The ailing housing market has put a dent in demand for rebar, but positive trends in other end-use markets have provided some offsetting reinforcement. While demand is down this year from the record levels of 2006, strong nonresidential and infrastructure construction activity, and limited import penetration, combined to make it a solid 2007 for domestic bar mills.
The bigger question for the producers of concrete reinforcing bar is whether this strength will continue into 2008. Analysts and industry experts believe a lot depends on whether the U.S. economy continues to be strong and if rebar imports continue to stay low.
“Demand has been steady although a little down from last year,” says D. Michael Parrish, executive vice president of bar and cold-finished steel for Nucor Corp., Charlotte, N.C. Nucor is one of the country’s three major domestic suppliers of rebar, along with Gerdau Ameristeel and Commercial Metals Corp.
While the moribund residential market is responsible for some of that decline, homebuilding comprises only 3 to 5 percent of total rebar consumption, according to Christopher Plummer, managing director of Metal Strategies Inc., West Chester, Pa.
“Luckily our market isn’t heavily affected by the residential construction market,” says Bob Risser, president of the Concrete Reinforcing Steel Institute, Schaumberg, Ill. “We are less affected by housing than other segments of the construction market.”
Yet even with such a small percentage of rebar going toward the residential market, the doldrums there contributed to a 7 percent downturn in demand for rebar in 2007 vs. 2006. Brian MacIntyre, a salesman for Re-Steel Supply Co. Inc., Eddystone, Pa., says the market for 20-foot rebar used for residential applications “is basically dead.”
Total housing starts (including single family and multifamily construction) in October slumped to a seasonally adjusted annual rate of 1.229 million units, down 16.4 percent from a year earlier, according to U.S. Commerce Department statistics. The Washington-based National Association of Home Builders reports that November builder confidence in the market for new single-family homes, while unchanged from October, remains at its lowest point since the trade association started tracking it in January 1985. “While they continue to work down inventories of unsold homes and reposition themselves for the market’s eventual recovery, they realize it will be some time before market conditions support an upswing in building activity—most likely the second half of 2008,” says David Seiders, chief economist for the NAHB.
Some places, most notably California and coastal regions such as Florida, use masonry brick reinforced with rebar, but Matt Brace, senior vice president of marketing and sales for Commercial Metals Co., Irving, Texas, notes this represents a fraction of the rebar market. More widespread is its use in high-rise multifamily housing and condominiums—a market that has also been fairly weak.
Multifamily construction is expected to fall about 11 percent next year following the already steep declines of 2007, according to Robert A. Murray, vice president of economic affairs at McGraw-Hill Construction in New York.
“With the decline in the housing market, people are less willing to buy condos. And financing is so tight that it is deterring some property owners from building, as well,” adds Jeff Estep, regional manager of Far West Steel Inc., Eugene, Ore.
While in general the nonresidential construction market continues to be strong, “the prolonged housing slump is starting to affect the light commercial market, such as churches, schools, banks, gas stations medical buildings and retail stores,” says Jack Stutz, president of Tamco Steel, Rancho Cucamonga, Calif. This is simply common sense, says Parrish. “If you stop building houses, you don’t need the buildings and roads that support housing. It doesn’t only affect rebar, but the whole economy.”
Murray McClean, president and chief executive officer of Commercial Metals, played this down, however, calling the impact of the housing slump on commercial construction “marginal.” And Mario Longhi, president and chief executive officer of Gerdau Ameristeel Corp., Tampa, Fla., says he hasn’t seen a slowdown in nonresidential construction yet. “However, if the residential construction market takes many more quarters to be cleaned up, certainly there will be some impact.”
Experts agree that the outlook for nonresidential construction overall remains positive, with “put in place” construction up 17 percent in 2007. That increase is quite broad-based, says Ed Sullivan, chief economist for the Chicago-based Portland Cement Association. The hotel/motel sector is “going absolutely crazy,” he says, increasing about 52 percent, while educational building is up 17 percent, office building is up 13 percent and retail is up 10 percent.
But all indications are that 2008 won’t be as good. One key leading indicator, F.W. Dodge contract awards, has shown declines for 10 consecutive months.
Other factors also point in that direction, Sullivan says, including predictions that the U.S. economy will slow in the fourth quarter of 2007 and the first quarter of 2008. An increase in the number of subprime loan defaults and the high price of oil as the heating season kicks in also bode ill. “Third quarter GDP was good, but I suspect that was on the back of credit cards. Now that debt is reaching a record level, I think people will back off their spending,” says Sullivan. Not only is consumer confidence falling, but so is business confidence, given that most economists see about a 35 percent chance of a recession.
This is particularly true when it comes to office construction, says Charles Bradford, metals analyst and principal with Bradford Research/Soleil Securities, New York. “Businesses are pulling back spending not just because of concerns that the economy is slowing, but because of what’s going on in the debt market as well,” he says.
“Nonresidential construction could be down 3 percent in 2008, and possibly down even further if a recession materializes,” Sullivan says, adding that the downturn could be prolonged. “Once nonresidential construction is in a contraction, it takes a while to get the confidence to come back.” Some believe the downturn could continue into early 2009.
Meanwhile, infrastructure construction looks strong and is likely to remain so, says Steve Cochrane, senior managing director for Moody’s Economy.com, West Chester, Pa.
Infrastructure demand is expected to increase about 9 percent this year and continue to grow next year, although at a reduced rate of only 2 percent, says Sullivan. “It is not driven by demand, but by government’s ability to pay,” he says. With 93 percent of the demand for public works coming at the state and local level, a downturn in the economy that hinders job creation and tax receipts jeopardizes that funding.
“Infrastructure projects have been helped by the $358 billion infrastructure spending bill passed about two years ago,” says Brace at Commercial Metals. “We are just starting to get to the meat of it,” because only recently have state and local governments been able to come up with the required matching funds.
“The states are making sure that they don’t leave any federal money on the table, especially given that about 80 to 90 percent of the funding comes from the federal government and only 10 to 20 percent from state and local agencies,” says Risser.
The federal infrastructure spending bill didn’t represent as much of a funding increase as some believe. Its dollar amount didn’t take into account inflation or the tremendous increase in material prices, says Sullivan.
Some states have passed legislation that supplements federal infrastructure funds. California is taking the lead in that area with a $38 billion, five-year bond measure to help upgrade dams, bridges and highways. In addition, California has 17 self-help counties, where sales taxes are used to meet the transportation needs of the county in addition to monies from the state bond issue and the federal infrastructure spending bill.
Shortly after the August collapse of the I-35W Bridge in Minneapolis, U.S. Sens. Ron Wyden (D-Ore.) and John Thune (R-S.D.) proposed the Build America Bonds Initiative, which would provide $50 billion in infrastructure upgrades, but thus far that bill has made no headway. In its support of the Wyden-Thune bill, the National Association of Manufacturers noted the United States has 75,621 structurally deficient bridges and another 79,523 that are functionally obsolete.
Another deadly bridge collapse in Laval, Quebec, in September led Canadian authorities to announce that they would spend $11.6 billion ($12 billion U.S.) over the next five years to repair and maintain bridges, roads and other structures in Quebec.
“The bridge collapses have made it harder to ignore reports on the state of our infrastructure,” says Stutz of Tamco Steel. “As of yet, I haven’t seen it equate to new bridge activity. That will take time.”
“We should be seeing a gradual increase in the use of rebar for infrastructure for the next 10 years or so,” Brace agrees.
Risser notes that while rebar demand is down slightly this year, and that weakness could continue through the first half of 2008, he is very optimistic about the rebar market long term. “It’s just gone from a 10-million-ton market in 2006 to a little over 9 million tons in 2007, but it should be back to 10 million tons in 2008 on its way to 11 million tons by 2011,” he predicts. That assumes the U.S. economy doesn’t fall into a recession. “If that happens, then all bets are off.”
Even with demand softening a bit from last year, mill executives say that supply is in balance and pricing has been fairly steady. “While rebar prices are not at the summer peak when they reached a record $600 a ton, they are still at about $575 a ton, still strong for rebar,” says John Anton, director of the steel service at Global Insight, Washington, D.C. Rebar prices could soften further, he adds, but are not expected to fall significantly.
One reason prices are holding up, according to Brace, is the discipline shown by producers in matching supply with demand. In addition, inventories are currently quite low, as are imports. According to Anton, bulk shipments are about four times below levels of a year ago.
Only about 100,000 tons of rebar per month came into the United States during August and September, and October imports were even below that. “U.S. steel prices are among the lowest in the world,” McClean says. “This, plus a weak dollar and high bulk freight rates, has put a brake on steel imports.” Freight costs are currently about $90 per ton from Turkey and $110 to $130 per ton from Asia, which is double the level of a few months ago.
Some expect imports to start coming in again from the Middle East, particularly Turkey, where the rebar market is getting very saturated. But the economics will likely discourage any surge.
Domestic supply is currently sufficient to meet demand, and mills’ plans—both announced and rumored—are likely to further increase capacity.
In early November, Commercial Metals broke ground on a micro mill in Mesa, Ariz., where it plans to start producing 250,000 tons of rebar per year. The company describes the micro mill as having a “continuous continuous” design where metal flows uninterrupted from melting to casting to rolling. It is called “micro” because it is more compact than existing, larger capacity minimills.
According to Risser, the micro mill concept has worked in Europe but has never been attempted in the United States. One potential advantage is that micro mills could be built in places where conventional minimills cannot. This can result in transportation cost savings, which is Commercial Metal’s goal with its Mesa mill. “It will market to a localized, underserved rebar area and is intended to vertically integrate with our expanding downstream fabrication operations in the Pacific Southwest.”
In January, David Stickler, senior managing director of Global Principal Partners LLC, said that a group of investors “made up of experienced long-products operators and steel industry executives” were forming a business to produce about 220,000 tons of steel, primarily rebar, in Mississippi. No formal announcement has been made nearly a year later and calls to Stickler were not returned. While nothing has come of it yet, Brace says, “Often where there is smoke there is fire. I’m not sure if they will do it, but anything that comes on would be at least 18 months away.”
Nucor is evaluating whether to restart its shuttered mill in Kingman, Ariz. The company is currently serving customers in the Southwest through its Plymouth, Utah, facility, while it could also serve them through its Jewett, Texas, mill. “As long as we are able to service the region from our other mills, we will continue to do so. If that changes, we might look at restarting Kingman. It could be restarted fairly quickly with very little capital expense,” Parrish says.
The Kingman facility does not have a melt shop, which would mandate shipping billet there. Though it has a rated capacity of 700,000 to 800,000 tons, if restarted Nucor would not likely run it at that rate.
Since rebar demand is projected to grow at a rate of 5 percent for the next five years, requiring an additional 2.8 million tons of production, experts agree that the market should be able to absorb the additional planned capacity.
With some sectors of the construction market suffering through various aches and pains, however, rebar suppliers can expect a few headaches of their own next year. “The market doesn’t have the flu. It has the sniffles, but the sniffles won’t go away,” Anton says.
Rebar Producers Rushing Downstream
While it’s not necessarily a new trend, the top three rebar manufacturers—Gerdau Ameristeel Corp., Nucor Corp. and Commercial Metals Co.—have clearly accelerated their movement downstream by acquiring rebar fabrication assets.
Bob Risser, president of the Concrete Reinforcing Steel Institute, Schaumburg, Ill., says this trend has had a huge effect on his members, which include architects, engineers and construction professionals. “It is not a positive or a negative, but just a change,” he says. He describes it as “going back to the future,” noting that about 40 years ago most fabrication shops were owned by integrated steel mills. When times got tough, the mills spun off their rebar fabrication units.
The market has changed considerably since those days, and the companies now involved are minimills, not integrated producers. “It is too early to predict if it will work this time around,” he says.
Additionally, the rebar market, which was once quite fragmented, has gone through a considerable amount of consolidation itself, observes Christopher Plummer, managing director of Metal Strategies Inc., West Chester, Pa., making the mills’ move into rebar fabrication a logical step. “They are at the threshold of making strategic moves in other areas. With the market so consolidated now, there isn’t much more consolidation that could occur among producers. By moving downstream, they can get into more value-added markets,” Plummer says.
Being active in downstream markets is nothing new for any of the top three rebar producers. Both Tampa, Fla.-based Gerdau Ameristeel and Commercial Metals, Irving, Texas, have had rebar fabrication units for some time. According to Matt Brace, senior vice president of marketing and sales, Commercial Metals has been vertically integrated almost since its founding in 1950, with its fabrication unit being the largest portion of its business.
Charlotte, N.C.-based Nucor, while a relative newcomer to rebar fabrication, also has its roots downstream, starting out as a joist manufacturer and then eventually producing steel to support that business, says D. Michael Parrish, its executive vice president of bar and cold-finished steel. He says that the move into rebar fabrication fits well with Nucor’s business philosophy. “Overall, it is part of our strategy to go downstream and to bring our business, and our customers, in-house.”
While currently the No. 2 producer of rebar, Nucor is relatively new to that business, boosting its presence in 2002 when it acquired Alabama-based Birmingham Steel Corp. Nucor’s first entrance into rebar fabrication came this March when it acquired Harris Steel Group Inc., Toronto. Nucor has since grown that business through additional acquisitions, including Barker Steel Co. Inc.’s Bethlehem, Pa., and Boston facilities; Consolidated Rebar Inc., which has facilities in Phoenix and Tucson, Ariz.; and South Pacific Steel Corp., Kapolei, Hawaii. “Harris is a good platform for us to grow our rebar fabrication business,” says Parrish.
Gerdau Ameristeel, which became the No. 1 rebar producer after it acquired Sheffield Steel Corp., Sand Springs, Okla., in June 2006, has recently increased its rebar fabrication presence through its acquisitions of Enco Materials Inc., Nashville, Tenn., and Re-Bars Inc., Pooler, Ga. It also formed a joint venture with Pacific Coast Steel Inc., San Diego, and Bay Area Reinforcing, Napa, Calif.
Commercial Metals added to its rebar fabrication holdings in September, acquiring Economy Steel Inc. in Las Vegas. This represented expansion to a new geographic market and offered a good fit with the company’s micro mill, currently under construction in Mesa, Ariz.
Most experts believe this consolidation trend will continue as long as there are independent rebar fabricators left to acquire. It complements the mills’ already successful business models and provides them with additional captive tons, says Jack Stutz, president of Tamco Steel, Rancho Cucamonga, Calif. “As long as there is profitability there, I see further moves in this direction, mainly by the three largest producers.”
