Wire Rod Market's 'In the Trough'
Demand for wire rod shifted dramatically from a solid peak to a dismal valley in the span of just a few months, report steel producers and distributors.
By Myra Pinkham, Contributing Editor
“It’s as if someone just pulled a light switch,” says Joe Druzak, president and chief executive officer of Kreher Steel Co. LLC, Melrose Park, Ill. Just a few months ago, conditions in the wire rod market were tight, with many mills putting customers on allocation. “But today mills are scrambling for orders.”
“There is virtually no demand at the moment,” says Richard Webb, vice president of industrial sales and marketing for Keystone Steel & Wire Co., Peoria, Ill. “Once the financial crisis hit, it seemed to just shut business down.”
Jack Lynch, director of sales and marketing for Charter Steel Manufacturing Inc., Saukville, Wis., is not surprised at the market’s abrupt downturn. Demand in major wire rod consuming markets—construction, automotive and industrial equipment—was already fairly weak. “The financial crisis was the straw that broke the market’s back,” he says, due to both “the fog of uncertainty” hanging over the market and customers’ inability to get financing.
“You should not mistake the tight supply earlier this year with good demand,” notes Webb. “Demand earlier this year was okay, but not particularly strong. What we were seeing was more a shortage of supply than strong demand.”
The domestic wire rod market has essentially been cut in half over the past decade due to an increase in imports of wire-containing finished goods, says Lynn M. Lupori-Gray, senior consultant with Hatch Consulting, Pittsburgh. In 1996, apparent U.S. consumption of wire rod totaled 7 million tons, while domestic production was 5.1 million tons. By 2007, consumption had fallen to 3.5 million tons and domestic production to about 2 million tons. This year domestic production was on the increase (at 1.8 million tons year-to-date through July), largely because rod imports were down by nearly 50 percent. Apparent consumption for the first seven months of the year totaled 2.5 million tons. Lupori-Gray noted that both domestic production and apparent consumption started to decline in August or September, making it difficult to predict how the market will finish 2008.
Christopher Plummer, managing director of Metal Strategies Inc., West Chester, Pa., does not see as steep a market decline, noting that about a third of all rod mills don’t report figures to the American Iron & Steel Institute. Accounting for that discrepancy, he estimates 2007 apparent rod consumption was 5.31 million tons and domestic shipments were 3.87 million tons, down from 8.54 million tons and 5.12 million tons, respectively, in 2002. Apparent consumption this year will hit 5.17 million tons, he predicts, while domestic production will total about 3.93 million tons.
There is no dispute that wire rod imports have plummeted. According to Plummer, imports into the United States declined to 1.54 million tons last year from 3.05 million tons in 2006, and will slide further to about 1.38 million tons this year if the side effects of the financial crisis don’t cause an import surge. With the U.S. dollar strengthening and demand for steel weakening in other parts of the globe, some observers predict foreign mills will be looking to North America once again as an outlet for their production. Walter Robinson, president of Johnstown Wire Technologies, Johnstown, Pa., fears rod and wire imports could “rear their ugly head again,” especially with China looking to remove its export tax from certain steel products.
While there have been increased import offerings of late, thus far there haven’t been many takers due to the risk that the market could weaken further, Druzak says. “You might as well go to Las Vegas as to buy imports. The odds would be just about as good. Buying imports might be the smartest or the dumbest move you could make, but most people just aren’t willing to take the risk.”
Even as rod imports have declined, foreign finished goods containing rod and wire have continued to arrive, notes Howard Booth, Hatch Consulting’s managing consultant. “Wire is coming in instead of rod, springs are coming in instead of wire, and component and finished goods imports are increasing.”
Mario Longhi, president and chief executive officer of Gerdau Ameristeel Corp., Tampa, Fla., a major producer of wire rod, says that the North American steel industry has, until very recently, performed well, with low imports, balanced inventories and new export opportunities more than offsetting declining domestic demand. “Unfortunately, this situation has changed,” he says, “with many small- to medium-sized businesses—which are highly dependent on credit to finance their working capital needs—under pressure, at least over the short term.”
Johnstown’s Robinson is more blunt. “I haven’t seen it this bad in the 41 years that I’ve been in the business,” he says. “No one is buying anything.”
“The financial crisis is changing everything,” says Druzak. “Scrap prices have come down tremendously. The dollar has strengthened. Demand has almost collapsed at the mill level. Just a few months ago they were on allocation, and now we can buy rod right out of rollings with essentially no lead time.”
Though new-home construction has been down for manymonths, people were still buying rod as recently as the first half of this year, says Webb. “But ever since the financial crisis really started to take hold, it seems as if all buying has stopped, and that will likely continue for a while. People are living off of their inventories, and it will take some time to chew through them. I expect that things will remain very slow at least through the first quarter. Hopefully we will see a spring pickup.”
According to the Washington, D.C.-based National Association of Home Builders, housing starts declined 4.5 percent in October to a seasonally adjusted annual rate of 791,000 units, the slowest pace for any month since the government started keeping track in 1959. Single-family starts declined by 3.3 percent to 531,000 units, the slowest pace since October 1981. Multifamily starts fell 6.8 percent to 260,000 units.
Likewise the automotive market, which uses a lot of fasteners made from cold-headed wire rod, has been weak for a while and could get even weaker—especially if the Detroit Three fail in their efforts to secure a federal bailout.
“The auto industry already had low sales before October, but October sales were at an all-time low,” Robinson notes. General Motors’ sales were down 45 percent compared with October 2007, Ford’s were down 30 percent and Chrysler’s were down 35 percent. Even the foreign-owned New Domestic automakers’ U.S. sales suffered in October. Toyota’s were off 23 percent, Honda’s were down 25 percent and Nissan’s declined by 33 percent vs. October 2007. Experts forecast sales totaling 13.1 million vehicles this year, and U.S. production of just 12.3 million units—a far cry from the 15 million to 16 million just a few years ago.
“It would be great if we even get [2008’s] numbers next year,” Robinson says. “People want cars, but they can’t get credit.” By some estimates, four out of every 10 auto loan applications are rejected today, vs. the typical rate of just two out of 10.
Many people are simply afraid to buy cars, appliances and other wire-containing products in this recessionary environment. “Everyone is cautious. Consumer confidence is extremely low,” says Webb, who places much of the rod market’s fate on how fast consumer confidence improves. “You need to be able to convince people that they will continue to be working before you can convince them to spend money,” he says.
That cautious attitude also extends to steel distributors. “Service centers want stable business conditions, but we haven’t had price stability all year,” notes Druzak. “The price of rod came down even faster than it ran up [largely due to elimination of some scrap surcharges]. There is no predictability. I’d like things to settle down and hit bottom, but we haven’t seen that yet.”
As a result, Kreher and other service centers have been doing what they can to reduce their rod inventories as quickly as possible. “We want to keep lean inventories until there is less confusion and we see the market bottom out. In the meantime, all steel buyers, including service centers, are sitting on their hands waiting to see what the market will eventually look like. There is just no visibility right now.”
Druzak is pleased with how producers have reacted to the sudden wire rod market decline. “The mills have reacted quickly and taken capacity out,” he says, though it is unclear how much. “We won’t have a good idea where it will settle until at least the beginning of the year.”
“We are doing what we always do, trying to control both our fixed and variable costs,” says Webb at Keystone Steel & Wire. Like other rod mills, Keystone has been taking more downtime. The mill took a planned three-week outage in late October and early November to rebuild a reheat furnace and will also have “unplanned” extensions of its Thanksgiving and Christmas plant closures.
The rod and bar mill at Evraz Rocky Mountain Steel Mills, Pueblo, Colo., was closed from mid-November to the end of the month, and a further outage was being considered for December due to a lack of orders, according to a company spokesperson.
Canada’s Ivaco Rolling Mills LP, L’Orignal, Ontario, shut down from mid-November until the end of the year, resulting in the layoff of about 600 employees. Republic Engineered Products Inc. plans to shut down its melt shop in Lorain, Ohio, including a blast furnace it uses for wire rod applications, for two weeks in December.
Longhi says Gerdau Ameristeel has been watching its order book carefully and plans to match its production rate with customer needs. Likewise, Lynch says Charter Steel is “reducing cost and pulling back supply” and “trying to reduce capacity to match demand.”
Several wire drawers are making similar moves, including Insteel Industries Inc., Mount Airy, N.C., which has laid off 50 workers in the past three months.
Bucking this trend—and production cutting moves it is making on its flat-roll side—is ArcelorMittal USA Inc., Chicago. In mid-November, the steel giant recalled “a majority” of the 168 workers laid off at its Georgetown, S.C., wire rod mill following a three-week outage there. A company spokesperson says the production curtailment was “the consequence of global market conditions,” but the company is “confident the situation will improve in the medium to long term.” ArcelorMittal has announced that it will cut its global steel output approximately 30 percent, including a 35 percent production cut in its Flat Carbon Americas unit in fourth-quarter 2008 due to declining demand.
Charlotte, N.C.-based Nucor Corp. is currently increasing its presence in the wire rod market, restarting its Kingman, Ariz., bar facility—which also has coiled wire rod production capabilities—in second-quarter 2009.
Despite the current weakness, 2008 as a whole has been a good year for wire rod, says Webb. In fact Lynch adds, it could even be a record year. “We have gone from an absolute peak to a valley, and we are in the trough now.”
Webb believes 2009 will start off slowly and then will likely improve. “A lot depends on what stimulus plans are enacted and what happens with the global market,” he says.
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