Galvanized Sidesteps the Soft Spots

The outlook for galvanized steel remains positive in spite of weakness in the auto, housing and appliance markets.

By Myra Pinkham, Contributing Editor

Despite concern about the U.S. economy and softness in such major markets as automotive and residential construction, most experts predict growth in demand for galvanized steel in 2008, thanks in part to plummeting imports and replenishment of lean inventories.

Domestic mills already have announced two price increases this year for the corrosion-resistant zinc-coated coils and more could be forthcoming.

“Demand has been fairly soft, though not depressed,” says Ladd Hall, executive vice president of Nucor Corp. Despite production cuts by North American automakers and the slowdown in new-home construction, which affects demand for galvanized products in the associated appliance and HVAC sectors, he predicts that 2008 will be a decent year.

But galvanized steel distributors won’t necessarily benefit as much from the decline in foreign imports as their mill suppliers due to the difference between true demand and apparent domestic consumption. Roy Platz, director of marketing for Chicago-based ArcelorMittal USA, explains that over the past three years true demand for hot-dipped galvanized steel has been relatively flat, ranging from 16.5 million to 17 million tons a year. Most of the fluctuations in steelmakers’ order books have come from the supply side, through swings in service center inventories and imports.

The story is a bit different for electro-galvanized steel, which generally is not sold through distribution and is used exclusively by the automotive market, primarily the Detroit Three. As a result, demand and pricing of electro-galvanized have declined in tandem with production cuts at General Motors, Ford and Chrysler. Few New Domestic automakers (such as Toyota, Honda and Nissan) use it at all, says Platz.

U.S. apparent consumption of hot-dipped galvanized totaled about 16.6 million tons in 2007, down 12.2 percent from 18.9 million tons in 2006. As much as 1 million tons of that decline resulted from inventory liquidations, primarily at service centers, however, which suggests that real demand is healthier than it may appear, Platz adds.

After trending down all year, galvanized inventories at service centers may have hit bottom, says Jim MacBeth, senior vice president of carbon steel operations for Reliance Steel & Aluminum Co. in Los Angeles. He believes that demand has caught up with inventories, and that service centers are back in the market buying galvanized steel. “But only based on need. It is very difficult to reduce inventories, and service centers don’t want them to get too high again.”

At present, service center inventories are at their lowest point in eight to 10 years, says Tommy Scruggs, manager of flat-rolled steel sales for Steel Dynamics Inc., Fort Wayne, Ind. This is true of steel inventories in general as well as those of hot-dipped galvanized. According to the Rolling Meadows, Ill.-based Metals Service Center Institute, U.S. steel inventories in November 2007 totaled 12.13 million tons, their lowest since November 1997 and a 27 percent decline from a year earlier.

While some restocking is starting to occur, Scruggs says, “there is no panic buying or placement of orders with several suppliers at the same time. There has been some speculation with galvanized and scrap prices going up, but I don’t think it’s nearly as widespread as in other cycles.”

Imports of galvanized steel declined to about 2 million tons in 2007, down from 3.3 million tons in 2006, which was a record year for imports. Both the weak dollar and low galvanized prices compared to other world markets have contributed to the slowing of imports into the United States. “Steelmakers don’t usually seek out low-priced countries,” Platz notes.

The price of domestic galvanized is at least $100 a ton below certain other markets, says Scruggs, “so there is room for a huge correction in domestic prices before a lot of imports will start to come back.” Recent softening in the European market should be offset by strengthening in the Asian market, so even the recently announced price increases in the United States shouldn’t start attracting new galvanized imports anytime soon. While there may be some narrowing of the gap between the U.S. and the international price, Scruggs adds, the most likely result will be an increase in steel prices worldwide.

China recently became the No. 1 importer of galvanized steel after being a major net exporter for a number of years, Platz notes. China and other importers are suffering from the same issues as the domestic steelmakers, including the high cost of raw materials and rising freight costs.

With both inventories and imports down, and exports up due to opportunities afforded by the weak U.S. dollar, mills are producing galvanized at nearly full capacity. What that means, says Scruggs, is that there isn’t enough galvanized to support even the current anemic level of domestic demand.

Despite some consolidation of ownership, including Steel Dynamic’s acquisition of The Techs and the purchase of Winner Steel by NLMK and the Duferco Group, the market’s capacity to produce galvanized is actually increasing. SeverCorr’s new galvanizing line in Mississippi shipped its first metal early in December and is expected to reach 75 to 80 percent of its rated capacity in 2008. Nucor plans to bring on a 600,000-ton galvanizing line at the Decatur, Ala., mill it acquired from Trico Steel. Still more galvanizing capacity is expected to come on line when ThyssenKrupp starts up its new Calvert, Ala., mill in 2010.

Mill shipments of galvanized declined to about 15.4 million tons in 2007 vs. 16.4 million tons in 2006, says Platz. Since most of that slide occurred during a time of inventory liquidation, he hopes for a turnaround in that trend in 2008. “Hopefully we have seen the inflection point.”

Domestic lead times have stretched out to eight to 10 weeks, says MacBeth. As of mid-December, the mills were booked through January and looking for February orders despite two price increases of $20 to $30 per ton announced early in the year.

According to Platz, 70 to 75 percent of hot-dipped galvanized is used by the automotive and construction industries, with automotive accounting for marginally more volume than construction. In the auto market last year, U.S. vehicle sales fell to about 16.2 million vs. 16.6 million in 2006, and this year could decline further to 16.0 million. “Actually the retail side of auto sales is doing relatively well. A big part of the drop has been in fleet sales—sales to rental companies and the like—which is an area where General Motors, Ford and Chrysler have been losing money. Consumers are not backing off as much as you think,” Platz says.

The outlook for auto production is guarded, says John Anton, director of the steel service of Global Insight Inc., Washington, D.C. Vehicle production in the NAFTA region is down about 20 percent from its peak two to three years ago and there most likely won’t be a significant uptick until 2010—much later than previous predictions of a rebound in the second half of 2008.

Early in December, GM and Ford announced they were continuing restructuring efforts, including production cuts in their core North American operations. GM said it would only build 950,000 vehicles during the first quarter of 2008, down 11 percent from a year earlier, while Ford cut its first-quarter production forecast by 7.4 percent to 685,000 vehicles. Chrysler previously announced that it would eliminate production shifts at several plants in the first quarter.

The New Domestics are faring better and bringing on new North American production capacity. Toyota has started production at its partner Subaru’s plant in Lafayette, Ind., and is opening a facility in Woodstock, Ontario, later this year. Looking further out, Honda plans to open a production plant in Greensburg, Ind., Kia is building a plant in West Point, Ga., and BMW is expanding its facility in Spartanburg, S.C. Volkswagen also plans to increase its concentration on the NAFTA market and could decide to build a 200,000-vehicle plant in the region to complement its Puebla, Mexico, facility.

Largely due to these new production facilities and the strengthening presence of the New Domestics in the South, Michael Wagner, chief commercial officer of SeverCorr, says his company is very upbeat about the galvanized market. SeverCorr started up the 450,000-ton galvanizing line at its new flat-roll steel mill in Columbus, Miss., in late November. “The response we have gotten for our new line has been fantastic,” he says, from makers of HVAC products, appliances and metal buildings, as well as automotive.

“We are the only 72-inch-wide, high-quality sheet producer in the South,” he adds, and will produce product suitable for exposed automotive applications. SeverCorr is currently in conversations with several automotive companies and expects to go through the qualification process this year.

High gasoline prices and the trend away from large SUVs toward smaller, more fuel-efficient vehicles is affecting demand for galvanized steel, says Anton. Consumers are switching to smaller crossover vehicles—SUVs on car rather than truck frames—as well as to passenger cars. The resultant decline in the curb weight of these vehicles has meant a decline in the use of steel, including galvanized.

The residential slump has also put downward pressure on appliance demand, though the appliance market hasn’t suffered as much as housing. Only about 30 percent of appliances are used in new homes, while 70 percent are replacements, notes Anton. “Remodeling is also down, but there is always replacement demand. People have to buy a new appliance when the old one stops working.”

Commercial construction is one bright area for suppliers of galvanized steel. Nonresidential fixed investment increased by 3.7 percent in 2007 and is expected to increase another 2.5 percent in 2008. “But much of that strength has been infrastructure-related for such applications as stadiums and schools,” says Scruggs. “Warehouses, manufacturing facilities and other smaller projects that use galvanized sheet largely on the roofing side were slightly weaker in 2007 and are expected to get weaker still.”

“We don’t expect to see much growth in nonresidential due to the influence of the soft residential market,” adds MacBeth at Reliance. “Common sense suggests [the housing slump] will impact light construction projects that support new communities such as hospitals, strip malls, schools, gas stations and the like.”

Residential construction is expected to remain weak for some time. According to data from the U.S. Commerce Department, housing starts nationwide were running at a seasonally adjusted rate of 1,187,000 in November, 3.7 percent below October’s rate and 24.2 percent below November 2006. Single-family housing starts declined in November to their lowest level since June 1991.

“It’s no surprise that builders are starting fewer homes and pulling fewer permits for new-home construction at a time when homebuyer demand is weak and there’s a heavy supply of vacant homes on the market,” says David Seiders, chief economist for the National Association of Home Builders. “But we expect the supply-demand balance to improve during the early part of 2008, supporting the early stages of recovery in starts and permits during the second half of the year.”

Despite the building slump, groups such as the Steel Framing Alliance and the Metal Roofing Alliance continue to promote the use of galvanized steel in the residential and commercial/industrial construction markets.

William Hippard, president of the Metal Roofing Alliance and vice president of sales for Precoat Metals in St. Louis, observes that metal roofs currently have a 9 percent share of the residential market in the United States, up from just 3 percent six years ago. This accounts for 800,000 to 900,000 tons of metal per year, about 65 percent of which is galvanized steel. The alliance hopes to raise the metal roofing share to about 15 percent in the next three to five years. That goal is attainable despite weak residential construction because it includes both replacement roofs as well as new homes, notes Hippard.

The alliance is also looking to increase the percentage of metal roofs in commercial/industrial applications by 2 to 3 percent a year from its current 15 percent penetration level, though Hippard admits this won’t likely occur until the economy improves.

Larry Williams, president of the Steel Framing Alliance, says his group will concentrate on promoting the use of steel framing in multifamily construction rather than single-family homes in light of the housing slump, though single-family remains the “Holy Grail.” In low- and mid-rise multifamily construction, where galvanized steel competes largely with concrete, shipments of steel have grown about 43 percent in the past 10 years. Concrete, like many commodities, has increased in price, while the cost of lumber and wallboard, whose primary use is residential construction, has plummeted. “We aren’t abandoning our goal to get a 25 percent share of the single-family housing market. Some day we will attain that, but right now we are deliberately focusing on segments where we have a clear advantage vs. competitive materials.”

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