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Do rising imports and inventory levels signal a downturn in demand? Despite concerns, mill and service center executives remain optimistic about next year.
By
Myra Pinkham,
Contributing Editor
Sidebars and Tables:
The North American carbon flat-roll market continues to chug along, though clouds are gathering on the horizon that portend at least a modest softening in the fourth quarter.
The flat-roll market is actually being pushed in two directions at once, explains Roy Platz, director of marketing for Mittal Steel USA, Chicago. “Underlying demand is still very good, although it has shifted a little in the last couple of months. Demand for anything not consumer related is extremely strong.”
At the same time, he says, U.S. flat-roll steel imports are very high and service center inventories have increased every month since November 2005. “They are not currently at an outlandish level, but I don’t think the inventory build is over yet. Service centers still have orders for more steel from offshore that hasn’t come in yet.”
Demand remains “not great, not bad, but OK,” says Steve Sorvold, vice president commercial for Wheeling-Pittsburgh Corp., Wheeling, W.Va., and chief operating officer of Wheeling Corrugating Co. “While automotive is off, most of our basic customers are doing well.” Third-quarter business is playing out as expected, he adds, but the “modest inventory issue” makes the fourth quarter uncertain.
Whether inventory levels are cause for concern is a matter of some disagreement. Bob Weidner, president of the Metals Service Center Institute in Rolling Meadows, Ill., admits that service center inventory levels have risen. “But shipments have also picked up. I don’t think that there are excess inventories in the pipeline. By historical standards, inventories are in fairly good equilibrium,” he says.
MSCI’s August inventory and shipments survey showed that total steel inventories rose 4.4 percent to 15.9 million tons, while months’ supply on hand declined to 3.1 months from 3.4 months (due primarily to three more shipping days). Carbon flat-product inventories showed the biggest gain, to 9.6 million tons in August, a 6.5 percent increase from the prior month. Months’ supply saw the smallest decline, falling to 3.1 months from 3.2 months in July.
September inventories are likely to fall as buyers with a “fear of dropping prices” mentality slow purchases and scale back ahead of the weakening price levels, reports Michelle Applebaum of Michelle Applebaum Research Inc. in Chicago. Ultimately, this slowing of inventory purchases—and hopefully import orders—will strengthen the flat-roll market, she adds.
Charles Bradford, metals analyst and president of Bradford Research Inc. in New York, believes that flat-roll inventories are excessive. “They are probably bigger than people think,” he says, noting American Iron & Steel Institute statistics show that U.S. apparent supply of flat-roll rose 14.6 percent in the first half (excluding imports of semifinished steel) vs. a year earlier. “There is no way that with a GDP growth of just 2.5 percent you could justify a 14 percent increase in supply. It must be going into inventories.”
But at least two major service center chains say their inventories are not out of whack. “If our flat-roll inventories are high, they are only about 5 percent too high, and we will probably work that down in the next two to three months,” says Tom Ballou, director of purchasing for flat-roll and tubing at O’Neal Steel Inc., Birmingham, Ala.
David Hannah, chief executive officer of Reliance Steel & Aluminum Co. in Los Angeles, says his company is in a similar situation. “Our inventories are in pretty good shape, and I don’t know of any service center that is really concerned about [inventory levels]. I don’t see anyone destocking. Inventories are higher than in the beginning of the year, but they are probably just at a more normal level.”
Even if inventories are moving into the high range, they aren’t near the danger level of 2004, says Christopher Plummer, managing director for Metal Strategies Inc., West Chester, Pa. In the second half of 2004, flat-roll prices collapsed to a low of $435 per ton amid a drastic inventory drawdown.
Service center inventories are still about 1 million tons below the levels of late 2004 or early 2005, when service centers had 4.5 months’ supply on hand, Platz agrees. “And real demand will suck some of that up. Inventories will grow a little bit yet, but we aren’t looking at anything like the 2005 inventory liquidation.”
The buildup of service center inventories is largely due to the high volumes of imported flat-roll, says Bob Johns, director of marketing at Nucor Corp., Charlotte, N.C. Import levels are cause for concern, say Johns and other mill executives.
“Imports until very recently haven’t had much of an impact on the market. There had been a narrow gap between domestic and foreign prices,” says Rob Levey, general manager, commercial, for Gallatin Steel Co. in Ghent, Ky. “But now we are hearing talk of additional foreign product availability at the same time as mills are catching up with their order books.”
In fact, AISI announced that U.S. steel imports totaled 4.197 million net tons in July, including 3.368 million tons of finished steel, making it the second highest monthly total ever, surpassed only by the 4.418 million tons recorded in August 1998. August imports totaled 3.959 million tons, including 3.135 million tons of finished steel—down from July’s near-record total, but still substantially higher than last year. Year-to-date figures for the first eight months of the year show steel imports up 42 percent vs. the same period in 2005. On an annualized basis, imports are on track to set an all-time record, AISI says.
Why the import surge when the economy is slowing? In part, Bradford says, it could be a side effect of domestic mills putting customers on allocation. “It might have caused some companies to turn to imports.”
Keith Busse, president and chief executive officer of Steel Dynamics Inc. in Fort Wayne, Ind., recalls some “hiccups” in supply earlier in the year that may have prompted some companies to seek foreign sources to fill the gap.
Perhaps the biggest influence, says Plummer, is the widening spread between U.S. and foreign hot-roll prices. Both European and Asian prices have gotten even cheaper recently compared to domestic offerings after being closer in price for most of this year. “Price premiums always lead to a surge of imports six months later,” he adds.
O’Neal’s Ballou reports that “there’s a fair amount of imports on the docks right now. They are coming in at below-market prices because they are late and based on first-quarter numbers. Domestic prices went up in the second quarter.
“All indications are that future imports will come in closer to domestic prices,” he continues, “and when that happens, the rate of imports will slow. But what is here will have to work through the system. I expect that service center inventories will grow a little as they absorb these imports.”
Despite concerns about supply, U.S. flat-roll consumption remains steady. “I think demand is better than what people give it credit for,” says Busse, noting that even prospects in the automotive market are not as bad as some believe, given recent announcements of restructuring by Ford Motor Co. and other traditional Big Three producers.
Though Ford is curtailing some production in the fourth quarter, Toyota is opening a new plant in San Antonio, Texas, at the end of the year, which promises to boost steel demand next year once it is fully ramped up, Platz notes. Several other new automotive assembly plants are also coming on stream in the next few years.
Even taking both the Big Three and the New Domestics into account, the number of cars being produced in North America in the second half of 2006 will be off by 8 percent, says Plummer, which could have a ripple effect on steel sheet production overall. “It won’t necessarily come crashing down, but we could see some downward activity.”
The impact of the auto slowdown will be very uneven, with companies that have actively pursued business with the New Domestics being in better shape than those dependent on the Big Three, says John Anton, director of the steel service at Global Insight Inc., Washington, D.C. Both groups of automakers buy much of their steel domestically. In fact, Platz notes, the Ford Mustang actually has less domestic content by percent than the Toyota Sienna.
Many other end-use markets for flat-roll steel are doing quite well, observes John Ferriola, executive vice president at Nucor, including nonresidential construction, appliances (despite a falloff in housing starts) and energy applications such as pipe and tube. The energy sector should remain active for some time, given the continuing high rate of exploration for both oil and natural gas. Likewise, steel demand in nonresidential construction should be strong for a while, “as long as the Federal Reserve doesn’t overcook interest rates and put a kibosh on things.” Major indicators point to strong activity in nonresidential construction this year and next, Wheeling-Pitt’s Sorvold agrees. “The same goes for metal buildings, especially roofing,” he adds.
There remains a certain element of unpredictability to the outlook for flat-roll, however. “So much of our business has to do with psychology. If buyers think that prices are going to soften, or even not go up, they tend to back off a little,” says Ballou, which seems to be happening now. “It is a little easier to get steel than it was six months ago. Mill lead times are coming in a little. Steel is not unlimited. The mills still have us on controlled order entry. But no one is having problems securing the metal they need.”
During the last three months, hot-roll prices have jumped a little bit, going from about $550 to $630 per ton, Plummer says, “but now there are signs the market is peaking.”
Can domestic mills sustain prices at this level? Anton expects prices to fall, albeit gradually, to around $500 per ton by late 2007, which is closer to the price that market fundamentals really dictate. “Prices have been $50 to $100 higher than they should be because of tight inventories,” he maintains.
In an effort to sustain market prices, Plummer expects mills to carefully control supply. “Any decline should be tempered by proven production and pricing discipline on the part of the consolidated steelmakers,” he says.
Several major steelmakers have voiced their commitment to pricing discipline. “We are determined to make sure that we continue to match supply with demand,” says Nucor’s Ferriola.
Mittal has voiced a similar stance. During its second-quarter earnings conference call in early August, the company stated that it expected to adjust North American production with underlying demand in the fourth quarter. “We are committed to matching supply with demand vs. continuing to pump out production should conditions weaken,” Platz says.
Will other producers follow suit? “That was the case in 2005,” Platz says. “In 2005, the industry took some capacity off stream as inventories were worked through the system. But going forward, every company will make its own decision.”
He maintains that pricing discipline is easier now that the steel industry has consolidated. “In general, when an industry consolidates it can more easily match supply to demand, and that ends up helping everyone in the supply chain.”
“It is not unusual for producers to take maintenance outages in the fourth quarter. It makes sense that this will happen in the fourth quarter of this year, as well, especially if there is weakness in the market,” says Sorvold. “It seems as if producers have better business acumen than they did several years ago.”
Generally, mill executives expect 2006 to finish as a good year despite a fourth-quarter slowdown, and 2007 to offer more of the same.
Some inventory adjustments need to take place, but the underlying fundamentals are still okay,” says Gallatin’s Levey.
“If everyone acts in a responsible, reasonable manner and there isn’t a flood of imports, the market should remain strong,” says Nucor’s Ferriola.
“If the economy doesn’t grow more than 2.5 percent and steel doesn’t grow at all, we could have lower activity in the first half of 2007,” says Bradford. But that isn’t necessarily bad. “It would just be a more normal year.”
Industry Waits to See If SeverCorr Succeeds
When steel veteran John Correnti’s long-awaited SeverCorr LLC steel minimill ramps up next year in Columbia, Miss., the industry will be watching closely to see if the startup can meet its stated goal: to be the first electric furnace steelmaker with the capability to produced flat-rolled sheet for exposed automotive applications.
Some fear the new mill could be disruptive to the domestic flat-roll market. But analyst John Anton, director of the steel service at Global Insight Inc. in Washington, D.C., says SeverCorr could actually supplant more imports than domestic metal. Indeed, he adds, if SeverCorr is successful in producing high surface quality steel, it could be a very profitable venture, given the growing rate of auto production in the Southeast and the lack of local suppliers in the region. “U.S. Steel’s Fairfield Works is the only integrated producer in the Southeast, and it isn’t focused on the automotive market,” he notes.
SeverCorr was formed about a year ago with the inking of a joint venture between Correnti’s SteelCorr LLC and Russian steelmaker JSC Severstal, which has an 80 percent interest in the mill. It will utilize the new “evolutionized” thin slab casting technology by German mill equipment maker SMS Demag AG, the company that pioneered CSP thin slab casting technology in the late 1980s. SMS Demag’s technology got a big push from Correnti and Ken Iverson at Nucor Corp., whose success in using the technology for its Crawfordsville, Ind., minimill in 1989 led to a flurry of CSP sales worldwide.
SeverCorr is using SMS equipment for its melt shop, hot and cold mills, pickling and oiling line, galvanizing line and temper mill. Other equipment suppliers include: Brickmont, for its tunnel furnace; Ebner, for its batch annealing facilities in the cold mill; GE Energy, for its substation, power distribution and melt shop electrics; and Toshiba, for the mill drives and automation control systems.
Correnti says this equipment is currently being delivered and installed, and will gradually be brought online next year. The pickling and oiling line should be up and running after the first of the year, followed by the cold mill, which will start operation early in March, and the galvanizing line, which is scheduled to come on stream sometime in the second quarter. The hot mill will ramp up last, allowing the steelmaker to start melting and casting its own steel by late in the second quarter. Prior to that, Correnti says, SeverCorr will process steel purchased from other companies.
SeverCorr officials expect all the equipment to be fully operational by third-quarter 2007, enabling the mill to produce 1.5 million tons of steel per year, with the option to expand capacity in the future. That 1.5 million tons will include about 400,000 tons of galvanized steel, 400,000 tons of cold-roll, 300,000 tons of pickled and oiled, and 400,000 tons of hot-roll.
“There has been a lot of interest in the plant,” says Correnti. “There are 4.5 million autos assembled in the South, which is a great reason to put our mill here.”
The location is especially strategic given that there currently are no other mills in the region capable of supplying carmakers—notably New Domestics like Toyota and Honda that have built new plants there—with automotive-quality steel for exposed applications.
The new mill’s fate is not tied exclusively to the auto industry. Actually, only about 30 percent of the company’s production will go to the automotive market, and only about half of that will be for exposed applications, says Michael Wagner, SeverCorr’s chief commercial officer. Other end-use markets the mill is targeting include pipe and tube, containers, construction, agricultural and metal buildings. Distribution will also account for a large percentage of SeverCorr’s sales, Wagner says, though he could not cite a percentage likely to pass through service centers.
The mill’s ability to produce steel suitable for high-end appliance and automotive applications remains one of its main selling points, however. “This is the first electric furnace mill that is being engineered, constructed, started up and operated to hit the quality standards of automotive,” asserts Correnti.
How can SeverCorr expect to succeed in serving the exposed automotive market where other minimills have failed? “One factor is our commitment to a richer blend of virgin iron units and high-quality scrap,” says Wagner. That metallics blend will of course vary depending on the product, Correnti adds. “If we are making construction products, we’ll probably use 90 percent scrap and 10 percent DRI, HBI or pig iron. But if we are making it for exposed automotive, we will probably be using 80 percent pig iron and only 20 percent scrap.”
In addition, the equipment that SeverCorr uses will make a big difference, including a state-of-the-art processing line and a vacuum degasser in the melt shop. “We will have a high-end, high-quality pickling line coupled with a five-stand tandem cold mill. Most other CSP mills have reversing mills. Only integrated mills tend to use tandem mills,” Wagner says.
“What we are doing is taking an electric furnace CSP hot side and marrying it with integrated-type finishing equipment,” Wagner adds, “including the coupled pickling line/cold mill and an automotive quality galvanizing line, all capable of producing 72- to 74-inch-wide product.”
SeverCorr won’t get into automotive exposed right away, but will start by producing some less demanding steel. “We’ll learn to crawl before we walk, walk before we trot and trot before we run,” says Correnti. At first, the company will make steel for such markets as tubing, construction and containers, and maybe some unexposed automotive. “Then after working through the bugs next year, we should be able to get into more surface-critical applications, such as exposed automotive and appliances, by early in 2008,” Wagner estimates.
Answering the question of whether there is a need for another domestic steelmaker, Correnti observes, “There is a shortage now of flat-roll material, and there is always demand if you are a low-cost, high-quality producer, as we plan on being.”
“Reception has been very favorable from pipe and tube producers to equipment manufacturers to Tier 1 automotive suppliers to the automakers themselves, given that we will be able to bring to the South products that aren’t currently available here,” adds Wagner, noting that the mill has already sold about 30 percent of its production capacity.
Other companies are already positioning themselves to take advantage of the regional market that SeverCorr creates. “We have several companies opening up next to us, including Kenwal Steel Corp., a full service steel processing center,” says Wagner, who expects others to do the same.
SeverCorr is not likely to be the only domestic producer to open greenfield steelmaking capacity in the near future, Global Insight’s Anton says. “I wouldn’t be surprised if we see another 5 million to 10 million tons of greenfield steel plate, bar and sheet capacity announced to come on stream by 2010.”
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