AK Steel
Sets New Record for
Operating Profit Per Ton
AK Steel, Middletown, Ohio, reported net income of $109.9 million for the second quarter of 2007, compared to net income of $29.1 million for the second quarter of 2006.
Net sales in the second quarter of 2007 were a record $1.87 billion on shipments of 1,711,400 tons, also a record, compared to sales of nearly $1.5 billion on shipments of 1,599,100 tons for the year-ago quarter. The company said its average selling price for the second quarter of 2007 was a record of $1,092 per ton, a 17 percent increase over the $936 per-ton mark set in the second quarter of 2006, and about 1 percent higher than the $1,078 per-ton level in the first quarter of 2007.
Second-quarter 2007 operating profit was $187.4 million, or a record $109 per ton, compared to $63.0 million, or $39 per ton, in the second quarter of 2006.
“AK Steel’s excellent second quarter results reflect strong shipment levels and prices for our products, an outstanding operating performance, and our unrelenting efforts to reduce costs,” said James L. Wainscott, chairman, president and CEO of AK Steel.
Alcoa
Reports Strong Earnings
Amid Failed Bid for Alcan
Aluminum giant Alcoa reported its second-best quarterly performance ever with net income of $715 million in the second quarter, up 5 percent from the first quarter. The first two quarters combined for the best first half of revenues in company history.
The net income of $1.38 billion during the first six months of 2007 was a slight improvement from the $1.35 billion posted in 2006.
Sales during the three-month stretch totaled $8.1 billion, another company record, up modestly over the $7.9 billion in the first quarter and the $7.8 billion posted during the same period in 2006. Higher volumes and an improved mix drove the revenue increase, company officials announced at the Pittsburgh, Pa.-based company’s second-quarter conference call with investors and analysts.
“We have achieved another strong quarter, with record cash generation, record downstream performance, and our lowest debt-to-capital ratio in nearly eight years, while continuing an ambitious investment program,” said Alain Belda, Alcoa chairman and CEO.
Alcoa reported record after-tax operating income in several segments, including flat-rolled products and extruded and end products. Flat-rolled products reported income of $93 million, up $31 million from the previous quarter. The increase was driven by continued strength in aerospace and can sheet.
Extruded and end products established an after tax operating income record of $46 million, up 35 percent from the first quarter. The improvement was credited to strong European markets and improved productivity.
The quarter was also marked by Alcoa’s bid to acquire rival Canadian aluminum producer Alcan, an offer Belda touted at the company’s quarterly meeting, which was later withdrawn in the wake of Alcan’s decision to accept a higher bid from Rio Tinto.
During the quarter, Alcoa also completed the formation of a joint venture with Sapa in the soft alloy extrusion sector. The company continued to report progress on its strategic review of its packaging, consumer and automotive castings and electrical systems businesses.
ArcelorMittal
Combined Company Setting
Records 1 Year After Merger
ArcelorMittal, Luxembourg, reported record results during the first half of 2007 in earnings and sales. The world’s largest steel company announced net sales of $51.70 billion during the first half, a jump of 19.3 percent. Net income leaped from $3.42 billion to $4.97 billion, a 45 percent increase.
For the quarter, ArcelorMittal enjoyed sales of $27.22 billion and net income of $2.72 billion, both significant improvements from both the previous quarter and the same period the previous year.
“We are pleased to be able to report a record set of numbers for the second quarter and first half of 2007,” said Lakshmi N. Mittal, president and CEO. “These results were driven by a strong demand for steel combined with higher selling prices in all our major segments.”
The outlook remains positive moving forward. “We are anticipating a robust end to the year supported by the strength of our unique global and diversified business model,” he said. “One year from the merger, the company has made excellent progress in effecting a successful integration and is well positioned for the future.”
ArcelorMittal’s primary U.S. business unit, Flat Carbon Americas, reported shipments of 7.1 million tons in the quarter, a 7.9 percent increase from the first quarter.
Nucor
Imports, Overall Economy
Keep Nucor Profits Down
A combination of softness in the sheet market, slowdowns in several end-use segments and rising input prices dampened earnings for Nucor Corp. in year-over-year comparisons. But it was a familiar factor, the Chinese steel industry, which Nucor’s top executive discussed extensively in the company’s quarterly conference call with analysts and investors.
Nucor, Charlotte, N.C., reported first-half earnings of $725.9 million, a decrease of 13 percent from the $830 million posted in the first six months of 2006. The second-quarter results were off even further, down 23 percent from $450 million to $344.9 million.
Sales, however, were up 9.5 percent in the quarter to $4.16 billion. For the first half, net sales were up 8.0 percent to $7.94 billion.
While pointing to a number of factors that contributed to the minimill’s weaker performance, including reduced demand in the automotive, appliance and housing sectors, plus increased scrap and energy costs, Chairman and CEO Dan DiMicco was particularly critical of unfair Chinese imports, flowing into the U.S. at a rate of 400,000 to 500,000 tons per month.
“The fact is China is making a mockery of real free trade,” DiMicco said. “Free trade is rules-based trade, driven by true comparative advantage. By contrast, China’s exporting machine, with its staggering amount of steelmaking capacity, is driven by government subsidies, currency manipulation and abuse of the environment. This is why China cannot be considered a responsible member of either the global trade community or the global steel industry.”
DiMicco said his company was encouraged by recent developments at the federal level, including the International Trade Commissions’ recommendation to continue antidumping duties on China and other countries on rebar, and the recommendation from a trade representative that the World Trade Organization establish a dispute settlement panel to address Chinese subsidies in violation of WTO rules.
In the second quarter, Nucor reported a sizable increase in the average selling price per ton, up 13 percent from the second quarter in 2006 and 11 percent from the previous quarter. However, the 5,621,000 tons shipped to outside customers declined 3 percent from the record shipments in the second quarter of 2006, and were down 1 percent from the first quarter of 2007.
Among other developments in the second half of 2007, Nucor expects bar shipments to improve over the second-quarter pace; the sheet market will continue to be challenged due to imports and the ongoing difficult conditions in automotive and housing; and the beam and plate divisions will experience solid demand.
Steel Dynamics Inc.
SDI Overcomes Weakness
in Flat-Roll Market
Despite soft demand for flat-rolled steel and a price still near the bottom of the cycle, Steel Dynamics posted solid earnings improvement over the previous year.
The Fort Wayne, Ind.-based company reported second-quarter earnings of $94 million, an increase of 7 percent over the same period in 2006. Net sales were up 11 percent to $911 million, which was also a 5 percent bump from the first quarter of 2007.
“Demand for flat-rolled steel turned out to be weaker than initially expected, reducing our shipping volume for sheet steels and resulting in more moderate price increases than anticipated for flat-rolled products,” Chairman and CEO Keith Busse told investors and analysts during the company’s quarterly conference call. “Second quarter operating income was relatively flat vs. the first quarter due to lower shipping volumes for flat-rolled and bar steels.”
Second quarter consolidated shipments of 1.2 million tons were approximately the same as shipments in the second quarter of 2006 and slightly less than the first quarter of 2007.
Shipments of 2.5 million tons for the first half of 2007 were 9 percent above the first six months of the previous year.
Boosting Steel Dynamics’ second-quarter performance were record shipments and profits from the company’s structural and rail division and a solid quarter from the bar mill division.
As is the case with others in the industry, the soft price for steel is not a huge concern to Busse. “I think pricing has reached the bottom, and if this is as bad as it gets in a cycle, the news relative to the future is pretty good.”
In the short term, Busse was uncertain where the average steel price would go, though he suspected there might be some forward momentum by the end of the quarter.
The company completed two major acquisitions during the quarter, completing the purchase of flat-roll steel galvanizing company The Techs, Pittsburgh, Pa., in July.
Earlier, Steel Dynamics purchased a privately owned company, which operates two metal processing scrap yards in eastern Tennessee. The scrap yards will partly serve as a source of steel scrap to the company’s mill in Roanoke, Va.
“We didn’t buy these things just to be feeders to the steel mills. They’re there to make a profit and an adequate return on invested capital,” Busse said of the upstream expansion.
Still, there will be benefits to SDI’s operations, with better control over the quality of material that reaches company furnaces. Having ready availability to the tonnage is also significant, he said. The company is also developing another scrap collection and processing facility in Indianapolis.
Looking forward, Busse said the outlook is quite positive, with scrap prices down, selling prices stable and better margins going forward.
“We expect market demand for flat-rolled steel to improve in the third quarter following several months of inventory liquidation, which would provide the possibility of a higher third-quarter volume of shipments and improved profit margins for sheet products,” Busse said.
U.S. Steel Corp.
U.S. Steel Integrating
Lone Star into Operations
Sales improved but income dropped substantially for U.S. Steel during the second quarter.
The Pittsburgh-based company reported net sales of $4.23 billion during the quarter, a 2.9 percent increase from the same period in 2006. But net profit for the three-month period was $302 million, down 25 percent from the second quarter of the previous year.
For U.S. Steel, the second-quarter was marked by the completion of the acquisition of Lone Star, significantly expanding the company’s presence in the tubular market. The acquisition was finalized in mid-July.
“We’re pleased with the progress we’ve made to date in integrating our new facilities and employees into U.S. Steel,” Chairman and CEO John Surma told analysts and investors.
The $2 billion acquisition will improve U.S. Steel’s range in the tubular market, where it’s strength in seamless will be coupled with Lone Star’s position on the welded side of the market.
One area of integration that will happen immediately is bringing Lone Star’s inventory position in line with U.S. Steel’s lean philosophy. “We have managed our businesses in a stridently low-inventory way. In connection with Lone Star, there is more inventory on hand that we think is unnecessary, and some of that is obsolete and not appropriate,” Surma said. “We’ll deal with that this quarter.”
The tubular market is one of U.S. Steel’s three segments, which also include U.S. Steel Europe and flat-rolled. Those two segments had vastly different performances during the quarter, and slightly different outlooks going forward.
U.S. Steel Europe delivered record results in the quarter, including $244 million income from operations during the quarter. But third-quarter results are expected to decline, in part due to outage spending and related projects.
As was the case throughout North America, the company’s results in the flat-rolled segment were down from a year earlier. U.S. Steel’s income from operations totaled $92 million, an improvement from the first quarter but well behind the $212 million posted during the same period of 2006.
Surma said some positive movement was forecast in that segment for the second half of the year. Though prices aren’t expected to improve, the company projects higher shipments and lower outage costs during the period.
Surma said U.S. Steel was not concerned about the additional steelmaking capacity coming on stream, in particular in the southeastern U.S. Instead, he said, it may hint at an optimistic outlook for the health of the manufacturing sector in North America.
“You have to view that in the context of the North American manufacturing economy, which might turn out to be pretty decent in the next couple of years. The dollar trending lower makes not just us, but our customers, a little more competitive. That may be why others are participating in the market,” Surma said.
SECOND-QUARTER REPORT
AND OUTLOOK: SERVICE CENTERS
Metals USA
Aluminum, Stainless Emphasis
Boosts Metals USA in 2Q
Metals USA Inc., Houston, reported last month that sales and profits increased both sequentially and year-over-year in the second quarter.
The Los Angeles-based service center reported net income of $122.8 million, up from the $100.5 million posted during the same period in 2006. The company’s second-quarter sales totaled $1.90 billion, compared to the $1.56 billion recorded in the same three-month period of the previous year.
“Customer demand and pricing for our products remain at relatively healthy levels in the markets where we operate, although demand is down a bit from last year’s levels for some of our products,” Chief Executive Officer David Hannah told investors and analysts during the company’s quarterly conference call.
Reliance executives were not particularly enthusiastic about the outlook for the start of the upcoming quarter. Though demand is expected to remain largely flat, with a slight dip due to typical seasonal slowdowns, executives expect pricing to weaken in the quarter. That pricing trend is most likely to affect stainless steel as a result of dramatic decreases in nickel surcharges.
Nickel dropped almost 40 cents per pound in July, with another 30-cent decrease expected in August. Though the decline will impact margins for the company, which generates about 22 percent of its sales from stainless products, Reliance President and Chief Operating Officer Gregg Mollins said the surcharge correction was needed.
“Although we never like the idea of prices going down, we feel in this case it’s the right thing over the long haul because prices have just gotten out of hand,” said Mollins. “As high as nickel was, well over $2 per pound, at some point it’s going to stifle demand.”
Executives said this price decrease could be absorbed more readily by Reliance because of its commitment to running tight inventories.
“We try to manage our inventories wisely and buy only what we need when we need it. That helps tremendously in a situation like this, where market prices start to level off and decrease,” Mollins said. “We turn over the higher priced material we have in inventory quicker than other people and replace it with lower cost material easier. We’re going to get bit, but we get bit a little less severely than if we had excess inventories on hand.”
In contrast to the stainless market, the company expects that carbon steel prices may rebound in the coming months, the product of the yearlong destocking of inventories at the nation’s service centers.
“When I see inventories falling consistently month over month, I would not be surprised if we saw an announcement sometime in August or September of a price increase on carbon flat-rolled products,” said Mollins, who noted that Reliance is paying about $520 per ton for flat-roll. The flat-roll market remains the most difficult, he added, due to a combination of soft demand and intense competition.
Though the price of carbon steel has bounced around a bit in the past calendar year, from a high near $600 to a low near $500, Hannah said that variance is a source of encouragement. In previous pricing cycles, the fluctuation as a percentage of the base price was much larger. “If we’re at $550, give or take $50 on an ongoing basis, that’s a pretty good market to operate in,” he said. “It’s always going to be a cyclical industry.”
During the quarter, Reliance added another service center to its growing roster, Clayton Metals. The Wood Dale, Ill.-based company, which specializes in processing and distribution of aluminum, stainless and red metals, recorded $123 million in sales in 2006.
“The addition of Clayton Metals to our Reliance family provides further diversification of our business by bringing new products and customers to important geographic areas,” said Hannah.
Reliance is constantly looking for new acquisition targets, he added. “There are a lot of opportunities. We’re probably busier than we’ve ever been evaluating opportunities for acquisition.”
Most of the companies Reliance is evaluating are similar in size to Clayton Metals, in the $150 million sales range.
Reliance’s growth is not motivated by mill consolidation. “I think we’re of sufficient size currently that we’re not worried about supplier consolidation having an impact on our ability to work with them,” Hannah said. “We don’t have to force ourselves to grow because our suppliers are growing. Our growth will happen because it’s the right thing for us.”
Russel Metals
Service Center Segment
Enjoys Profitable Quarter
The service center segment of Russel Metals’ business enjoyed improved performance during the second quarter of 2007, though revenues for the overall company were almost identical to the previous quarter.
