MSCI Tubular Conference:
Ferriola Forecasts Fair But Flat Year

“In 2007, many key markets will be flat or slightly down. However, given the strength of 2006, slightly down is not a bad thing.”

That sentiment characterized the moderately optimistic forecast offered by John Ferriola, executive vice president of Nucor Corp., who spoke to service center executives Jan. 19 at the Metals Service Center Institute’s Tubular Pro­ ducts Conference in Ponte Vedra, Fla.

Nucor predicts that steel demand will grow at a rate of just 1 to 2 percent over the next three to four years. Ferriola offered a mixed outlook for major end-use markets in 2007.

In automotive, U.S. light vehicle production will dip to 16.4 million units, down from 16.5 million. Growth in nonresidential building will be offset by weakness in housing, resulting in a 1 percent overall decline in the construction sector. Production of heavy equipment, agricultural machinery and commercial trucks are expected to see more significant declines. Never­ theless, buoyed by the energy sector, consumption of pipe and tube should remain fairly strong in 2007, he said.

Many experts expected im­ ports to decline in 2006 as supply outpaced demand and inventories piled up. Yet imports of all steel mill products into the U.S. averaged 3.42 million metric tons per month in 2006, up from 2.43 million in 2005 and 2.71 million in 2004, Ferriola reported.

In hot-rolled sheet, imports averaged 379,300 tons per month in 2006, up from 238,100 tons in 2005 and 320,100 tons in 2004.

The oil country tubular goods market also saw a much higher level of imports, averaging 155,700 tons per month in 2006 vs. 125,500 tons in 2005 and 83,800 tons in 2004. Likewise, line pipe imports grew from an average of 82,700 tons per month in 2004, to 90,400 tons in 2005 and 149,500 tons in 2006.

Import levels and their potential effects on pricing will be key in 2007, he added, urging service centers to be judicious in their sourcing. “Service centers are the entry point for almost half of sheet imports. Service centers that overbuy then destock amplify the swings in the steel cycle.”

China’s the culprit
The industry is still adding capacity in excess of global demand growth, which is a serious concern, Ferriola continued. Assuming annual demand growth of 5 percent, Nucor estimates that global demand will total nearly 1.18 billion metric tons in 2007, well short of the industry’s 1.54 billion tons of production capacity. By 2010, demand of 1.36 billion tons will be overshadowed by a mill capacity of 1.84 billion tons.

China is the biggest contributor to this imbalance, Ferriola said. “China has led all other countries in the export of steel to the United States. In the last six months. China has exported more into the U.S. than our neighbor Canada—which makes no sense in terms of supply chain efficiencies in an open market. The disruptive potential of this unrestrained, subsidized production is the biggest threat to the entire steel industry.”

In 1980, 40 percent of the world’s steelmaking capacity was government-owned. Over the years, most countries have privatized their industries to compete in the free market. Today, only 5 percent of all steelmaking outside of China is government-owned. However, factoring China’s state-owned industry back into the equation, the overall figure remains at 40 percent.

China’s capacity will grow from 462 million tons in 2006, vs. apparent domestic demand of 374 million tons, to 517 million tons this year, well in excess of 413 million tons of apparent steel use. “This cap­ acity is subsidized by the Chinese government and is not driven by market forces,” Ferriola asserted. “Uncontrolled, it will again lead to a wave of dumped steel and undermine
the strength of the non-Chinese steel industry.”

He called on industry and U.S. government officials to “expect and demand a level playing field” in international trade. “The government of China must change its political and economic practices,” he said. To avert a global steel crisis, China must immediately shutter 100 million tons of excess and obsolete steelmaking capacity; its government must curtail subsidies and unfair trading practices; and its currency must be allowed to float freely, he added.

Though China has unpegged the yuan and allowed its value to rise modestly against the dollar and other foreign currencies, Chinese producers still retain a large cost advantage over competitors in the United States and other parts of the world.

Globalization’s for the good
“The impact of globalization remains a growing force in our business,” Ferriola noted, adding that mergers, often among global players, stand to make the market more stable, and more profitable.

He expects the pace of consolidation, which accelerated in 2006, to become even more intense in 2007. Many opportunities for consolidation remain for steel producers, including deals upstream with suppliers of raw materials and downstream with the customer base.

The consolidation trend is concentrating power among the industry’s heavyweights. Today, the top 10 producers of steel account for about 30 percent of the annual 1.1 billion metric tons produced worldwide.

During the Q&A session with MSCI executives, Ferriola assured his audience that at this time Nucor has no plans to venture into the distribution side of the steel business. “Around 50 to 60 percent of our customers are service centers. We don’t want to compete with our own customers. And we have no reason to believe we could do a better job.”