Nov 2016

Hot-Roll Steel Underachieves

Experts are cool to hot-roll’s growth prospects in 2017.

By Myra Pinkham, Contributing Editor

U.S. demand for hot-rolled steel is disappointingly soft due to the nation’s modest economic growth, persistent weakness in the energy sector, a small dip in automotive orders and uncertainty over the presidential election. Even the victory in the recent trade case against unfair flat-rolled imports is unlikely to give the market much of a boost in 2017, sources say. “While it isn’t getting any worse, it just isn’t going anywhere,” says analyst John Anton of IHS Markit, echoing widespread sentiments about current conditions in the carbon hot-roll market.

Imports have declined as a result of the Commerce Department’s ruling earlier this year that producers from Australia, Brazil, Japan, South Korea, the Netherlands, Turkey and the United Kingdom have dumped hot-rolled steel on the U.S. market. Unfortunately, carbon steel prices have also declined. As of early October, spot prices for hot-rolled coil had fallen to less than $500 per short ton from a mid-June peak of $640. By the end of 2016, they could be as low as $470 to $480 per ton, Anton says. Amy Bennett, principal consultant for Metal Bulletin Research, believes hot-rolled coil prices could bottom out in November and pick up slightly by early first-quarter 2017.

Demand for hot-rolled steel has been disappointing this year. Apparent consumption of hot-rolled coil declined by 0.2 percent in the first seven months, while the total sheet market saw only a small 0.3 percent gain, reports Christopher Plummer, managing director of Metal Strategies, Inc., West Chester, Ohio.

Trade cases often create a situation that could be equated to the carnival game of Whack-A-Mole—imports may get whacked in one region just to pop up again in another. But to date, no other country has significantly increased its hot-roll import volumes to the U.S. in place of the imports that are restricted. The situation was different following trade cases on U.S. imports of cold-roll and galvanized steel, where Vietnam stepped up its shipments to fill the void, Plummer notes.

Based on the latest license data from the Commerce Department, September hot-rolled sheet imports dipped 9.4 percent from August and were 19.7 percent lower than a year earlier. But not just because of the trade case. “There is nowhere near the same incentive to buy imported hot-roll than there was earlier this year,” says Mike Lerman, president of Steel Warehouse Co., South Bend, Ind. The price differential between foreign and domestic was only around $20 to $40 per ton as of early October, according to various observers, not nearly a big enough spread to justify importing material.

“The hot-roll trade case could help demand in the short term, but that will not necessarily be the case over the longer haul,” says Marc Lerman, chief commercial officer at Steel Warehouse. Hot-roll imports may just be replaced by a pickup in imports of finished goods or components from foreign suppliers, who will use locally sourced steel. So the net benefit of the trade case on domestic steel suppliers is unclear, though mill capacity utilization rates in the U.S. did edge up to the mid-70 percent level following the Commerce Department’s ruling.

Demand from two of the largest purchasers of hot-rolled steel—the service center and pipe and tube sectors—is especially weak at present, sources say. Service centers are being cautious about how much hot-roll they buy due to the falling prices and the need to whittle down inventories for year-end accounting purposes, says James Bouchard, chairman and CEO of Esmark, Inc., Chicago Heights, Ill.

“It’s part of this world we are living in,” adds Lisa Goldenberg, president of Delaware Steel Co., Fort Washington, Pa. “Cycles are very short. No one wants to be caught with their pants down.

Everyone is carrying less inventory than they used to.”Hot-roll inventories average about 2.2 months of stocks on hand at many service centers. “But given the short domestic mill lead times, and the fact we are close to the end of the year, service centers are looking to get them even lower,” says Tony Hammes, vice president of supply chain management at O’Neal Flat Rolled Metals, Brighton, Colo. Lead times from many mills are as short as three weeks. On occasion, it’s possible to get steel in just a week or two, says Mark Chuvala, O’Neal Flat Roll’s director of the carbon supply chain.

Chris Billman, research manager at Majestic Steel USA, Bedford, Ohio, blames the flagging energy sector for much of hot-roll’s weak demand. Hot-roll is used to make welded pipe and tube, including oil country tubular goods.

Billman says there would need to be a prolonged period of oil prices over $50 per barrel, and higher natural gas prices, for hot-roll used in OCTG to pick up significantly. U.S. exports of oil and gas, which are now allowed by law, are not much of a factor, he adds. At present, only one liquefied natural gas (LNG) export terminal is open, and U.S. crude oil exports have been limited. “The global market is already flooded with oil.”

According to Metal Strategies, total apparent consumption of welded pipe and tube (hot-roll weighted) declined 21.1 percent in the first seven months this year, including a 53.1 percent decline in OCTG and a 15.1 percent decline in non-energy tubulars. That included a 1 percent rise in mechanical tubing, a 27 percent decline in structural tubing, a 9.4 percent decline in standard pipe and a 54.2 percent decline in pressure tubing. Only about 8.5 million tons of hot-roll will be consumed by the welded pipe and tube sector this year, down more than 18 percent from the 10.4 million tons used during the most recent peak in 2008, Plummer says.

Even though oil prices have edged up recently, the change hasn’t translated into new steel sales yet, sources say. Energy exploration and production companies have made technological advancements that allow them to extract more oil and gas with fewer drill rigs. As of the first week in October, West Texas Intermediate crude oil prices had risen to about $50 per barrel and Nymex natural gas prices had topped $3 per million BTU. The number of active drill rigs was up nearly 30 percent for the year, but remained 74 percent below the peak in 2008, reports oil services company Baker Hughes, Inc. Plummer predicts it could be another 12-18 months before hot-roll sees a measurable boost in demand from the energy sector.

Much of the bump in oilfield demand is being met with pipe from inventories, which built up when the energy market fell. “Because of that, it will take a sustained period of higher prices for it to have a positive impact,” Anton says. He estimates it will be late 2017 or early 2018 before the market has worked through the OCTG inventories.

Another major market for hot-rolled steel is the construction sector. While construction has seen growth, it has yielded little increase in hot-roll demand. “Other flat-rolled steel products, particularly coated steels, are seeing a greater pickup from construction than hot-roll,” says Marc Lerman at Steel Warehouse.

The first half of 2016 was fairly strong for nonresidential construction, says Jeff Simons, president and CEO at O’Neal Flat Rolled Metals. But he is concerned about the rate of growth moving forward, pointing to the widely watched American Institute of Architects’ Architecture Billings Index, which slipped into negative territory in August and September to 49.7 and 48.4 points, respectively. Kermit Baker, chief economist for AIA, says that while this recent backslide should act as a warning signal, it could reflect hesitancy in the marketplace to move forward on construction projects until the presidential election is decided. “The fact that new work coming into architecture continues to slowly increase suggests that billings will resume their growth in the coming months,” he says.

The automotive market remains one of steel’s greatest sources of strength, with production this year at a record-level pace of 17.5 million to 17.7 million vehicles. Output of new cars and trucks is expected to decline slightly in 2017, Plummer says, though the impact should be modest. “The steel industry has done a good job of competing against aluminum through production of new advanced high-strength steels,” Bouchard notes. “Because of that, it shouldn’t see any further deterioration of market share, at least in 2017.”

Another area of concern for steel suppliers is agricultural equipment. Unlike other types of heavy equipment, production of tractors and combines uses more hot-roll and less steel plate. July farm equipment shipments were 11.9 percent lower than a year earlier, with little hope for much improvement through 2017, Plummer says. Crop cash receipts are forecast to fall 3.7 percent this year, leaving farmers short of funds for new machinery.

Industry observers are waiting anxiously to see what happens to steel prices when new capacity comes on line. Big River Steel, the new mill in Osceola, Ark., plans to begin producing hot-roll late this year. ArcelorMittal has announced plans to restart the No. 3 blast furnace at its Indiana Harbor West facility. And the idled RG Steel in Mingo Junction, Ohio, formerly Wheeling-Pittsburgh Steel, could be restarted as soon as the first half of next year, some sources told Metal Center News.

After producing its first hot-roll in mid-December, Big River plans to slowly ramp up over the next seven to nine months, working straight through the Christmas and New Year’s holidays, says Mark Bula, chief commercial officer. Putting this into perspective, he points out that hot-roll will account for only about one-third of Big River’s total 1.6 million tons of steelmaking capacity. He also stresses that Big River will be more of a niche than a commodity steel player. Big River has no intention of disrupting the hot-roll market. “We will be ramping up responsibly. Our impact will be minimal as we will be a small player in a very big pond, accounting for less than 3 percent of the total steel produced in the United States,” Bula said.

The restart of ArcelorMittal’s No. 3 furnace is also expected to have minimal impact, as it will shift rather than add capacity, observers say. But the prospect of the former Wheeling-Pitt mill getting new life is raising some eyebrows. “Mingo Junction is something we will need to keep our eyes on,” Chuvala says. While Bouchard sees it as a sure thing, Anton at IHS Markit doubts it will happen. “And if it does, it could fail again, especially if it produces commodity grade steel. There is already plenty of commodity steel in the marketplace.”

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