Now that the industry has right-sized inventories, and with imports on the wane, domestic producers expect demand for flat-rolled steel to pick up in 2008.
By Myra Pinkham,
Contributing Editor
Sidebars and Tables:
Prospects are finally looking up again for the carbon flat-roll market after a relatively lackluster year marked by lukewarm demand and an inventory correction on both the service center and end-user levels. With that correction largely complete, combined with a significant decline in imports, U.S. flat-roll producers report that their order books are filling up. In fact, they’ve announced a $20 to $30 per ton price increase.
Charles Bradford, metals analyst and principal of Bradford Research/Soleil Inc. in New York, characterized flat-roll as the worst of the major steel markets, but perhaps not for long. “While it isn’t on fire, flat-roll demand is improving,” says Keith Busse, president and chief executive officer of Steel Dynamics Inc., Fort Wayne, Ind.
John P. Surma, chairman and chief executive officer of U.S. Steel Corp. in Pittsburgh, says he is very optimistic about the flat-roll market’s long-term prospects given the relatively weak U.S. dollar compared with most other currencies, higher freight rates for foreign competitors and a reasonable economic environment.
“Certainly demand in the first half of this year wasn’t terribly good,” says Roy Platz, manager of marketing for ArcelorMittal USA in Chicago. “Apparent steel consumption was down 5.5 million to 6 million tons vs. the first half of 2006 with about half of that due to the inventory liquidation. Service centers came into the year with record inventories after being very low for much of 2006.”
U.S. steel service center inventories totaled 13.1 million short tons, or 2.7 months of stocks on hand, in January 2006, according to the Rolling Meadows, Ill.-based Metals Service Center Institute. Increasing steadily throughout the year, service center inventories ended 2006 at 16.5 million tons, or 4.7 months of supply.
Fingers point to imports as the cause of this inventory buildup. “More often than not, when service centers need to destock inventories over a long period of time, it is due to overbuying of offshore product,” observes Gregg Mollins, president and chief operating officer for Reliance Steel & Aluminum Co. in Los Angeles.
Total U.S. finished steel imports last year reached a record 35.9 million tons, up 42 percent from 2005, according to the American Iron & Steel Institute in Washington, D.C. A substantial percentage of flat-roll imports apparently found its way into service center and end-user inventories because of the downturn in demand that began last year, particularly among residential construction and automotive customers.
Service centers have been working down excess inventory levels for the past eight to 10 months, with some success. MSCI reports that total steel service center inventories fell to 13.0 million tons in August, or 2.8 months of stocks on hand, the lowest level since December 2005.
Bradford notes that this period of destocking has been a long and arduous one; not only have service centers been trying to trim their flat-roll inventories, but so have their customers. This has taken a toll on service center shipments. MSCI reports that distributor steel shipments declined by 7.8 percent through August, falling to 36.1 million tons vs. 39.2 million tons for the first eight months of 2006.
In turn, the dip in demand from service centers has cut into mill orders, contributing to the recent decline in flat-roll prices. According to Mollins, flat-roll bottomed out around $520 per ton this summer, down from about $590 earlier in the spring.
This decline was not nearly as deep as others in past cycles, however. “The low point of this cycle was still higher than the high price in 2004,” notes Bradford. In fact, each year for the past several years the pricing floor has risen, says Tom Ballou, director of purchasing for O’Neal Steel Inc. in Birmingham, Ala. “That indicates there is more stability in the market, that the mills are doing more to control the swings both up and down.”
Industry consolidation has helped stabilize prices, he adds. “While there are still plenty of players, with three companies controlling a significant part of the capacity [ArcelorMittal, U.S. Steel and Nucor], there are fewer people chasing the same tons.”
Domestic producers cut back production significantly, especially late last year, says Platz. As a result, not only did prices not fall much, but capacity utilization recovered despite the lackluster demand. “With consolidation, the industry has been able to be more flexible,” he explains. “When you only have two blast furnaces, turning one off can be problematic. The more blast furnaces you own, the more flexibility you have. What has happened is that the industry has moved from being dysfunctional to being more functional.”
“At this point, both service centers and mills are doing a good job of keeping inventories balanced,” says James P. Bouchard, chairman and chief executive officer of both Esmark Inc., Chicago Heights, Ill., and Wheeling-Pittsburgh Corp., Wheeling, W.Va.
“I think we will start see a more normal pattern of buying and selling,” says Michael Siegal, president and chief executive officer of Olympic Steel Inc. in Bedford Heights, Ohio. With the lack of imports available, service centers should begin buying more domestic flat-roll in the coming months.
With many foreign markets stronger than the U.S., causing prices in other parts of the world to strengthen, there is little temptation for service centers to place orders overseas, notes John Anton, director of the steel service for Global Insight Inc., Washington, D.C.
“We are seeing import offers at or above domestic prices, so there is no real incentive for companies to buy them,” agrees Platz. “When you add in the freight rate, which has really come up a lot, import prices are currently very unattractive.”
“Right now [service centers] would be crazy to bring in offshore material, especially given the prices,” adds Mollins. “Why destock and be right back where you were before?”
Consequently, U.S. flat-roll imports have declined considerably this year, though “they are still at historically high levels,” says John Ferriola, chief operating officer for steelmaking at Nucor Corp., Charlotte, N.C.
AISI reports that U.S. imports of finished steel through July totaled 16.97 million tons, down 20 percent from the first seven months of last year, based on U.S. Census Bureau data. U.S. Commerce Department data on import permits suggests that the downtrend is continuing. Finished steel import permit applications for August totaled 1.95 million tons, down 20 percent from July and 7 percent from those in August 2005. (AISI did not compare the current data to last August because 2006 was an all-time record year.)
With the help of this import decline, capacity utilization at U.S. flat-roll mills has increased to a healthy rate of nearly 87 percent, up from less than 70 percent in December, as domestic producers have stepped up production rates, says Platz. Imports should remain low, at least through the end of the year, giving mills a feel for the market’s “true demand,” he adds.
Realistically, flat-roll is at the very front end of a turnaround that may take some time, says Esmark’s Bouchard, with demand down 5 to 7 percent from a year ago, roughly mirroring the iffy U.S. economy. “We would like it to be stronger,” says Reliance’s Mollins. “Residential construction is still struggling and automotive has not recovered at the rate we would like,” adds Nucor’s Ferriola.
While below its peak of nearly 18 million vehicles a year, U.S. automotive production will likely hold around 16 million vehicles and not collapse, says Anton. In fact, Platz notes, the second half of this year is expected to be better than the second half of last year for vehicle manufacturers and their suppliers.
Despite the well-publicized weakness on the part of the traditional domestic automakers, the New Domestics, including Honda, Toyota and Nissan, have been doing fairly well, “and since they also buy domestic flat-rolled steel, that should pick up some of the slack,” says Mollins.
Auto industry prospects are uncertain, however, especially in light of contentious labor negotiations currently under way. Successful contract negotiations “could add a spark to the market,” observes Bouchard. (Editor’s note: Just before press time, GM announced it had reached a tentative agreement with the autoworkers union, which sets the stage for similar pacts with Ford and Chrysler. See related article in Business Topics.)
The effects of the subprime mortgage crisis could spill over from housing to other sectors, warn industry executives. “The credit crunch is bad for anyone needing to borrow money,” says SDI’s Busse. “Good credit is lumped with bad. It is harder to borrow money. If you have to be in the credit market, it isn’t a good time. It will definitely cost you more.”
“What makes consumers more confident is their wealth. If the stock market drops and housing prices drop, they feel less wealthy. That could affect their purchases of consumer durables,” adds Platz.
Steel suppliers remain concerned about the construction sector, despite the Fed’s recent cut in interest rates. “Housing has declined 25 percent from 2006 and I’m not comfortable that there will be a big uptick in 2008,” says Platz. Yet demand for appliances has held up relatively well, he adds, declining only about 5 percent vs. a year ago.
Other flat-roll-intensive markets are improving, report various sources, including equipment for nonresidential construction, agricultural machinery, railcar, shipbuilding and general manufacturing. Of particular strength is any product related to oil and gas exploration and transportation, and alternative fuels such as ethanol and wind power generation.
Sales of pipe and tube—especially oil country tubular goods and line pipe—have been fueled by $80 a barrel oil prices, which boost exploration efforts. Reports of poor quality imports have also given structurals producers a shot in the arm. “Domestic tube producers are getting orders like crazy due to concerns about Chinese structural tube,” says Bill Hickey, president of Lapham-Hickey Steel Corp. in Chicago. Hickey points to industry reports indicating that some samples of Chinese structural tubing have fallen well short of the 46,000 psi yield strength required in the ASTM A500 Grade B tubing specification.
Signs of improved demand, and rising raw material costs, prompted major mills to announce a price increase of $20 to $30 per ton for October deliveries. Even if the entire price hike doesn’t stick, Bradford says, “it sends a message to buyers that with scrap prices up, companies cannot continue to hold off buying flat-roll in anticipation that prices will go lower. If they do, they are making a bad bet.”
Another sure sign of optimism about flat-roll’s future is the new capacity coming on stream. In late August, SeverCorr LLC began producing hot-rolled coils at its new, 1.7-million-ton Columbus, Miss., mill. Germany’s ThyssenKrupp AG plans to build a 4.5-million-ton carbon and stainless mill in Calvert, Ala., with an anticipated startup date of 2010. Russia’s OAO Magnitogorsk Iron & Steel Works, which reportedly was one of the failed finalists to acquire Canada’s Stelco, plans to build a 1.5-million-ton steel sheet mill either in Haverhill, Ohio, or in Quebec.
“2007 will go down in history as a lackluster year for flat-roll,” concludes Busse. “But 2008 will be brighter, especially if demand continues in the right direction and the dollar doesn’t strengthen.”
U.S. Steel Sees Stelco
as Investment in the Future
One of U.S. Steel Corp.’s motivations for acquiring Canada’s Stelco Inc. was its confidence in the future of the North American flat-roll market, says John P. Surma, U.S. Steel chairman and CEO.
While the $1.1 billion acquisition, expected to close in the fourth quarter, has been called a little pricey by some, it is generally seen as a smart strategic move. U.S. Steel has excess rolling capacity while Stelco has excess slab production capacity, which makes their marriage a natural fit. “U.S. steel is short of hot-rolled coils because of its acquisition of Lone Star Steel,” says Charles Bradford, metals analyst and principal of Bradford Research/Soleil Inc. in New York. “This will help them a lot.”
“This acquisition is good from all sides, for both mills, for their customers and for the industry,” says Tom Ballou, director of purchasing for O’Neal Steel Inc., Birmingham, Ala. “It allows U.S. Steel to lock up some of its raw material needs, and I think it will bring more stability to the marketplace.”
During the conference call announcing the deal, analysts asked Surma: Why this acquisition and why now? He responded that certain macroeconomic factors are lining up positively for the North American flat-roll market, “so we feel more comfortable proceeding on a transaction than we might have in the past.” Recent capital improvements at Stelco—and the fact that slab coming out of Stelco’s Hamilton, Ontario, plant fits nicely into U.S. Steel’s Midwest consumption patterns—make the acquisition particularly attractive.
“The potential for synergies are significant, especially as we better utilize and balance our low-cost raw materials and our geographically dispersed raw steel and finishing facilities to serve an expanded North American customer base,” says Surma, noting that Stelco is currently long by 900,000 tons of slabs annually.
“The business case for this acquisition is very strong,” Surma says. “We can expand our customer base in North America, increase production at our Minnesota ore operation and expand our supply chain, providing semifinished steel to our flat-rolled and tubular finishing facilities in the United States.”
Stelco has two major steelmaking facilities: Lake Erie Works, with an annual raw steel capability of 2.9 million tons, and Hamilton Works, with a capacity of 2.6 million tons. Stelco also owns several joint ventures, including iron ore operations and the Z-Line hot- dipped automotive quality galvanizing line.
Once this deal closes, it is expected to give U.S. Steel an annual raw steel production capability of over 33 million tons, including almost 25 million tons in North America, making it the world’s fifth largest steelmaker.
While this deal marks the latest of many flat-rolled steel acquisitions, most industry observers do not expect it to be the last, though clearly the pickings are a bit slimmer.
One acquisition in the works is steel service center Esmark Inc.’s acquisition of Wheeling-Pittsburgh Corp. James P. Bouchard, who is chairman and chief executive officer of both companies, expects the merger to close by the end of October.
Bouchard also hopes to acquire ArcelorMittal’s Sparrows Point, Md., mill (now renamed Maryland Steel Sparrows Point), with joint venture partners CVRD of Brazil and Ukraine’s Industrial Union of Donbass. Bouchard eventually hopes to integrate Wheeling-Pitt and Sparrows Point into a steelmaking subsidiary of Esmark.
“Midsized North American flat-roll companies joining with large companies has pretty much run its course,” says analyst John Anton, director of the steel service for Global Insight Inc., Washington, D.C. “The next major acquisitions will be large and global, on the scale of ArcelorMittal.”
