‘Dismal Year for Plate’
While there has been a slight uptick in steel plate demand, few experts expect much recovery in plate’s primary capital equipment, construction and energy markets until next year.
By Myra Pinkham, Contributing Editor
One of the hottest steel product categories just a year ago, the domestic carbon plate market is among the coldest today.
“Demand for plate dropped off the face of the earth and has stayed there. It has been anemic since the beginning of November ,” says Jim Hoffman, senior vice president of operations for Los Angeles-based service center Reliance Steel & Aluminum Co.
The plate market “nightmare” is at nine months and counting, agrees plate distributor Ron Whitley, president and chief operating officer of Ranger Steel LP in Houston. “Everyone thought we would be seeing more activity by now. Demand is flat at best, and we are fearful it might even wane.”
“The weakest market we have is plate. We don’t see any recovery in plate in the second half of this year or next year. We think plate will stay pretty flat for at least the next 18 months,” says Wayne Bassett, president of Samuel, Son & Co., Mississauga, Ont.
In fact, the recent bump in order activity primarily reflects service centers filling holes in their inventories, which remain extremely lean, rather than significant improvement in underlying demand, industry executives say. Recovery of plate sales promises to be long and protracted, they add, and could be derailed if plate mills bring idled steelmaking capacity back on line too quickly.
“We are currently walking on a razor’s edge,” says Scott Montross, vice president and general manager of steelmaker Evraz Inc. NA, Portland, Ore. “All it would take is a little bit of a capacity increase to throw us into an oversupply situation again.”
“We seem to be at the bottom of the trough, but I suspect it will be a slow climb up,” says David Britten, president of SSAB North America, Lisle, Ill., who points to small signs that the plate market may have begun stabilizing, albeit at a very low level.
Likewise, John Ferriola, chief operating officer of steelmaking operations for Nucor Corp., Charlotte, N.C., believes the plate market bottomed in May and has shown only limited sales gains since then.
“There is nothing out there right now that suggests more than a very modest improvement [for plate],” says Christopher Plummer, managing director of Metal Strategies Inc., West Chester, Pa. “2009 will be quite a dismal year for plate, and 2010 could still be very challenging, as well.”
More than 90 percent of plate is consumed by the capital equipment, construction and energy sectors, and all three remain lackluster at best, Plummer says. One of the few end-use markets remaining strong is for armor plate and other defense applications due to the continued military conflicts in Iraq and Afghanistan, sources report.
“General economic conditions have caused a number of companies to cancel projects and to cap their spending programs,” says John Campo, vice president of sales and marketing for O’Neal Steel Inc., Birmingham, Ala. “That, plus a lack of available financing, has slowed down demand for plate from just about all major consumers.”
According to Metal Strategies, shipments of plate mill plate in the first five months of this year were down 51 percent vs. the same period last year. Coiled plate shipments were down 65 percent in the same comparison. Coiled plate prices reportedly fell to about $580 a short ton in May, down 61 percent from their peak of nearly $1,500 in September 2008. July prices were up about 6 percent, to about $615 a ton, largely due to scrap cost increases. Mills have announced further price increases, which generally are expected to stick, even though real demand is unlikely to improve significantly before next year.
Recent economic data helps explain the persistent weakness in underlying plate demand, Plummer says. Industrial equipment investment in first-quarter 2009 was down 14.8 percent compared with the previous quarter, and down 20.8 percent compared with first-quarter 2008. Likewise, durable goods shipments year-to-date through May were down 17.9 percent compared with the first five months of 2008. Durable goods new orders—a predictor of future demand—were down 10.4 percent. NAFTA construction equipment assemblies also declined 30.1 percent using the same comparison.
Construction statistics from the U.S. Commerce Department appear more favorable, but are somewhat misleading. Government stats show that the value put in place for public works construction during the first five months of this year was up 11.3 percent vs. last year, while nonresidential construction was up 2.5 percent. But these figures include long-term projects that have been in process for several years, prior to the economic downturn, note the experts.
“The problem is that a lot of our customers are now running out of building projects,” says Mark Breckheimer, executive vice president of Namasco Corp., Roswell, Ga. “With financing often not in place yet for many commercial and industrial construction projects, the rate of new orders is low and will likely be low for a while.”
Demand is not quite as weak in energy as it is in other plate-consuming industries such as industrial equipment and transportation, adds Breckheimer, but the combination of falling energy prices and tight credit has even caused some energy-related projects to be shelved.
Falling energy prices—and therefore falling thermal coal demand—have also put a dent in production of plate-heavy mining equipment, says Mark Trimble, marketing manager for Huntington Steel & Supply Co., Huntington, W.Va. “We are not seeing a bottom yet to the coal market,” he says. “Coal miners are still being laid off every week.”
Even production of wind towers—touted as a major new growth opportunity for plate—has lost some of its momentum. Each wind turbine uses about 100 tons of plate. By some estimates, the credit crunch has caused cutbacks of up to 25 percent in new wind farm projects, most of which are privately funded. “People are pulling in their horns and putting off a number of projects. Even oilman T. Boone Pickens recently delayed his high-profile plans for a wind farm in the Southwest,” Hoffman notes.
Most wind-power projects have been delayed rather than cancelled, however. “Eventually, the wind tower market will be a significant market for plate, with the potential to consume as much as 1 million tons per year,” says Plummer.
The decline in natural gas prices has also contributed to the becalming of wind power, says John Anton, director of the steel service at IHS Global Insight in Washington, D.C. “Wind power costs aren’t really cheap. Its advantage is that it is nonpolluting.”
Wind power should recover more quickly than other end-markets because it qualifies for loans under the American Recovery and Reinvestment Act. That is especially true now that certain regulations regarding those loans have been clarified, says SSAB’s Britten.
Federal economic stimulus spending has not proven the savior for plate that was originally anticipated. Highway and infrastructure projects will receive only about $27 billion of the $787 billion stimulus package, and even those funds aren’t being released as quickly as had been hoped, says Campo.
“Stimulus dollars haven’t even filtered to the people involved in bridge construction yet,” says Whitley. “I’m skeptical whether it will ever show up. If it does, it could be a year or more before people start building. I’m not looking at the stimulus package as a serious fix.”
Much of the money released to date has been for road paving, Britten notes, which does not consume any steel.
“We were hoping that the stimulus would put people back to work, but it looks as if only 11 to 19 percent of the total stimulus package would affect manufacturing, thus creating jobs in steel-related industries. That doesn’t seem like enough,” Hoffman adds.
Dan DiMicco, chairman, president and chief executive officer of Nucor Corp., Charlotte, N.C., says he has seen “zero” impact from the economic stimulus program so far. “I said from the beginning that the stimulus package was very weak on infrastructure spending, and very little of that money has been spent to date. People say it will be back-end loaded. We’ll see. I’m very concerned about the track that it is taking and if anything will materialize before the end of the year.”
“We don’t see much in infrastructure spending. We are not counting on government spending to make a big difference,” concurs Samuel’s Bassett.
Most of the bump in demand that plate mills are experiencing right now is coming from service centers that—after nine months of working down their inventories—have finally reached the point where they must restock certain “A” and “B” items, says Evraz’s Montross. “And even that isn’t a heck of a lot. They aren’t acting crazy and buying a lot of inventory.”
Some experts question how long even this fill-in buying may last. “We might see a cap to activity or even a moderate correction in a few months, given that there isn’t any real improvement in underlying demand,” Plummer says.
In light of the beating they have suffered since last fall, service centers are likely to be gun-shy about rebuilding their stocks. “Since October 2008, inventories have become a big liability,” maintains Whitley. “Service centers were caught with more high-priced material than they would like to admit.”
Service centers across the board have been in a dramatic inventory reduction mode since last October–for carbon plate and most other products—as demand and prices have plummeted. According to the Metals Service Center Institute, U.S. service center steel inventories totaled only 5,976,000 tons at the end of June, or 2.4 months of supply, down 44.4 percent from a year earlier and down 45.8 percent from a peak of over 11 million tons in August 2008.
Now, after several months of holding the line on purchasing, “it appears as if some people are returning to the market,” says Anton. “There are more price inquiries. Order books, while still well below average, are starting to firm up somewhat, and lead times are stretching out a little.”
The noticeable increase in activity is more than a result of stock levels that have gotten too low for even the current weak volume. Plummer points to a general feeling that the steel market, and U.S. manufacturing, are finally stabilizing. Buyers’ acceptance of the recent mill price increases reflects increased confidence in the plate market. Demand for plate from China and India is also looking up.
“There is nothing showing that demand is roaring back by any means,” Hoffman says, “but at current demand levels, service centers should be able to begin buying from the mills again and that should get the machine running.”
Sales to service centers make up a large part of the plate market, 50 percent or more, so their renewed purchasing is critical for the market’s recovery, Montross observes. “But while there is a little more service center demand, it isn’t a heck of a lot yet.”
He doesn’t expect any major improvement in end-use demand until the credit crunch eases. “Companies need financing to get their projects going. While we could see a slight increase in demand in the third or fourth quarter, it will be a slow climb out of this trough we are in.”
Steelmakers have taken enough excess capacity out of production to allow plate prices to rise a bit, but such recovery is fragile. “It wouldn’t take much more capacity to tip the balance and hurt our proposed price increases. We need those price increases, especially with scrap continuing to go up,” Montross says.
Anton estimates that a plate price up to about $600 a ton will stick, “but anything much above that will cause the market to relapse.”
The fate of plate is much dependent on macroeconomic factors, such as the loosening of credit, government funding of infrastructure development, and improved employment and consumer confidence. Many executives believe it will take three or more years for the U.S. economy, and domestic plate demand, to fully recover.
“While the depth of the downturn came as a surprise to everyone, nothing has really changed regarding long-term plate demand,” Hoffman says. “The infrastructure is seemingly crumbling in both the United States and Canada. It needs to be repaired, and it will take steel, including steel plate, to do that.”
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