”

In light of that, Steel Dynamics plans to build a $200 million, medium-sections structural mill at Columbia City, Ind., which would increase its structural and rail mill capacity to 1.5 million tons from its current 900,000 tons level. “It will afford us the opportunity to load up the existing mill on rail, as well as allowing us to produce some wider sections that either Steel of West Virginia doesn’t produce or doesn’t want to,” Teets said. “It will also be designed to accommodate some larger bar sections that Roanoke Electric may or may not find desirable.” Since the company has not officially announced this project yet, no start-up date has been determined.

Steel Dynamics’ bar division is making good headway out of the spot market business and into the contract world, Busse says, with sales and order-entry activity extending out through mid-March. Its new finishing facility in Pittsboro, Ind., is ahead of schedule and will likely begin operation late in the first quarter or early in the second quarter of this year.

Busse admits that import activity may increase this year, “but if it does, I don’t think we will see anything substantial until the second quarter. That could affect selling values to some degree, given where world prices are in relation to domestic prices, but I think the impact will only be moderate.”

All in all, Busse expects another solid year in 2006. “We have gotten off to a better start in the first quarter of 2006 as opposed to the first quarter of 2005. I think that Steel Dynamics is very well positioned in the markets we serve at this point in time.”

CARPENTER TECHNOLOGY
Earnings Reflect Demand
for Higher Value Materials
Driven by very strong demand from the aerospace and medical markets, Carpenter Technology Corp., Wyomissing, Pa., said that earnings for its fiscal second quarter, ended Dec. 31, were the second strongest in the company’s history. It reported $42.9 million in net income for the quarter on net sales of $345.7 million, compared with net income of $32.5 million on net sales of $312.1 million a year earlier.

“Our performance was driven by solid demand for our higher value materials across key markets worldwide,” said Robert J. Torcolini, chairman, president and chief executive officer. “In particular we experienced continued strong demand for our specialty alloys (including stainless steel), as result of increasing commercial aircraft deliveries.”

Carpenter’s sales to the aerospace market, at $129 million, were up 44 percent from a year earlier, representing the eighth consecutive quarter that its aerospace sales increased.

“The upcoming number of commercial aircraft deliveries as well as the increasing proportion of larger aircraft in the mix should sustain demand,” he said, noting that there has been increased demand for wide body aircraft, which typically require greater use of lighter-weight materials such as the titanium alloys that Carpenter supplies. “This should continue to drive demand for titanium materials over the next several years with deliveries for the Airbus 380 and the Boeing 787 beginning in 2007,” he added.

Medical was another very strong market for Carpenter, where sales for the quarter increased 63 percent to $34 million vs. the year earlier period. “This reflected growth with key customers, strong demand from Europe and pricing actions. We continue to see steady growth of our specialty alloys and titanium materials in both the domestic and foreign medical markets,” Torcolini said.

Overall, Carpenter’s titanium sales for the quarter were up 60 percent to a record $41 million vs. a year earlier. Its sales for stainless steel were not nearly as strong. In fact, at $120 million, they were down 9 percent from a year earlier. This, Torcolini said, “reflects our strategy not to pursue lower margin business, as well as inventory adjustments within certain supply channels and reduced sales to the industrial, consumer and automotive markets.”

Torcolini expressed the most concern about the automotive market, especially in light of recent announcements of cutbacks and plant closings by major carmakers. Sales for high-performance parts and heavy-duty trucks remain strong despite the overall softness in the automotive sector, he added.

Softness in Carpenter’s industrial sector sales, which declined 12 percent to $82 million, does not necessarily reflect weakness in that sector. Rather, Carpenter has made a strategic decision to reduce its participation in those marginally profitable products, Torcolini said.

Looking forward to the balance of fiscal 2006, Torcolini commented: “We see continuing strength in the demand for our aerospace materials and solid growth in other key end-use markets. Based on current market conditions, Carpenter is well positioned to achieve another record year.”