8-2009 Second-Quarter Report Mills
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Not as Bad as the First Quarter

In their latest quarterly reports to analysts and investors, mill executives report further losses, though results generally show improvement.

By The staff of Metal Center News

AK Steel
AK Trims Losses in Second Quarter

Losses continued in the second quarter for AK Steel, though the company moved closer to a return to profitability. The West Chester, Ohio-based steelmaker reported a net loss of $48.0 million during the quarter, well behind the $145.2 million profit posted during the same period in 2008, but an improvement on the $73.4 million loss during the first quarter.

“Considering that the continuing global recession resulted in an all-time low quarterly shipment level, the effort by AK Steel employees to significantly improve our results over the first quarter is notable and remarkable,” said James L. Wainscott, chairman, president and CEO. “While we can never be satisfied with an operating or net loss, the improvements speak volumes about AK Steel’s business model.”

Net sales for the second quarter of 2009 totaled $793.6 million on shipments of 740,600 tons, compared to sales of $2.24 billion on shipments of 1,737,800 tons for the year-ago quarter. Shipments for the first quarter of 2009 totaled 778,800 tons.

AK Steel’s average selling price during the quarter was $1,072 per ton, a 9 percent decrease over the $1,184 per-ton price in the first quarter of 2009 and about 17 percent lower than the $1,287 per-ton price for the second quarter of 2008.

For the first six months of 2009, the company reported a net loss of $120.6 million. Net income for the corresponding 2008 period was $246.3 million. Company officials hope to break even in operating profit during the third quarter.

First-half 2009 sales totaled $1.71 billion, compared to $4.03 billion in the first half of 2008. Shipments for the first half of 2009 totaled 1,519,400 tons, compared to 3,316,200 tons in the first half of 2008.

AK Steel said it expects shipments for the third quarter to be approximately 940,000 tons, reflecting an increase of nearly 27 percent over second-quarter 2009 shipments. The company anticipates that its average per-ton selling price will be approximately equivalent to the second-quarter 2009 level.

“We’re happy to see an increase in orders, from auto customers and appliance customers and a host of service centers. We are seeing an improvement as restocking occurs,” Wainscott said, adding he doesn’t think the supply chain will be guilty of overbuying. “I don’t think anybody is going to get ahead of this. I think the service centers are too smart and the auto guys have a dose of reality now.”

Wainscott believes AK’s sales to its automotive customers will increase sharply in the third quarter. Just as important, the restructuring of the domestic steel industry has not had a negative effect on the company. “We have collected 100 cents on the dollar of all GM and Chrysler pre-bankruptcy receivables,” he said.

Production has been slowly ramping up throughout the year. The company operated at about 40 percent of capacity during the first quarter, was still below 50 percent in the second and is now up above 50 percent. Production at Middletown Works, which had a planned maintenance outage in the second quarter, is back up to essentially full production, Wainscott said.

AK Steel had planned to idle production at its Ashland, Ky., facility during the third quarter, though an independent arbitrator overturned that plan in July. The arbitrator ruled a provision in the contract with the USW required the company to prevent layoffs while other plants were operating.

Wainscott said the arbitrator ultimately ruled that “as long as there is demand for products that can be produced at Ashland, those products must be produced at Ashland. We disagree strongly with that interpretation,” he said.

Alcoa
Alcoa’s Cost-Saving Measures Taking Hold
Alcoa posted its third straight losing quarter, though the company continued to reduce the severity during the second quarter. The Pittsburgh-based aluminum manufacturer reported a net loss of $459 million, a dramatic improvement from the first quarter and a dramatic improvement from the $1.19 billion loss posted during the fourth quarter of 2008.

Additionally, Alcoa reported cash from operations of $328 million, an almost $600 million improvement from the first quarter. The company cited its wide-ranging financial and operational initiatives to reduce costs, increase cash and strengthen its balance sheet as the reasons for the positive cash flow.

Revenues for the quarter totaled $4.2 billion, a 2 percent increase from the first quarter of 2009, but a decrease from the $7.2 billion in the second quarter of 2008. The decline from the previous year’s second quarter was the result of lower metal prices and the company’s curtailment of aluminum and alumina production in response to reduced demand. The average price of aluminum on the London Metal Exchange in the second quarter of 2009 was $1,485 per metric ton, a 9 percent increase from the first quarter of 2009, but a 49 percent decrease from the second quarter of 2008. The economic downturn has affected most of Alcoa’s end markets—automotive, commercial transportation, building and construction, and aerospace.

“Our cash generation initiatives, productivity improvements and portfolio changes are working. Now Alcoa has the staying power and reduced cost base to withstand the most serious downturn in the history of the aluminum industry,” said Klaus Kleinfeld, Alcoa president and CEO. “Our operational and financial initiatives also provide Alcoa with the focus and flexibility to compete and grow in the most profitable segments of the industry as the economy recovers.”

The company has achieved approximately $1.0 billion in procurement savings through the first half of the year, or approximately two-thirds of the full-year target. Overhead savings year-to-date total approximately $270 million, or 134 percent of the full-year target for 2009.

Kleinfeld said upper management’s strategies are only half the battle in reducing costs. “To make good improvements, you have to have the operational expertise of the people on the ground who have to live with different cost structures. They have to make it happen.”

Allegheny Technologies
Confidence Remains Despite Second-Quarter Loss
Allegheny Technologies Inc., Pittsburgh, reported a net loss for the second quarter of $13.4 million on sales of $710.0 million. In contrast, in second-quarter 2008, ATI reported net income of $168.9 million on sales of $1.46 billion

For the first half, the company reported a net loss of $7.5 million compared to income of $310.9 million during the first six months of 2008.

“ATI was profitable in the second quarter before special charges, and ended the quarter with significant cash on hand and an improved balance sheet,” said L. Patrick Hassey, chairman, president and CEO. “We saw signs of stabilization in some of our markets during the quarter, but few indications of meaningful recovery.”

The company realized improvements in its flat-rolled products segment, the result of reduced out-of-phase raw material surcharges and improvement in base prices for its stainless steel products.

In its high-performance metals segment, the company experienced solid demand for exotic metals in the chemical process industry and nuclear electrical energy market. However, ATI reported deteriorating profits in its titanium alloys and nickel-based alloys and superalloys segment due to significant inventory reduction in the jet engine supply chain.

In its engineered product segment, three of the four operating companies were not profitable due to weak demand across all markets.

“We remain confident in the intermediate and long-term growth potential of our core markets. ATI has the financial resources and flexibility to continue our strategic investments and growth initiatives and to introduce important new alloys and products,” Hassey said.

ATI’s performance was aided by an increasing emphasis on international sales. Sales to its global customers represented 32.5 percent of totals sales in the second quarter.

ArcelorMittal
ArcelorMittal Posts $792 Million Loss
The world’s largest steel company reported its second straight quarterly loss, though ArcelorMittal reduced the size of the loss in the second quarter. The Brussels-based steelmaker reported net losses of $792 million, an improvement from the $1.06 billion lost in the first quarter of 2009.

Net sales of $15 billion were flat with the first-quarter numbers, but 60 percent behind the $37.8 billion in sales posted during the same period in 2008. The main reason for the decline continues to be the extreme weakness in demand for steel products in 2009 as a result of the global economic crisis, along with a steep fall in prices, officials said.

“The first six months of the year have been some of the most challenging the steel industry has ever experienced. Operating in such a difficult environment, I am pleased with the way in which ArcelorMittal has responded to adapt production, cut costs and strengthen our balance sheet,” said Lakshmi N. Mittal, chairman and CEO.

ArcelorMittal reduced net debt by $3.8 billion during the quarter. Additionally, the company completed more than $10 billion of annualized fixed cost reductions.

Total steel shipments for the three months were 17.0 million tons, in line with the 16.0 million tons shipped in the first quarter, but nearly 50 percent below the 29.8 million tons shipped during the same period of 2008.

Total steel shipments in the Flat Carbon Americas segment were 3.5 million tons for the three months, just below the 3.6 million tons shipped in the first quarter. Sales declined from $3.2 billion to $2.8 billion due to both lower volumes and prices, including an 11.5 percent decrease in the average steel selling price. The segment reported an operating loss of $400 million for the quarter.

Shipments are expected to be slightly higher in the third quarter than in the second quarter of 2009, officials reported, while average steel selling prices are expected to remain stable or move slightly lower.

Carpenter Technology
Carpenter Posts 4Q Loss, But Annual Profit
Carpenter Technology Corp., Wyomissing, Pa., reported a loss of $20.8 million for the fiscal fourth quarter ended June 30. The down quarter was not enough to derail a profitable year for the specialty metals producer.

For fiscal year 2009, Carpenter reported net income of $47.9 million. That figure was 82.7 percent behind the $277.7 million income reported in 2008.

Net sales for the fourth quarter were less than half the sales from the same quarter in 2008. Carpenter reported net sales of $256.9 million, 53.8 percent behind first-quarter 2008 sales of $556.3 million. For the year, net sales were off 9.3 percent to $1.36 billion.

“As expected, we experienced a decline in our revenues and earnings this quarter, consistent with our comments three months ago,” said Anne L. Stevens, chairman and CEO. “Continuing weak global manufacturing activity affected demand throughout our customer base, and especially in our higher-value energy and aerospace products.”

Total pounds sold in the fourth quarter declined 50 percent from the fourth quarter a year ago. Volumes shipped by the premium alloys operations segment decreased 55 percent as a result of lower demand in the aerospace and energy markets. Pounds sold by the advanced metals operations segment dropped 47 percent due to lower industrial, automotive and consumer demand.

During the quarter, the company also incurred $7.3 million in costs associated with the closing of its Crawley, UK, metal strip manufacturing facility, which will reduce fixed costs and utilize existing production capacity more efficiently.

As was the case with many in the metals industry, reducing costs was a primary objective during the quarter. “With a strong emphasis on operations, we were able to generate positive free cash flow and maintain our solid balance sheet, despite a downturn that is broader and more severe than the one we went through in 2002-2003. The company has reduced inventories, dramatically lowered production labor hours and closely managed customer receivables,” said Stevens. “We will continue to focus on reducing costs in all areas, improving our manufacturing efficiencies and preparing for the market recovery when it comes.”

Looking forward, “we expect to begin to see modest improvement in our business through the year. Automotive demand may see some limited recovery as a new model year starts, while consumer and industrial demand will be tied largely to housing starts and overall consumer confidence,” said Stevens. “In our aerospace market, the most recent airline build projections indicate that the second half of our fiscal year may show improvement. The energy market, though, appears to be headed for a more extended downturn that could last later into 2010.

“Based on current economic conditions, we anticipate that overall demand across our markets will probably bottom out during our first fiscal quarter, with a gradual recovery after that. Total revenues in fiscal year 2010 will still likely be less than in fiscal year 2009,” she said.

Nucor
Performance Improving, Despite First-Half Loss
While still reporting red ink, Nucor Corp.’s loss for the second quarter was not nearly as deep as the previous quarter. The steelmaker attributed the lion’s share of the improvement to restocking by its service center customers rather than any significant increase in true end-use demand.

The Charlotte, N.C.,-based steelmaker posted a $127.7 million net loss, down from a $189.6 million loss in the first quarter, even though it carried a “substantially greater burden” in the second quarter from accelerated consumption of high-cost pig iron and scrap inventories purchased prior to the collapse of the economy and raw materials pricing. Nucor posted a net income of nearly $688.7 million in the second quarter of 2008.

Net sales for second-quarter 2009 were down 7 percent compared with the first quarter and down 65 percent from the second quarter of 2008.

For the first half, Nucor posted a net loss of nearly $323 million on net sales of $5.13 billion, compared with net earnings of $990.5 million on net sales of $12.1 billion last year.

Daniel R. DiMicco, Nucor’s chairman, president and chief executive officer, said that the steelmaker’s performance improved each month during the second quarter with average weekly shipments rising 21 percent in May and 8 percent in June. The strong business performance, which was led by the steelmaker’s sheet, plate and beam mills, continued in July.

“We have accomplished all of this without laying off a single Nucor employee while going through this Great Recession, the worse downturn in our lifetimes,” he added.

While noting the progress his company, and the industry, have made, DiMicco was adamant that he does not believe there has been any noticeable improvement in real end-use consumption—at least not yet. “We continue to believe that real demand in the steel market is in for a long, slow recovery.

“In addition to seasonal improvements in demand, it also appears that customer inventory destocking has run its course and our customers are now ordering at the rate that their customers are ordering from them,” he said.

John J. Ferriola, Nucor’s chief operating officer of steelmaking operations, observed that service center inventories have been reduced by 46 percent from their peak levels in August 2008 and are now at their lowest levels since August 1983. “As a result, service centers have recently increased their buying to match end-use demand...but our expectations are that there won’t be any significant improvement in end-use demand for the balance of this year.”

But Ferriola pointed to improving conditions in all of Nucor’s steelmaking operations:

n While the bar group’s first-half shipments decreased 44 percent vs. a year earlier, second-quarter shipments were up 16 percent compared with the first quarter due to customer inventory restocking, strengthening of seasonal demand in construction markets and attractive export market opportunities.

n Likewise, the structural steel group’s first-half shipments were down 56 percent compared with the first half of 2008, but second-quarter shipments were up 12 percent vs. the first quarter largely due to customer inventory restocking and an increase in activity in such market segments as hospitals, power plants, government buildings and schools.

n While first-half shipments were down 51 percent vs. a year earlier for Nucor’s plate group, the market reached a bottom in May. Sales showed an upturn as customer destocking reached its end and buying picked up in the energy sector, specifically for wind towers. Ferriola said both of Nucor’s plate mills are in the midst of extensive product development work that could expand the company’s plate opportunities in such end-use markets as energy, bridge and shipbuilding.

n The sheet mill group’s first-half shipments were down 57 percent compared with the first six months of 2008. More recently, the group has seen improved order entry due to the winding down of service center destocking and an incremental improvement in demand from the automotive and HVAC segments. Its new galvanizing facility in Decatur, Ala., is likely to be “an excellent growth platform” for Nucor in the value-added coated sheet steel market, Ferriola said.

Nucor has announced price increases in all these market segments.

Steel Dynamics
SDI Cuts Losses in Second Quarter
Steel Dynamics Inc., Fort Wayne, Ind., reported its second straight quarterly loss during the second quarter of 2009. However, the Fort Wayne, Ind.-based steelmaker cut its losses from $88 million during the first quarter to $16.5 million in the second, and expects to be profitable again in the third.

Net sales for the second quarter totaled $792 million, 3 percent below the $815 million from the first quarter and down 67 percent from the same quarter in 2008.

Steel shipments for the second quarter were 886,000 tons, 45 percent below second quarter 2008 shipments of 1.6 million tons. However, the shipment totals were an improvement from the 743,000 tons shipped in the first three months of the year.

“Volume was actually up, but pricing continued to deteriorate,” Keith Busse, chairman and CEO of SDI told investors and analysts during the company’s second-quarter conference call. The second quarter’s average selling price per ton for steel operations was $594, a decrease of $126 per ton from $720 in the first quarter of 2009 and down from $417 per ton from the year-ago quarter.

Still, it was the company’s steel operations that led the way in the quarter, with the division posting a $36 million profit, or $41 per ton shipped. In the first quarter, the steel operations sector contributed an operating loss of $88 per ton shipped.

Capacity utilization improved to approximately 50 percent in the quarter, despite continued sluggishness in the long products segment. The company’s structural and rail division operated at about 25 percent of current capacity.

“Steel Dynamics remains poised to ramp up quickly to meet renewed demand for steel products when it occurs. Our employees demonstrated this responsiveness in June as our flat-roll and metals recycling operations quickly ramped up output in response to increased demand,” Busse said.

Average scrap cost per net ton charged decreased $79 compared to the first quarter. In metals recycling, OmniSource’s ferrous metals shipments were 840,000 tons, down 44 percent from the second quarter of 2008, and nonferrous shipments were 170 million pounds, down 33 percent. Still, the division recorded a modest $9 million profit during the quarter.

Busse sees mostly favorable signs for the company entering the second half, though some markets such as construction will remain weak. “We have hit the bottom and we’re going to start to rebound in almost every segment, even though long products may remain weak for some time. We’re in a period where, especially in the automotive arena, they’re in the process of rebuilding the pipeline. Service centers are in the process of coming off the bottom, and inventories may have dipped too far in light of slightly improved business conditions. They will begin ordering steel at the same rate they’re going to consume it, and it will lead to a better operating result in general,” he said.

Timken
‘Impact of Recession Greater than Anticipated’
The Timken Co., Canton, Ohio, reported sales of $828.9 million for the second quarter of 2009, a decrease of 46 percent over the same period a year ago. The decline in sales was due to weaker demand across most of the company’s end markets, lower steel surcharges and currency, which were partially offset by improved pricing, company officials said.

For the quarter, the company incurred a loss of $63.8 million, down from a gain of $89.9 million a year ago. The results reflect lower sales volume and manufacturing utilization, which were partially offset by favorable pricing and cost-reduction initiatives.

Sales for Timken’s Steel Group, including inter-group sales, totaled $134.8 million during the quarter, a decrease of 74 percent from $518.9 million in second-quarter sales last year. The decline was driven by lower demand across all market sectors, with the greatest decline coming from the energy, service-center and automotive sectors. The Steel Group incurred a loss of $32.9 million, compared with positive earnings of $80.3 million for the same period a year ago.

“While the economic outlook continues to remain uncertain, the company expects the impact of the global recession to be greater than previously anticipated, due not only to the depth and breadth of decline across end-markets, but also the compounding factor of inventory destocking throughout the supply chain,” James W. Griffith, Timken president and CEO said.

U.S. Steel
Predicts Further Losses in the Third Quarter
Not only did U.S. Steel Corp. report significant losses at all of its business units in the second quarter, and lower capacity utilization rates than the steel industry at large, but executives expect further red ink in the third quarter despite modest improvements in order activity, lead times and pricing.

With its order books and shipments remaining at very low levels, while incurring sizeable carrying costs for its idled facilities, the Pittsburgh-based integrated steelmaker reported a net loss of $392 million for the second quarter, marginally better than its $439 million loss in the first quarter but off considerably from the positive net income of $668 million reported in second-quarter 2008.

U.S. Steel’s net sales for the quarter totaled $2.1 billion, down 22.7 percent from the first quarter and more than a three-fold decrease from the $6.7 billion a year earlier.

John P. Surma, the company’s chairman and chief executive officer, observed that while the second quarter was a very difficult period for the domestic steel industry as a whole, U.S. Steel’s North American flat-roll operations had a capacity utilization rate of just 32.5 percent for the quarter—even lower than the 45 percent rate reported by the American Iron & Steel Institute for the industry as a whole.

U.S. Steel’s North American flat-roll segment had an operating loss of $362 million for the second quarter, not as bad as the $422 million operating loss in the first quarter, but way down from the $468 million in operating income posted in last year’s second quarter. Surma attributed the losses primarily to weak demand in most markets and continued destocking of inventory throughout the supply chain.

U.S. Steel’s second-quarter flat-roll shipments totaled 1.8 million net tons, down 14.5 percent from the first quarter and 62.6 percent from a year earlier. Its average flat-roll realized price fell to $677 a ton, down from $715 a ton in the first quarter and $777 a ton in the second quarter of 2008.

One reason that U.S. Steel’s operating rates were lower than the industry average is that the company is heavily configured toward tubulars—not just the tube rounds that it makes, but also the flat-roll used in welded tubing. Last year the company’s welded operations sold a million tons of tubing, this year almost zero, Surma said.

The company’s tubular segment had an operating loss of $88 million in the second quarter, down from an operating income of $127 million in the first quarter and $177 million in last year’s second quarter. Tubular shipments totaled 92,000 net tons, down 56 percent from the first quarter and 81.6 percent from a year earlier. Surma blamed this severe downturn on a combination of lower drilling activity and extremely high inventory levels in the tubular supply chain, which he said was caused by “unprecedented levels of unfairly traded and subsidized tubular imports from China.”

Another factor affecting the flat-roll operating rates is the weakness in the automotive sector, where U.S. Steel has strong positions with automakers that have seen their operations disrupted as they go through major restructurings.

On the positive side, the steelmaker has seen some improvement in order rates and is considering whether to restore idled production at various facilities, though Surma remains cautious. “The sustainability of this order trend remains uncertain as both the U.S. and global economies struggle to recover. We anticipate that we will continue to face challenging conditions until the recovery becomes more apparent and more sustained.” In its current configuration, U.S. Steel’s operating rates are just over 50 percent.

U.S. Steel had been working to restart its Granite City, Ill., operation, but the failure of a natural gas line and a small fire July 30 will indefinitely delay the restart of the blast furnace, company officials said.

Despite signs that the destocking cycle has ended in both North America and Central Europe and that customer orders are increasing, Gretchen R. Haggerty, executive vice president and chief financial officer, said she expects that each of U.S. Steel’s segments will once again report operating losses in the third quarter due to continued low operating rates, idled facilities carrying costs and lower average realized prices.


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