AK Steel
Average Price Hits
$1,000 Per Ton
AK Steel cracked an average selling price of $1,000 per ton for the first time in company history during its record third-quarter performance. The company’s selling price of $1,020 per ton was $84 better than the second quarter and almost $200 more than the $825 per ton registered in the same period one year earlier.
Strength in the electrical and stainless steel markets and an unwillingness to chase a softer spot market for carbon steel were some of the reasons for the record per-ton price, AK Steel Chairman, President and CEO James Wainscott told analysts and investors during the company’s third-quarter conference call last month.
Overall, AK Steel’s shipments were down slightly in third-quarter 2006, though sales were up. Net sales hit a record $1,553.6 million on shipments of 1,522,600 tons. Third-quarter sales were about 12 percent higher and shipments about 10 percent lower than in the year-ago period.
AK management attributed the drop in shipments to lower demand in the North American automotive and light truck production sectors, plus higher customer inventory levels and increased imports.
AK’s third-quarter net income totaled $26.0 million, an improvement over the same period in 2005 when the company reported a net loss of $29.0 million.
October marked the third anniversary of management changes at the Middletown, Ohio-based company. Wainscott said his management team has achieved most of its objectives to return the steelmaker to profitability during that timeframe.
He characterized his first-year plan as “the Three Cs”—regaining customers, reducing costs and improving the cash position. The second year focused on “the Three Fixes”—repairing AK’s one-sided customer agreements, its uncompetitive labor position and its raw material supply agreements. Most of these objectives have been met, Wainscott said, with ongoing labor negotiations at its Middletown Works the last of eight labor contracts to renegotiate.
Announcing his new plan for AK, Wainscott said, “We’re moving beyond restoring, repairing and renewing to accelerating our company’s future progress.”
AK’s new plan goes by the acronym PEDAL: Profitable growth initiatives with relatively small, targeted investments; Enhancing shareholder value; De-leveraging the balance sheet; Asset maximization; and Long-term sustained profitability.
One day earlier, AK announced a capital investment to increase production capacity for high-quality, grain-oriented electrical sheet steel by 12 percent. The $55 million expansion project is designed to meet strong demand for electrical steel products in electrical generation and transmission markets.
The improvements are planned for the company’s Butler (Pa.) and Zanesville (Ohio) facilities. They follow a $14 million investment at Butler Works announced in April. By mid-2008, the company expects its electrical steel capacity to reach 335,000 tons per year.
Strong demand for electrical steel, as well as stainless products, has Wainscott optimistic about the fourth quarter despite some slowing in carbon steel markets. But the final quarter will also feature continuing labor negotiations with locked-out union employees at AK’s main facility in Middletown.
After coming close to ratification on a previous contract vote, the International Association of Machinists rejected a contract proposal from management in October by a larger margin. AK responded with a less attractive offer that reflected “changing economic conditions,” Wainscott said.
Though the company has cut employment costs since the lockout, it is “not maneuvering to make temporary replacement workers permanent,” Wainscott said.
Alcoa
Price Decline Clouds Strong Results
Though Pittsburgh-based Alcoa announced third-quarter 2006 income of $540 million, an 89 percent increase compared with third-quarter 2005, third-quarter sales declined 2 percent vs. the second quarter due to seasonality and lower metals prices. Prices for aluminum on the London Metal Exchange declined 6 percent in the third quarter, or approximately $172 per ton, bringing Alcoa’s profits in below expectations.
Nevertheless, in the first nine months of 2006, Alcoa generated more profits than in any full year in the company’s history. Year-to-date income from continuing operations was $1.9 billion, 82 percent higher than the same period in 2005, officials reported.
“We continue to drive stronger performance than our results in 2005, with both the top and bottom line showing double-digit improvements over the third quarter of last year,” said Alain Belda, Alcoa chairman and CEO.
Alcoa reported mixed results in its six business units. Three units—alumina, primary metals and engineered solutions—reported positive results compared with a year earlier. Extruded and end products reported flat operating income, while flat-rolled products and packaging and consumer goods reported lower operating income. Softening in the North American automotive and housing markets was offset by continuing strong demand from the aerospace and commercial transportation sectors.
The third quarter was solid, though not at the level of the previous quarter, partly due to unplanned and extended production outages, Belda told shareholders and analysts last month.
Production is back on track, and the company has made strong progress on capacity expansion projects, he said. The Alcoa Fjardaal smelter in Iceland is now 75 percent complete and is expected to produce its first metal in the second quarter of 2007. In Brazil, the new Juruti bauxite mine and the expansion of the Sao Luis alumina refinery are under way. The refinery will produce an additional 2.1 million tons per year beginning in 2009. In North America, work continued on environmental upgrades at the company’s Warrick, Ind., smelter. At the Intalco smelter in Ferndale, Wash., the company will be starting up a second potline, which will produce an additional 7,500 metric tons per month beginning in the first half of 2007.
While declining to speculate about future aluminum prices, Belda noted that inventories are at the lowest levels since 1988 and demand is on the increase in North America, Europe, Japan and China. “The present price is certainly justified by the fundamentals,” he said.
The biggest wild card is the future supply and demand in China, he added. “They are growing demand at 20 percent per year. The question is whether their growth will slow down or whether they will have the necessary energy and raw material to increase their own capacity.”
IPSCO
New Record on Strong Shipments
of Plate, Energy Tubular Products
IPSCO Inc., Lisle, Ill., reported record net income for third-quarter 2006 of $197.1 million, up from $134.0 million in third-quarter 2005 and $156.4 million in second-quarter 2006. For the first nine months of 2006, IPSCO’s net income was $504.2 million, up 21.3 percent from $415.6 million for the comparable period last year.
“Record sales volume and higher margins driven by record average product pricing pushed earnings above the high end of our guidance for the quarter,” said David Sutherland, IPSCO president and CEO.
Sales for the third quarter hit a record $996.9 million, an increase of 37.3 percent over the same quarter last year and 11.6 percent more than sales in the second quarter.
Total shipments for the quarter of 1,042,000 tons achieved a new record, an increase of 194,000 tons compared to last year and 41,000 tons higher than the prior quarter.
IPSCO’s third-quarter average product price of $957 per ton, also a new record, was up $101 per ton from a year ago and $64 per ton vs. the second quarter this year.
Steel mill product shipments of 691,000 tons increased 30.9 percent over last year, but declined 1.6 percent from the record achieved in the prior quarter. Record tubular shipments of 351,000 tons, driven by greater large-diameter sales volumes and stronger U.S. energy tubular shipments, increased 9.5 percent over the prior year.
IPSCO management expects that end-user demand for plate and energy tubular goods will continue to be strong. “While energy prices have fallen recently, we expect them to remain at levels sufficient to maintain high drilling activity and resultant demand for OCTG products,” Sutherland said.
Demand from service centers and distributors is declining in the fourth quarter as these customers reduce inventories, however. “As previously announced, we will be adjusting our production accordingly,” Sutherland said, “utilizing this opportunity to accelerate maintenance of equipment that has been running at capacity during this record year and to better align our own inventories.”
ISPCO expects its total fourth-quarter shipment levels to remain comparable to the prior quarter, though higher maintenance expenses resulting from the production curtailments and a less favorable product mix related to lower large-diameter pipe sales will cause some margin compression.
IPSCO’s acquisition of the NS Group is on schedule to close prior to year-end, subject to approval by NS Group shareholders.
Nucor Corp
Earnings Already Top Last Year
Through nine months of 2006, Nucor Corp. has already established a new full-year earnings record.
Net earnings for the first nine months totaled $1.35 billion, ahead of the $1.31 billion posted during 2005, the previous record year. The quarterly earnings figure of $517.6 million was also a record, 14 percent better than the previous high of $452.8 million set during the second quarter, and 77 percent better than the $291.9 million earned during the same period in 2005.
Daniel DiMicco, chairman, president and CEO, said part of Nucor’s success is attributable to its wide-ranging steel product line. “With our product line diversity, Nucor’s short-term performance is not tied to any one market. Nucor’s favorable outcome for setting a third-consecutive annual earnings record is again proving the value of our position as North America’s most diversified steel producer.”
During the first nine months of 2006, Nucor’s sales were comprised of 39 percent sheet, 30 percent bars, 14 percent beams, 11 percent plate and 6 percent downstream steel products.
In the first nine months of 2006, Nucor’s consolidated net sales increased 19 percent to $11.28 billion, compared with $9.49 billion in the first three quarters of 2005. Average sales price per ton increased 7 percent while total tons shipped to outside customers increased 11 percent vs. the first nine months of 2005. In third-quarter 2006, Nucor’s consolidated net sales increased 30 percent to $3.93 billion, compared with $3.03 billion in third-quarter 2005.
Also during the quarter, Nucor announced its choice of Memphis as the site for an SBQ mill in the southern United States. The facility will have an estimated bar capacity of 850,000 tons and is expected to start up during the first quarter of 2008.
“For a number of reasons, Memphis is a great location for an SBQ mill,” said Executive Vice President Mike Parrish. “It’s situated right in the heart of a rapidly growing market for SBQ products. And it’s taking advantage of existing infrastructure in place at the idled bar mill facility acquired in the Birmingham Steel transaction in 2002.”
Parrish said capital costs for the project are $230 million, substantially less than the $450 million projected by industry analysts.
DiMicco spent part of October in Washington, D.C., testifying before the International Trade Commission on the sunset review of galvanized steel import duties. Domestic automakers joined the affected foreign producers in arguing against the duties, which DiMicco and other U.S. steelmakers would like to see renewed.
Most of DiMicco’s concerns remain fixed on China and fair trade. In 1980, 44 percent of the global steel industry was government-owned. In 2006, outside of China, only about 5 percent is government-owned, DiMicco noted. “Unfortunately, with what China’s built up, we’re back up to 40 percent.”
Steel Dynamics
On Pace for Record Year
Executives at Steel Dynamics Inc., Fort Wayne, Ind., reported record revenue and earnings for the third quarter and forecast a positive fourth quarter despite softening of their flat-roll business. Keith Busse, SDI president and chief executive officer, attributed the slowing to a drawdown of service center inventories and weaker automotive demand, which he expects to be short-lived.
The minimill steelmaker’s net income increased 161.5 percent to $118.7 million during the quarter vs. $45.4 million a year earlier. Net sales increased 82.9 percent to $911.9 million compared with $498.7 million in third-quarter 2005.
SDI’s year-to-date earnings and sales were also much improved with net income up 85.9 percent to $292.6 million compared with $156.8 million in the first nine months of last year. Year-to-date net sales were up 48.5 percent to $2.4 billion in the same comparison.
Looking ahead to the fourth quarter, Busse said the expected weakness in the flat-roll sector, which only accounts for about half of SDI’s current business, should not affect margins for the quarter. While flat-roll prices will likely be down $20 to $25 per ton in the fourth quarter, scrap costs are also expected to decline a similar amount. Production volumes could be affected, however, not only by the sector’s softness but also due to planned maintenance outages.
Even though SDI does not have much exposure in the automotive market, production cuts by domestic automakers will still have an effect, Busse said. “It impacts the overall industry because that material has to move somewhere.”
Industry wide, Busse said, domestic steelmakers could stand to cut flat-roll production levels by as much as 1 million to 1.5 million tons in order to hold the line on pricing. “There obviously are a few renegades around dropping bombs on people, but they don’t represent that much capacity. All in all, the market is holding up real well,” he added.
The inventory correction at the service center level “will be somewhat short-lived—two months or three months in duration,” Busse said. That view is supported by many industry observers, including analyst Christopher Plummer, managing director of Metal Strategies Inc., West Chester, Pa., who recently indicated that the inventory drawdown should be concluded by the end of this year. “There is a good chance you will see the industry recover again in early first-quarter, and perhaps we will be headed for another fairly terrific year in 2007,” Busse said.
SDI’s long products business has been doing particularly well, he continued, with backlogs up sharply and margins stable or increasing. In light of increased bookings for special bar quality business at SDI’s Pittsboro, Ind., engineered bar products division, the steelmaker is considering adding another rolling facility there. Pittsboro has more melting and casting capacity than rolling and finishing capabilities. The facility currently has the ability to roll 500,000 to 600,000 tons a year while the melt shop, if pushed, could produce 800,000 to 900,000 tons of steel. “So we are considering adding another facility that might increase and enhance SBQ rolling capability to the tune of 400,000 tons a year,” Busse reported.
Should SDI choose, after completing a viability and profitability study, to go ahead with the upgrade, the project would not be completed until sometime in 2008, Busse said.
SDI is also in the midst of a 500,000 to 600,000 ton per year expansion at its Columbia City, Ind., structural and rail division, which includes a new medium section mill expected to be completed in late fourth-quarter 2007 or early first-quarter 2008. The company expects to complete a rail welding facility at Columbia City by early next year, as well as its railroad tie joint venture.
SDI is also revamping the fabrication divisions acquired with Roanoke Electric Steel, adding roll forming to the Virginia operation.
