Industrial Sector Moving Well Through Mid-Cycle
The economy has suffered several blows in the 12 months since Eli Lustgarten last appeared at the Metals Service Center Institute’s forecast conference. The housing market has bottomed out, the price of gasoline has topped $3 per gallon and, most recently, sub-prime lenders have suffered a meltdown.

What hasn’t changed, however, is Lustgarten’s take on the state of the industrial sector and its position in his long-range economic forecast.

When Lustgarten spoke last year at MSCI’s Economic Summit: Forecast 2007, he informed the gathered steel industry executives that the industrial sector was entering a period of slower growth within a generally solid period for manufacturing. He titled his presentation, “Managing Into Mid-Cycle.”

Lustgarten, who serves as senior vice president and senior analyst at Longbow Research in Cleveland, modified his presentation on capital, agricultural and industrial equipment only slightly for this year’s Forecast 2008 conference, held last month in Chicago. “Managing Through Mid-Cycle,” was the title of his latest assessment.

Though the stresses on the economy, most notably the unexpected activities in the sub-prime market, bear watching, the overall picture remains positive for the years to come, he asserted. “What’s going on in the industrial sector is probably the best environment we’ve seen in a while.”

A number of factors support Lustgarten’s contention that the industrial sector is working its way through a slight slowdown during an overall period of growth. And while the market isn’t as impressive as it was from 2004 through early 2006, or will be from 2008 through the end of the decade, it looks good from a historical perspective.

“You should recognize that there will be some sloppy conditions over the next year or two—but those were records for you five years ago,” said Lustgarten, in one of the conference’s most-attended sessions. “The outlook remains quite positive for the next several years.”

Lustgarten described a mid-cycle economy as a mild pause in the midst of a period of extended growth. During a mid-cycle period, companies can expect top-line growth in the low to mid-

single digits and bottom-line growth of 7 to 10 percent. Improvements to top-line growth can only be expected through increasing market share, new products, acquisitions or financial engineering, such as share repurchase programs.

One reason behind the general confidence in Lustgarten’s optimistic projections is that his earlier forecasts have largely played out. He previously said 2004 was the first year of an improvement in the industrial sector, a period of growth that would last at least three years and possibly through the end of the decade.

And last year, despite a solid performance in the first half, Lustgarten cautioned that the “existing flat yield curve was a harbinger of a slowdown of the industrial sector.”

That slowdown was particularly evident, if not immediately apparent, in the fourth quarter of 2006. GDP during that quarter, initially reported at 3.5 percent, was later revised to a figure in the low 2s. Lustgarten said miscounts on inventory levels and the degree of the trade imbalance contributed to one of the largest GDP revisions in the past 30 years.

Also in his 2007 forecast, Lustgarten projected strong markets for power transmission and distribution, and weaker performance out of automotive and housing, another assessment that time bore out.

Now, despite a sluggish first half, he sees several positive trends in the economy going forward. The most noteworthy, he said, is the index of manufacturing activity provided by the Institute for Supply Management. In the past several months, ISM has consistently reported manufacturing activity well above the 50 percent level that indicates growth in factory production.

Another positive trend is in the jobs market, with basic wage and salary income growing at more than 6 percent during the first half of the year. That improvement was somewhat tempered by rising gas prices, which eroded those gains.

Businesses, which are flush with cash, also revved up capital spending during the second quarter, increasing expenditures by 8.1 percent. Equipment and software spending enjoyed a 2.3 percent rise in the second quarter, outpacing the paltry 0.3 percent figure in the first quarter.

Additionally, ISM’s customer inventory index receded modestly below 50 percent for four consecutive months before jumping back to 51 percent in July. “[This suggests that] the end to inventory liquidation in the economy is approaching, at least within the next few months,” Lustgarten said.

The one risk to increased capital spending, Lustgarten said, is the possibility that credit tightening in the mortgage and consumer sector may spread to the commercial and industrial sector.

In terms of individual segments, Lustgarten envisions several end-use markets enjoying “plus” years in 2008. Commercial aerospace, non-residential construction, energy (oil and gas), power generation, fluid power, farm equipment, packaging, medium/heavy construction equipment and trucks will be up. The outlook for defense, material handling, housing, automotive, appliances and light/medium construction equipment is uncertain, while rail car is the only market that definitely will be down in 2008.

In the aggregate, this is considerably more positive than his forecast last year, which rated roughly equal numbers of markets up, down and uncertain.

“Current economic data is supportive of our forecast for an improved domestic economy in the second half of the year and through 2008,” Lustgarten said. “There’s a likely tug-of-war between housing/sub-prime risk and the rest of the economy, with some spillover, mostly to weaker segments of the industrial economy.”

Overall, he predicts a two-tiered domestic industrial recovery. On one front, he doesn’t expect more than stabilization this year for the truck sector, construction equipment and automotive. “Most other industrial sectors should show modest improvements as the second half of 2007 unfolds, with the real strength in the industrial economy still outside the U.S.”

OmniSource Acquisition
Moves SDI Forward in Backward Integration
Steelmaker Steel Dynamics Inc., Fort Wayne, Ind., has agreed to acquire nearby scrap processor OmniSource Corp. in a 50-50 stock and cash transaction valued at about $1.6 billion. The combination of SDI and OmniSource creates an enterprise with $6 billion in annual revenues, and should generate about $15 million in annual synergies.

Terms of the deal call for OmniSource shareholders to receive 9.7 million shares of Steel Dynamics stock and $425 million in cash. Steel Dynamics also will assume some of OmniSource’s liabilities, including debt of about $210 million.

Keith Busse, SDI’s chairman and chief executive officer, calls the deal “a blockbuster type transaction that goes a long way toward our continued attempts to backwardly integrate the company.” The deal complements other recent moves by SDI, he says, including its investment in the Mesabi Nugget iron ore project and its purchase of two Tennessee scrap yards earlier this year.  

“This is a tremendous platform anchoring SDI’s future growth. Scrap industry fundamentals are very strong today and are expected to remain strong for the foreseeable future. OmniSource’s size and track record provide SDI with a strong platform to make further acquisitions within the highly fragmented North American scrap industry,” Busse says.

In fiscal 2006, OmniSource processed 5.7 million tons of ferrous and 800 million pounds of nonferrous metals from its 42 facilities in the eastern U.S. and Canada, generating sales of $2.3 billion.

Busse believes that OmniSource, also based in Fort Wayne, is the ideal partner for SDI. “We’ve looked at other opportunities in the sector and concluded that the footprint of the Omni organization as laid on top of the SDI organization really represents the best strategic fit for both parties.” Notably, the proximity of the two companies offers valuable logistical efficiencies.

OmniSource has a longstanding relationship with SDI, serving as one of the company’s largest scrap suppliers. It will operate as a wholly owned subsidiary of Steel Dynamics and will continue to focus on the ferrous and nonferrous scrap processing, brokerage and industrial scrap management needs of its customers. SDI has no plans to sell any of OmniSource’s nonferrous operations, including its Superior Aluminum Alloys LLC secondary aluminum smelter. “We are highly interested in the margins in its nonferrous as well as its ferrous operations,” Busse says.

Danny Rifkin, OmniSource’s president and chief executive officer, will continue to lead the OmniSource subsidiary as president and chief operating officer, as well as joining SDI’s management team as executive vice president. “I’m very excited about the transaction and the prospects for the combination going forward. After being involved with the formation of SDI almost 15 years ago, to have the companies come together now seems to be a truly fitting structure for the future,” Rifkin adds.

Both Busse and Rifkin say they are not concerned about being seen as a competitor by their prospective customers, given that SDI will continue to buy scrap from its current network of scrap suppliers and OmniSource will continue to sell scrap to its current steelmaker customers. At present, SDI consumes about 10 percent of OmniSource’s output, and that percentage is not expected to change appreciably, Busse says, though the new combination could allow the minimill to scale back the amount of scrap it keeps in inventory. Likewise, the acquisition of OmniSource doesn’t diminish SDI’s commitment to Mesabi Nugget, Busse adds.

“We’re really excited about our mining and minerals platform and the value it is going to deliver to the company. Omni’s going to continue to grow, as will others in this business. We’ve always said that we’re interested in backward integration,” Busse adds. 

ArcelorMittal’s Goal: 131 Million Tons by 2012
ArcelorMittal’s internal growth plan calls for a 20 percent increase in shipments in the next five years, reaching production of 131 million tons by 2012. The plan relates to organic growth only and does not include any current or future greenfield projects or potential growth through acquisition.

Growth will come largely from the company’s low-cost operations in developing markets, particularly in Latin America, Africa, Eastern Europe and the CIS.

“Underlying demand for steel globally remains buoyant with world steel production expected to maintain a yearly growth rate of between 3 and 5 percent,” says Lakshmi N. Mittal, president and CEO. “Considering our high exposure to developing markets and industrial leadership, we are well positioned to capture growth opportunities that will permit us to increase shipments from our existing operations by some 23 million tons by 2012. This growth plan forms only one part of our three-dimensional growth strategy, which also focuses on value-added product growth and value chain growth (mining and distribution).”

On the acquisition front, ArcelorMittal has agreed to acquire 51 percent of Rozak, the primary Turkish steel stockholding company. Rozak has five sites in Turkey and specializes in H-profiles, sheet and plate. It shipped 450,000 tons in 2006. The transaction is expected to close by the end of the year.

“This acquisition is an important step for ArcelorMittal to meet the strong Turkish demand in all products. Turkey is one of the fastest growing steel markets. The construction sector is very dynamic, with a growth rate above 10 percent,” says Gonzalo Urquijo, head of Steel Solutions & Services for ArcelorMittal. “The acquisition of this stake in Rozak will allow our steel distribution business in this country to reach its capacity target in 2010.”

ArcelorMittal also announced plans to acquire Wabush Mines, an iron ore and pellet producer in northeastern Canada. The company will exercise the right of first refusal that its Dofasco subsidiary held on the Wabush Mines Joint Venture.

Also, ArcelorMittal has completed the combination of its laser-welded steel tailored blanks business with Noble International Ltd., North America’s largest producer of laser-welded steel products. 

Nucor to Acquire Nelson Steel
Nucor Corp. plans to acquire the assets of wire mesh producer Nelson Steel, New Salem, Pa., in a $54 million cash transaction.

Nelson is a producer of wire mesh and related products including wire rack decking, lightweight galvanized mesh, mine mesh and engineering mesh. The company has approximately 80,000 tons of capacity.

“The acquisition of Nelson is a good growth opportunity for one of our existing downstream businesses and complements and expands our wire mesh businesses at Connecticut and LEC,” says Mike Parrish, Nucor executive vice president.    

Outokumpu Increasing Stainless Duplex Capacity
Stainless producer Outokumpu will invest nearly $780 million over the course of three years to increase production capacity of specialty steel grades at its Avesta Works in Sweden. The investment will increase its finished products capacity from the current 250,000 tons to 650,000 tons of primarily duplex grades, starting in 2010.

The company notes that demand for duplex grades is growing faster than that of standard stainless grades, with annual growth estimated at over 20 percent. Duplex stainless steel is characterized by good corrosion resistance and high strength, as well as low nickel content.

The investment in Avesta includes a new AOD converter, increase of the melt size from 100 to 125 tons and a new slab grinding line, increasing the melt shop capacity to some 750,000 tons from the current 500,000 tons. The investment further includes a new 400,000-ton, two-meter-wide annealing and pickling line with integrated edge trimming. 

Harris, Barker Merge Northeastern Operations
Harris Steel Inc., a wholly owned subsidiary of Nucor Corp., and Barker Steel Co., will combine the companies’ rebar fabrication operations in the northeastern U.S. market.

Harris will contribute its facilities in Bethlehem, Pa., and Boston, plus cash, in return for 90 percent equity in the new venture.

Barker will contribute facilities in Albany, N.Y.; Canaan, N.H.; South Windsor, Conn.; Avenel, N.J.: Providence, R.I.; and Deerfield, Westfield, and Canton, Mass. The Barker facilities have a total rebar fabrication capacity of approximately 218,000 tons.

Harris also recently completed the acquisition of Consolidated Rebar Inc., which has rebar fabrication facilities in Phoenix and Tucson. This followed the June acquisition of South Pacific Steel Corp., Kapolei, Hawaii.

“We are excited to welcome the Barker, Consolidated and South Pacific Steel employees to the Harris Team, and to the Nucor family,” says Hamilton Lott, Nucor executive vice president. “With the completion of the Barker joint venture, Harris Steel’s annual rebar fabrication capacity will exceed 1 million tons.”  

Japanese Laser Maker Moves Production to U.S.
Koike Aronson Inc./Ransome, the U.S. subsidiary of CNC cutting machine manufacturer Koike Sanso Kogyo of Japan, known as Koike worldwide, has started to produce Koike laser cutting machines at its Koike Aronson plant in Arcade, N.Y. Production of the first 6KW Lasertex machine in the U.S. began in the second quarter of this year.

Worldwide demand for large plate laser cutting machines has increased significantly in the past few years. Large industrial fabricators, such as shipyards, construction machinery builders, special vehicle manufacturers, tank manufacturers, and various steel service centers are now cutting and fabricating thicker and larger steel components by using laser cutting machines.

Koike Aronson officials report a marked increase in their sales of large plate laser cutting equipment. Until recently, Koike was able to handle the worldwide demand from its factory in Japan. As the backlog of orders increased, however, lead times became too extended to satisfy customers’ needs in the Americas.

Koike expects the move to shorten lead times by 50 percent. Parts will be stocked in the U.S., streamlining manufacturing and repairs, with the help of an expanded U.S. service force. The move will also help reduce the cost of laser cutting machines to customers in the Americas, company officials add.

Koike Aronson has broken ground for a 20,000-square-foot addition to its Arcade plant to accommodate the manufacturing line for the Lasertex cutting machines, as well as a new line of downdraft and water cutting tables. Construction is scheduled for completion in early 2008. The new expansion follows a recently completed 11,000-square-foot addition and new demonstration center for sales of thermal cutting machines and welding positioners.

In addition to the two expansions, Koike Aronson says it has invested over $4 million in new machining and milling equipment to improve manufacturing efficiencies and quality, and to better handle the increased business from the company’s new product lines.

“The addition of the Lasertex line to the other products made here allows us to service our steel fabricating customers in the Americas at a very high level and at a competitive price structure,” says Koike Aronson CEO Jerry Leary. “We expect it to add $8 million to $10 million in revenues by 2009.”

ThyssenKrupp Merges Sister Companies
ThyssenKrupp VDM USA Inc., Florham Park, N.J., has merged with its sister company Precision Rolled Products Inc., also based in Florham Park. The merged corporation will retain the name of ThyssenKrupp VDM USA, and combine the sales and business support teams of both companies.

“As one company with one mission and one team, we can utilize our resources more effectively for future growth and profitability. The merger with Precision Rolled Products will result in better customer service by optimizing capabilities to supply certain products manufactured in the U.S. and extensive production resources in Germany” says Joe Fuhrman, president and CEO of ThyssenKrupp VDM USA.

The predecessor company, Precision Rolled Products, is an approved super alloy producer and supplier to most of the world’s leading aircraft gas turbine and airframe manufacturers, as well as their subcontractors. The Florham Park operation melts and forms super alloys, primarily nickel and cobalt, to ensure high purity and precise chemistry. 

Steelmakers Shut Down STEEL 24-7 Site
STEEL 24-7, the e-commerce platform jointly run by ArcelorMittal and ThyssenKrupp Steel has been closed.

The platform was created in 2001 by the four largest European steel producers. The ambition was to serve as many steel customers and suppliers as possible via one common and mutually used electronic platform.

Since then, both the evolution of information technology and the fast-paced consolidation of the steel industry have given a decisive competitive edge to more individualized solutions, thus making the original concept of STEEL24-7 obsolete.

ArcelorMittal and ThyssenKrupp Steel have agreed to close the platform and develop their own e-commerce solutions.

Briefs
Members of the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers Union have ratified a new five-year labor contract with Republic Engineered Products Inc., Fairlawn, Ohio. The new contract, which runs through Aug. 15, 2012, covers nearly 2,000 workers at Republic’s plants in Gary, Ind.; Lackawanna, N.Y.; and Lorain and Massillon, Ohio.

Shareholders of Chaparral Steel Co., Midlothian, have approved the merger agreement with Gerdau Ameristeel. Approximately 99.7 percent of the shares voted were cast in favor of the merger.   

The Timken Company, Canton, Ohio, will acquire the assets of The Purdy Corp., a precision manufacturer and systems integrator for military and commercial aviation customers for $200 million. The acquisition expands the growing range of power-transmission products and capabilities Timken provides to the aerospace market.

Aleris International Inc., Beachwood, Ohio, has completed the purchase of Wabash Alloys from Cornell Limited Partnership. Wabash Alloys, Wabash, Ind., is a producer of aluminum casting alloys and molten metal. Aleris will permanently close its Dickson, Tenn., manufacturing facility as part of its acquisition of Wabash Alloys. Aleris also completed the acquisition of Alumox Holding AS of Norway, which recycles dross and scrap to recover aluminum, and processes salt slag to recover aluminum and aluminum oxide.

Alcan, Montreal, has signed a joint venture agreement with Dingsheng Aluminium, a privately owned Chinese foil producer, to set up a greenfield facility in Zhenjiang, Jiangsu province, in China. Alcan is the majority partner in the project. The new facility will produce heat-treated aluminum plate for the fast growing aerospace and general engineering markets.

Alcoa, Pittsburgh, has approved more than $100 million in additional capital improvements for the smelting and fabricating areas at its Tennessee operations. These projects are part of roughly $265 million in capital investments planned over the next three years for the Tapoco hydropower facilities.  In other action, Alcoa has opened a new 280,000-metric-ton-per-year anode plant in Mosjoen, Norway. The facility will produce anodes for Alcoa’s Fjardaal aluminum smelter in Iceland and the Mosjoen aluminum smelter in Norway. 

Metal Management Inc., Chicago, will merge with Australia’s Sims Group Ltd. to create one of the largest metal recycling companies in the world. The new company, to be named Sims Metal Management, will have over 200 locations on four continents, and will process and trade more than 15 million tons of metal annually. The combined company has revenues estimated at $6.8 billion.

Morgan Construction Co., Worcester, Mass., has been awarded a contract to build a two-stand wire rod mill in Visakhapatnan, Andhra Pradesh, India. Also, Smorgon Steel, now part of OneSteel in Melbourne, has contracted with Morgan Construction Co. to upgrade both its bar mill and rod mill at its North Laverton facility in Australia with two replacement stands.

 KPS Capital Partners L.P. has sold its portfolio company, Genesis Worldwide II Inc., Callery, Pa., to HVS Acquisition Inc., an affiliate of Grey Mountain Partners LLC. Genesis II, which was jointly owned by KPS with Pegasus Partners II L.P., is one of the world’s leading designers and manufacturers of high-quality metal coil processing equipment under the Herr-Voss Stamco brand name.

The London Metal Exchange has set April 28, 2008, as the launch date for trading steel billet futures. The contracts cover two regions: Mediterranean and Far East.

Worthington Industries will implement a consolidation plan at five of its Dietrich Metal Framing locations: East Chicago, Ind.; Rock Hill, S.C.; Phoenix; Wildwood, Fla.; and Montreal, Canada. The company’s steel processing operation in the Rock Hill facility will not be impacted.

Commercial Metals Co., Irving, Texas, has acquired the assets of Las Vegas-based Economy Steel Inc., a rebar fabricator, placer, construction-related products supplier and service center. The business will operate under the name CMC Economy Steel.

Extrudex Aluminum has chosen Granco Clark to upgrade the handling equipment for the 4,000-ton press in its North Jackson, Ohio, facility. The new handling system will be “double length” allowing for two press cycles of air cooling while the profile is under control of the puller heads. Also, Indalex Aluminum Solutions has ordered a heating and handling system from Granco Clark to support the 6,000-ton press at its Connersville, Ind., facility.

Villacero, Monterrey, Mexico, has announced the formation of a new worldwide enterprise, Villacero Commercial International to provide a platform for marketing and business development efforts in North America and around the world. VCI, based in Houston, is the parent company of TexTube, S&P Steel Products and Best Border Cargo. Houston-based Tex-Tube has installed more than $5 million worth of production line upgrades, including a new line saw, bevellers, hydrostatic testers and other changes. The company makes API line and standard pipe.

MC Machinery Systems Inc. welcomed more than 150 customers to a September open house for Mitsubishi Laser at the Wood Dale Ill., showroom to celebrate Mitsubishi’s 20th anniversary in North America. The company introduced its high-performance NX series laser, its fastest and most powerful model, at the open house.

Moscow-based RUSAL has signed a letter of intent with the state company Corporacion Venezolana de Guayana to jointly explore opportunities to develop raw material and aluminum projects in Venezuela. The joint venture would cover projects in the area of bauxite extraction, alumina, aluminum and alloy production.

St. Michael, Minn.-based Jet Edge Inc., a manufacturer of ultra-high pressure waterjet and abrasivejet systems for precision cutting, coating removal and surface preparation has entered a partnership with Saimo Group of Xuzhou in Jiangsu, China. Under its agreement with Jet Edge, Saimo Group will manufacture precision waterjet systems based on Jet Edge’s high rail gantry design and sell them in China and Australia.     

Approximately 200 workers represented by the United Steelworkers went on strike following the expiration of a labor contract at PTC Alliance Corporation’s facility in Alliance, Ohio. Executives of PTC Alliance informed existing customers the company would continue to deliver its products, on time, during labor negotiations. Before the strike, the company and union leadership reached an agreement, though the membership rejected the deal.

People
John Ferriola has been elected chief operating officer of Nucor’s steelmaking operations. Ferriola had been vice president in charge of sheet, plate and beam operations for Charlotte-based Nucor. Other Nucor promotions include:  Ladd Hall to executive vice president of flat-rolled products and Joe Stratman to executive vice president in charge of beam and plate products. Doug Jellison replaces Stratman at Nucor Yamato and Gill Daughtridge replaces Hall at Berkeley County. Also, Raymond Milchovich has resigned his position on the board of directors.

Sergey Bubhov has been appointed president of RUSAL America, one of several management changes announced by UC RUSAL, Moscow. Bubhov will oversee the company’s expansion in the North American market. Also, Richard Kellner has joined RUSAL America as chief operating officer and Mark Bodner has been appointed sales director. Former President Bruce Markowitz will leave the company.

Andrew McElwee has been named president of Pittsburgh-based Dynamet Inc., a Carpenter Technology Corp. subsidiary, which manufactures titanium bar, fine wire and shaped products. He replaces Mark S. Kamon, who has been appointed senior vice president, Advanced Metals Operations for Carpenter.

John Roberts has been named president of Dietrich Metal Framing, a Worthington Industries company, replacing interim president George Stoe. Roberts had been the company’s vice president of sales and marketing, a position that will be filled by Todd Muirhead, a 15-year sales veteran of the Columbus, Ohio-based company.

Darryl Thompson has been named director of integrated supply operations for Wheeling, Ill.-based DGI Supply, a DoALL company. He will oversee all policies and goals for DGI’s supply group, including management of the installed base of automated inventory control vending systems in North America.

Garrett Sparacio and Tod Hirsch have been appointed regional sales managers at SeverCorr. Sparacio had been purchasing manager for Wyoming Steel Supply, while Hirsch was vice president of purchasing and marketing for SteelSummit Holdings.

Precision Marshall Steel Co., Washington, Pa., has added three individuals to its staff. Candace Rae Mooney has joined the company as a manufacturing engineer, Jack G. Scarborough is the new manager of materials and John M. Barrett will serve as customer service manager at its Bolingbrook, Ill.-based national distribution center.

Jim Witte has been hired as sales manager of Georg Automatic Feed Ltd., Columbus, Ohio. Witte will coordinate all GAF sales, engineering, manufacturing, and service activities in North America for slitting, cut-to-length, blanking, multi-blanking, and packaging equipment for all ferrous and non-ferrous applications.