Rebar Makers Betting on the Come
With prospects for nonresidential construction still so uncertain, some producers’ plans to add rebar capacity are raising eyebrows.
By Myra Pinkham, Contributing Editor
Why are steelmakers planning to add capacity for rebar when the U.S. construction market remains so dismal? Some observers question the logic, while others say it positions the mills for the eventual rebound and, frankly, can’t make the market much worse.
“It just makes no sense to start up new capacity in a market that is the worst we have seen since the Great Depression,” says Daniel R. DiMicco, chairman, president and chief executive officer of Nucor Corp., Charlotte, N.C.
DiMicco admits that Nucor recently cold commissioned its 500,000-ton capacity Kingman, Ariz., rebar and wire rod mill, which the company had kept mothballed since purchasing it from North Star Steel Corp. in 2003. Cold commissioning will allow the company to ramp up quickly when the time is right. “But we have no plans to restart it under current market conditions,” he adds.
Nucor has not indicated how much of the mill, which no longer has a melt shop, would be dedicated to rebar vs. wire rod. What it does produce will be mainly a coiled rebar product, unlike other mills in the region that make straight rebar.
Even without Kingman, Nucor is the largest producer of rebar in the western U.S., according to Christopher Plummer, managing director of Metal Strategies Inc., West Chester, Pa. Under normal conditions, Nucor ships as much as 950,000 tons a year of rebar from its mills in Plymouth, Utah, and Seattle, Wash. They compete mainly with Tamco Steel, Rancho Cucamonga, Calif., and Cascade Steel Rolling Mills Inc., McMinnville, Ore., which normally ship about 1 million tons a year combined.
One of Nucor’s major competitors, Commercial Metals Co., recently entered that market, rolling the first rebar at its 300,000-ton-per-year micro mill in Mesa, Ariz., in late August. “We are now continuing to test the facility and starting to ramp up production there,” says William B. Larson, the company’s chief financial officer. CMC is hoping to roll 140,000 to 150,000 tons of rebar in Mesa during its fiscal 2010 ending Aug. 31, the majority of which would be produced near the end of the fiscal year. “During the next three or four months, we mainly will be conducting trials of various sizes of rebar,” Larson says. “By the end of the fiscal year, we are hoping to be running the facility flat out.”
He notes that over 60 percent of the rebar produced at the Mesa mill will not be entering the open market, but rather will be used by one of CMC’s affiliate business units for fabrication, with the rest displacing domestic and import competitors’ tons. “Currently, it would be more displacing business from other domestic competitors,” he admits, since rebar imports are so low.
U.S. rebar imports through August 2009 were an annualized 510,000 tons, down from 1.0 million tons in 2008, 1.9 million tons in 2007 and 2.6 million tons in 2006, reports Lynn Lupori-Gray, senior consultant for Hatch Management Consultants in Pittsburgh.
Rebar imports have been creeping upwards in recent months, however, notes DiMicco, rising to 27,000 tons in October, nearly double the 14,000 tons that came in during September, but still far below the 91,000 tons per month average of a year ago. “With mills running at tremendous excess capacity, there is no reason for even one ton of imports to come in,” DiMicco adds.
Meanwhile, Steel Development Co. LLC, headed by steel industry veteran John Correnti, is keeping a low profile, declining to comment on the progress of its 300,000-ton-per-year greenfield rebar mill under construction in Amory, Miss. In late September, SDCO was granted 18.7 megawatts of power from the New York Power Authority for a proposed 300,000-ton rebar manufacturing facility in western New York state. Prior to the economy’s collapse, SDCO executives stated their intention to build several such micro mills around the country.
Rebar fabricator Steel Works Fabricators LLC has also announced plans to build a facility with 340,000 tons of melting capacity in Medley, Fla. During its Phase I startup, it would produce 180,000 tons a year of rebar.
All of this additional capacity is being considered despite the fact that rebar demand is currently “sickly,” says DiMicco, and may not rebound until 2012 or even later, depending on what happens with the construction market.
Anirban Basu, chief economist for the Washington, D.C.-based Associated Builders and Contractors, calls the two big rebar markets “a tale of two sectors.” It is the best of times for public works, aided by economic stimulus spending, but the worst of times for private commercial. “Nonresidential construction is not nearly as benign [as public works],” says Basu, who estimates the value of put-in-place nonresidential construction fell 10 to 20 percent in 2009 and will decline another 10 to 20 percent next year.
Plummer questions the accuracy of the U.S. Commerce Department’s value-put-in-place data for estimating steel usage in construction, however, because of materials inflation, timing of purchases and types of steel and other materials used. He believes that combined nonresidential and public works construction was actually down 40 to 45 percent in 2009. Based on the American Institute of Architects’ billings index, which he says is one of the best leading indicators for nonresidential construction, commercial construction could decline another 10 percent next year. The index showed a 12 percent decline in commercial construction through September this year.
With fewer projects in the works, both apparent consumption and production of rebar are way down. Makers of structural steel, hollow structural sections and mesh, which compete against rebar for certain types of applications, are adding to the competitive pressures. Plummer estimates U.S. apparent consumption of rebar will be down 40 to 45 percent this year following a 20 percent decline in 2008. Domestic rebar production this year will total about 4.9 million tons, down about 33 percent.
Ed Leppien, vice president of service center Pacific Steel & Recycling, Great Falls, Mont., says that while his rebar sales volumes are off about 40 percent year on year, he has seen a slight pickup in orders recently from building contractors. That might just be a seasonal uptick, however. “This time of year we usually can sell rebar a little easier, as many of our customers realize they need to move quickly on their projects before the bad weather sets in.”
On the light commercial side, a few contractors are restarting projects they had put on hold until the economy found some stability. Few large commercial projects are moving forward. “We are probably at or near the bottom now—especially for smaller projects—but we are likely to just bump along at this level for at least the next four to six months,” Leppien says.
“We haven’t seen more than the usual seasonal pickup this summer. Right now we aren’t seeing much indication of a recovery. We haven’t seen any signs that the government’s economic stimulus program has helped at all,” says CMC’s Larson. The earliest he expects any improvement is spring 2010, and then the impact will be limited.
The $787 billion American Recovery and Reinvestment Act will generate only about 1.5 million tons of rebar demand during its life, says Larson, “and that is all for public works. It won’t do anything for private construction. Right now private nonresidential construction doesn’t seem to have much of a pulse.”
All told, about $131 billion of the federal stimulus dollars will go to infrastructure projects, most of which is yet to be released, says ABC’s Basu. The rebar market should start feeling some effect from those funds this spring.
At the same time, Lupori-Gray observes, certain public nonresidential construction projects such as courthouses and schools could also benefit from economic stimulus monies in 2010-11.
The public works sector could also see an additional push should Congress reauthorize the current surface transportation law known as SAFETEA-LU (the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users), set to expire at the end of the year. While Congress was expected to consider a six-month extension after returning from its Thanksgiving recess, the House Steel Caucus is calling for quick passage of a full surface transportation reauthorization bill—a move supported by the American Iron and Steel Institute in Washington, D.C.
“In order to maintain its position as a global leader, the United States must upgrade its crumbling infrastructure sooner rather than later,” says Thomas J. Gibson, AISI’s president and chief executive officer. “We, as an industry, support providing an adequate level of funding in the reauthorization for all federal infrastructure needs.”
“The reauthorization of the highway bill would be of a greater benefit to the rebar market than the stimulus program,” adds Larson.
Getting it passed could be difficult, given lawmakers’ current focus on health care reform, says Lupori-Gray. “Any bill that involves significant spending will have a hard fight.”
States may be hard pressed to come up with matching funds required by the surface transportation spending bill, delaying some large infrastructure projects, says Basu. But Larson feels jobs creation will be key. “While states would need to contribute, in most cases it is only 10 to 20 cents on the dollar. Given the amount of employment they would generate, states would give these projects priority.”
With office vacancy rates so high and credit so tight, Basu expects private nonresidential construction to continue slipping. On a value-put-in-place basis, ABC forecasts a 5.2 percent decline in 2009 and a further 4.3 percent decline in 2010. Manufacturing construction will be especially hard hit, Basu says, declining 18.9 percent in 2010 after rising 15.9 percent in 2009.
Many projects already in the works were completed in 2009, but there are few new ones on the drawing board, says Larson, which is not surprising given the record unemployment rate. “Companies won’t build buildings if there is no one to sit in them, especially when there is already an oversupply of unoccupied office space.”
Due to the widespread weakness in major construction sectors, rebar prices have suffered significantly despite efforts by mills, especially Nucor and Tampa-based Gerdau Ameristeel, to hold the line on published long-product prices through December. Spot transaction prices for rebar reportedly fell about $50 a ton in November, to around $470 from nearly $520 a ton in October. Rebar was selling at just under $1,000 a ton at this time last year. In light of the price volatility and uncertain economy, service centers that still sell significant quantities of rebar are keeping their inventories lean. (With increased vertical integration moves by mills, much of the rebar sold today goes through their own fabrication units.)
Mills are running lean, as well, with lead times of three to four weeks. While some larger rebar producers have stocks on the ground, the smaller ones are just rolling to order.
How much of an impact will the planned new production capacity have on a rebar market that is still struggling to find its bottom? “While I don’t think that new capacity right now makes much sense, I’m not sure it will actually harm the market,” says Leppien. “How do you harm a market when there isn’t any market?"
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