Will 2014 Raise the Bar?
SBQ remains a tale of two markets: automotive and all the rest.
By Myra Pinkham, Contributing Editor
Thanks mostly to the robust automotive sector, sales of special bar quality products have managed to hold their own this year. But plans to increase industry SBQ production capacity by 25-30 percent raise the specter of a future oversupply situation, say the experts.
On the positive side, demand from automakers, which accounts for half of all SBQ consumption, should return to pre-recession levels by early next year, says Jack Finlayson, president of Gerdau Special Steel North America, Jackson, Mich.
Other end-use markets for high-quality bar have not performed nearly as well. Mining equipment has been particularly weak, says Joe Druzak, president and chief executive officer of Kreher Steel Co. LLC, Melrose Park, Ill. Given the weakness in commodity prices, he expects production of mining machinery to remain stalled at least through 2016.
Other SBQ markets experiencing some softness include medium- and heavy-duty trucks, industrial motors, construction equipment, agricultural equipment, and oil and gas, says Jose-Luis Bretones, vice president of strategic sourcing and supply for A.M Castle & Co., Oakbrook, Ill. All those markets have been flat this year and are not expected to recover until late next year.
Metal Strategies Inc., West Chester, Pa., forecasts that apparent consumption of SBQ will be down about 2.7 percent this year, due in part to the lingering effects of a demand bubble in 2012. But next year the bar market should see across-the-board improvement, predicts Managing Director Christopher Plummer. “While 2014 still won’t be a stellar year for SBQ, it will be up from this year.”
Druzak at Kreher Steel also expects gains for SBQ next year in the 2.0-2.5 percent range, depending on how the economy fares.
“We have already started to see some nice improvement in incoming orders in the last two months or so, making us very positive about 2014,” adds Ted Thielens, executive vice president of Republic Steel, Canton, Ohio.
SBQ was one of the first steel markets to rebound from the economic downturn and remained in a recovery mode from 2010-2012. After falling nearly 50 percent from its 6.95-million-ton peak in 2008 to 3.63 million tons in 2009, SBQ apparent consumption jumped 46.5 percent in 2010 and another 15 percent in 2011 to 6.11 million tons, according to Metal Strategies.
“The sharp recovery of the automotive market caught everyone off guard and led to extremely long lead times from 2010 to 2012—longer than a year for some SBQ products,” Plummer explains. “That opened the door to imports. It also caused a lot of double and triple ordering during this time period. So the market has been in a correction mode ever since the first quarter of 2012.”
Much of that excess inventory has already been worked down, says Kimberly Leppold, senior steel analyst for London-based Metal Bulletin Research. “I’m not sure if inventories are as low as some companies would like, but they will likely come back to a fairly good balance by the end of the year, putting the SBQ market in a stronger position for next year.”
Bill Hickey, president of Chicago-based Lapham-Hickey Steel, says supply and demand is fairly well balanced for SBQ products, with about three months of supply in service center inventories. That equilibrium could be changed quickly by a surge of competitively priced products from offshore, however, including SBQ-containing finished goods.
Druzak is equally concerned. Even though stock levels are in better shape than six months ago, the weak European economy and slowing growth in China could trigger a surge in energy-related SBQ imports in the coming quarter, he says. That could cause another oversupply situation, even though service centers continue to keep their purchasing close to the vest. “With lead times so short, there is no need to buy more than necessary,” he says. Lead times from auto-oriented mills are out past 90 days, but most others deliver in only 30 to 60 days.
The U.S. Census Bureau reports that imports of hot-rolled steel bars grew by 12.4 percent in the first nine months of this year, including a 46.9 percent jump in September, compared to the same period last year. But these imports are primarily aimed at the energy distribution and oil and gas markets, Finlayson notes. “We see less impact on imports of SBQ for automotive and other manufacturing sectors.”
Jim Hoffman, senior vice president of operations for Los Angeles-based Reliance Steel & Aluminum Co., also has seen a modest influx of foreign SBQ. But with readily available domestic product, shortening mill lead times and only about a 20 percent price differential, he questions whether those orders are worth the risk.
An even bigger risk to the domestic SBQ market is the import of SBQ-containing finished goods, says Hickey, who notes that the merchandise trade deficit currently amounts to more than 5 percent of U.S. GDP. Every finished product manufactured overseas represents steel that was not sold in the United States.
Alan Tonelson, a research fellow with the U.S. Business & Industry Educational Foundation, estimates the overall U.S. trade deficit is at its highest level in four years. The merchandise or manufactured product portion of the deficit surged by nearly 34 percent in July to $62.08 billion, a level more typically seen during periods of much higher economic growth.
Bretones, at A.M. Castle, expressed optimism that imports of finished goods will moderate as the on-shoring trend brings more manufacturing back to the United States. But as noted by Jeff Simons, vice president of marketing and business development at O’Neal Industries Inc., Birmingham, Ala., much of that re-shored manufacturing is migrating to Mexico, not the U.S.
Meanwhile, domestic consumption of SBQ will likely continue to be driven by the automotive market, says Mark Millett, president and chief executive officer of Steel Dynamics Inc., Fort Wayne, Ind. Recent forecasts call for North American automotive build rates to exceed 16 million vehicles this year, a 4.2 percent increase. The industry is expected to build about 16.5 million vehicles in 2014 and 17.3 million vehicles in 2015.
Auto designers’ efforts to lighten vehicles and improve fuel economy will affect SBQ much less than other steel products, Plummer says. SBQ tends to be used in critical support applications and is an important tool in keeping vehicles safe. The average light vehicle currently contains about 300 pounds of SBQ—a figure that may actually increase as cars and trucks are equipped with higher-torque engines.
In the oil and gas sector, low natural gas prices have slowed drilling activity. Thus energy-related SBQ inventories have ballooned a bit, say the experts. Most are confident that the long-term growth of energy applications will take SBQ along for the ride.
Finlayson at Gerdau says his company has already seen an uptick in SBQ demand from the oil and gas sector. “We continue to be optimistic about future expansion of infrastructure for exploration, extraction and distribution of energy products,” he says.
Thielens at Republic is also counting on solid oilfield demand for SBQ. He expects the price of natural gas to trend up as more liquefied natural gas export terminals are completed.
On the heavy equipment side, experts say, demand for mining equipment is suffering the most as coal faces environmental pressures. Production of construction equipment is weak due to lagging commercial building and lackluster infrastructure funding in the U.S. Economic doldrums in Europe and the slowdown in China are limiting export opportunities for domestic yellow goods manufacturers. All that adds up to less consumption of high-quality steel bar.
Demand from the farm equipment sector has been positive, but an abundant crop yield this year could lower commodity prices and the income farmers would otherwise use to buy new tractors and combines, says Simons at O’Neal.
Another large user of SBQ bar, the heavy-duty truck market, is now hitting bottom, says Plummer at Metal Strategies. Truck production was down about 22 percent through September. Part of that decline was caused by buyers who brought new trucks last year ahead of new EPA emissions regulations that made engines more expensive. On a positive note, Plummer says, the rate of decline has slowed and heavy truck output should improve 3-4 percent next year.
Of concern to some is all the new SBQ production capacity expected to ramp up between now and 2015—a total of about 2 million tons in a 6.5-million-ton market. “It could be problematic if the mills perform poorly with it,” says Hoffman at Reliance. “I’m hoping they won’t pursue a ‘fill the mill’ business philosophy and will work to protect their market share and their customers. If they do the latter, eventually demand will catch up to capacity.”
For most mills, the decision to build this new capacity was a result of strong SBQ demand and pricing in the recent past, before the demand bubble burst in 2012, says Leppold. The mills that have announced capacity additions—Nucor, Steel Dynamics, Republic, Timken and Kentucky Electric Steel--are all established players in SBQ and may use the new production facilities to replace some older, less efficient capacity. All of the expansions are upgrades of current facilities rather than new mills, Plummer adds.
"Current market demand will not absorb this supply," says Castle's Bretones. "However, with a turnaround in the in the U.S. economy and continued strength in the automotive sector, supply/demand could balance." It all depends on whether the automotive forecast of 17-18 million vehicles by the end of the decade proves true, adds Druzak.
The SBQ market has been going sideways, but should see forward progress next year, says Seth Wiener, national product development manager for O'Neal Steel. "I am expecting that overall U.S. business conditions will improve in 2014 and that SBQ will benefit to some degree. All ships are lifted by a rising tide."