Mills are scrambling to meet demand for high-quality bar products, steel’s strongest market.
By Myra Pinkham, Contributing Editor
Demand for special bar quality products will continue to lead the steel market for the next three to five years, say the experts, though perhaps at a slightly slower, more sustainable growth rate.
Despite fears that macroeconomic issues such as high unemployment, gridlock in Washington and contagion from the sovereign debt crisis in Europe might undermine recovery in the United States, most steel executives hold SBQ above the fray. The fundamentals underlying the major end-use markets for high-quality bar have staying power, they say.
“The U.S. steel industry is definitely a bifurcated marketplace,” observes Sal Miraglia, Jr., president of The Timken Co.’s steel group in Canton, Ohio. It is separated into two categories—those products that are construction related and those that are not. SBQ is one of the few steel products that is not affected to a significant degree by the lingering weakness in residential and commercial construction.
Indeed, SBQ’s major users—the automotive, heavy duty truck, heavy equipment and energy sectors—are the ones leading the economic recovery. As a result, SBQ consumption is on an upward trajectory with no signs of leveling off, say both producers and distributors.
Like all markets, steel bar took a huge hit during the recession, with consumption cut in half to 3.2 million tons in 2009. In 2010, SBQ use grew by 38.9 percent to 4.5 million tons, and it is on target to rise another 23.9 percent to 5.6 million tons this year—a major recovery but still below the 6.4 million ton level of 2008, says Christopher Plummer, managing director for Metal Strategies Inc., West Chester, Pa. He predicts SBQ will see slower, but still respectable, growth rates of 5.0 percent in 2012 and 9.6 percent in 2013.
Strong demand for SBQ has created tight supply conditions for some products. Plummer estimates that lead times for larger diameter, higher quality product have extended as far out as 70 to 75 weeks at some mills. Even for smaller diameter, medium to lower quality SBQ, lead times are out as far as 25 to 30 weeks.
During the first nine months of this year, in anticipation of strengthening demand, service centers and end-users may have built up inventories of SBQ, worsening the backlog of orders at the mills. “It’s possible they might have ordered too much,” says Chris Hoyt, director of sales for Republic Steel, Canton, Ohio.
“We’ve been walking a fine line,” says Joe Druzak, president and chief executive officer of Kreher Steel Co. LLC, Melrose Park, Ill. “We are trying to have enough inventories to meet our customers’ requirements, but low enough to mitigate inventory risk. But the market has been changing every day with the swings of the stock market, changes in currency valuations and news about the European debt crisis. We have been walking on eggshells.”
Miraglia expects some relief on lead times as the inventory restocking cycle of the past year runs its course and buyers go into their normal end-of-year destocking mode. Activity has slowed slightly in the fourth quarter. “It isn’t that we are seeing demand go away. It is just that the frenetic pace has been easing somewhat,” he says.
The amount of easing varies depending on the size and grade of SBQ. The higher quality, larger diameter product used in more critical applications, such as moving parts for automobiles, gears, axles and down-hole oil and natural gas applications, has not lost much steam. Softening of demand is more pronounced for smaller diameter, commodity- to medium-grade material, which is more affected by competition from imports, especially as the value of the dollar strengthens vs. the euro, say the experts.
Jack Finlayson, president of Jackson, Mich.-based Gerdau Special Steel North America (formerly Gerdau Macsteel), notes that the SBQ market has been driven largely by the production of light and commercial vehicles in North America, although the energy and heavy equipment markets also have been factors.
“Automotive demand has been increasing ever since the Cash for Clunkers program, and I don’t see it letting up,” agrees Mark Huemme, Republic Steel’s director of marketing.
Recovery of the auto industry has been dramatic, with North American light vehicle output jumping from a woeful 8.6 million vehicles in 2009 to 11.9 million in 2010, almost a 40 percent improvement. Plummer forecasts that production will see another 7.3 percent improvement to 12.8 million vehicles this year, followed by a 5 percent rise to 13.4 million vehicles in 2012. This year’s auto production could have been even higher had it not been for supply chain disruptions resulting from the natural disasters in Japan.
Also boosting SBQ consumption is the popularity of light trucks, which use more steel. The percentage of light trucks vs. passenger cars has risen steadily from 50.8 percent of all light vehicles produced in 2008 to 57.3 percent last year. That ratio is expected to hit 58.4 percent this year and 59.1 percent in 2012, Plummer says.
Engineering and efficiency trends also favor SBQ, notes Huemme. For example, the transmissions in the popular all-wheel-drive vehicles require more SBQ. U.S. steel suppliers also are benefiting from increased “localization” by New Domestic automakers, which are making an effort to source more parts and components for their vehicles in the markets where they are being sold vs. importing them from their home countries.
In 2012 and 2013, commercial vehicle production is expected to reach new heights. Plummer forecasts NAFTA production of heavy duty trucks will hit 249,000 units this year, just shy of the 255,000 peak in 2007. Output will reach a projected 293,000 vehicles in 2012 and 335,000 in 2013, he says. He attributes this growth to a combination of pent-up demand after the recession and pre-buying in advance of the next round of EPA truck engine efficiency regulations, which take effect in 2013. More efficient engines are more expensive, pulling demand forward.
Many countries—particularly China, India, Brazil, Australia and Russia—are undertaking major infrastructure development. This translates into purchases of heavy construction and mining equipment, Miraglia says, much of which is exported from the United States. The two major U.S. yellow goods manufacturers, Caterpillar Inc. and Deere & Co., have recently announced plans to “re-shore” manufacturing capacity to the United States, which is good news for domestic steel suppliers, he adds.
Surging oil and natural gas drilling, especially in the nation’s shale plays, also has bolstered demand for seamless pipe, which is sometimes fabricated from SBQ. As of mid-November, 2,001 drill rigs were operating in the United States, up from 895 in 2009. Plummer forecasts 2,543 rigs will be drilling in 2012 and 2,662 in 2013.
All these positive demand factors have SBQ producers scrambling. Most major mills have been forced to place customers on some form of allocation or controlled order entry as they seek ways to add capacity.
Nucor Corp.’s new Memphis, Tenn., hot-rolled bar facility has been online for about two years and its SBQ has already been qualified by automakers for use in such applications as steering knuckles, ring gears, differential gears, spindles, camshafts, axles and crankshafts. Nucor is continuing to expand SBQ production at its Norfolk, Neb., facility as well. John Ferriola, Nucor’s president and chief operating officer, says SBQ represents more than 20 percent of the company’s bar shipments today, up from just 10 percent two or three years ago.
Gerdau is in the midst of two major expansions. Already in the works is a $67 million project to boost the capacity at its Monroe, Mich., mill by 200,000 tons by 2013. It has announced plans for a $320 million investment to expand SBQ capacity by another 400,000 tons by 2014 through expansions in Monroe and at its Jackson, Mich.; Fort Smith, Ark; and St. Paul, Minn., plants. It is also studying the possibility of building a greenfield
Republic Steel has announced an $85.2 million investment in its Lorain, Ohio, facility for electric arc furnace and associated equipment to support demand for SBQ, to be up and running in 2013. This EAF will include bloom casting capacity for bar products, an ability the company has not had since it consolidated steel production in 2008. The new EAF will allow it to re-enter the seamless tube rounds market.
Timken is investing $225 million at its Faircrest steel plant in Canton, Ohio, to increase its SBQ tonnage by about 25 percent once it comes online in 2014. This is in addition to a previously announced $35 million investment in a high-volume in-line forge press at the Faircrest rolling mill, to be completed by late 2012 or early 2013.
Meanwhile, under the allocation umbrella, “customers can order in a healthy way with a good understanding of what they need,” Miraglia says, and get SBQ within 12-16 weeks, as opposed to over a year out. “With allocation, we assure customers we have done business with in the past that they will not need to speculate to get everything they need,” he adds.
Gerdau Special Steel has not put its customers on allocation, Finlayson says, and is still trying to support its traditional customers with the steel they need for their operations. “We understand the level of service needed to supply the automotive, truck and distribution markets and are prepared to accommodate last minute adjustments from our customers.”
Most smaller diameter or lower-end SBQ products are not currently on allocation, say executives.
As expected of a product where demand is outpacing supply, SBQ prices are very strong. The market has seen four or five price increases in the past year, not including the latest announcement by Nucor Memphis, which would increase base prices by $50 a ton while decreasing the scrap surcharge by the same amount, effective Dec. 1, therefore keeping the transaction price unchanged. Plummer places the average transaction price for SBQ at $922 a ton in 2011, up from $767 in 2010 and from $702 a ton at the depth of the recession. He predicts it will fall back slightly to about $894 a ton next year.
Plummer expects the extreme supply tightness for SBQ to ease up in the next 12 to 18 months, but not demand. “I think producers will continue to see improved demand for the next four to five years from light vehicles and for the next two to three years from heavy duty trucks, heavy equipment and the energy sector,” he says.
“I see 2012 being a slightly better year than 2011,” adds Republic’s Hoyt. “While the rate of growth won’t be as great, it will be a much more reasonable, sustainable rate with fewer spikes in demand than this year.”