Worst Still to Come
Leading mills reported strong results for full-year 2008, though they all took a hit in the fourth quarter and some are anticipating losses at least in first-quarter 2009.
By the Staff of Metal Center News
Despite Faltering Economy, Company Posts Records
AK Steel, West Chester, Ohio, considers 2008 to be one of the best years in the company’s history despite barely eking out an operating profit in the fourth quarter.
“During the fourth quarter, AK Steel’s results were impacted by the sudden and dramatic downturn in the global economy. However, despite the significant challenges posed by recessionary economic conditions worldwide, we reported adjusted pretax income of $600,000 for fourth quarter 2008,” said Albert Ferrara Jr., vice president of finance and chief financial officer, in remarks last month to analysts and shareholders.
Including a $699.5 million non-cash charge related to the company’s pension plans, AK Steel recorded a net loss of $430.6 million for the quarter.
Net sales for fourth-quarter 2008 totaled nearly $1.46 billion on shipments of about 1.1 million tons. Fourth-quarter 2008 sales and shipments were approximately 14 percent and 32 percent lower, respectively, than in the year-ago period. However, the company’s average selling price for the quarter was $1,359 per ton, approximately 26 percent higher than a year ago.
For full-year 2008, AK Steel achieved record net sales of $7.64 billion on shipments of nearly 5.9 million tons. This compares to revenues of $7.0 billion on shipments of 6.5 million tons in 2007. The company’s average selling price for 2008 rose to a record $1,303 per ton, approximately 21 percent above its 2007 average of $1,081 per ton.
Including the fourth-quarter pension charges, the company posted net income of $4.0 million for 2008, down from a net income of $387.7 million in 2007.
“While the sudden economic downturn late in the year made for a very challenging fourth quarter, 2008 was an exceptionally good year for AK Steel,” said James L. Wainscott, chairman, president and CEO. “AK Steel is uniquely prepared to weather this economic storm, and we will continue to make the necessary adjustments, not only to meet today’s challenges, but to quickly take advantage of any improving market conditions.”
Nevertheless, the company anticipates a significant operating loss in first-quarter 2009. Noting that the economic situation remains uncertain, AK Steel plans to take advantage of the economic downturn by temporarily idling its Middletown, Ohio, blast furnace for maintenance beginning early in March. The project is expected to take about 45 days. The company planned to restart its previously idled furnace in Ashland, Ky., early this month.
AK Steel executives expect shipments in the first quarter to range from 850,000 to 900,000 tons. Improving shipments in the second quarter, coupled with lower raw material costs, should generate a modest operating profit.
“The first quarter of 2009 will be negatively impacted by a host of factors, including even lower production and shipment volumes, lower average selling prices, high cost raw materials carrying over from 2008 and increased maintenance costs,” said Wainscott. “But we have some reason for optimism that the worst of it will be behind us in the first half of this year, if not by the tail end of the first quarter.”
Looking at major product groups, Wainscott said that carbon steel demand remains depressed as the housing, capital goods and automotive sectors continue to experience historically low sales activity.
From 2007 to 2008, North American light vehicle sales declined by about three million units, from 16.2 to 13.2 million vehicles. Another three-million-unit drop is expected for 2009.
Wainscott noted that AK Steel is not as reliant on automotive business as it was in the past. The company has reduced its direct auto shipments to 32 percent of total sales from 58 percent in 2003. The fact that the auto industry is currently selling more vehicles than it is producing holds promise for 2009.
“Looking at December, only 773,000 vehicles were made in North America, while sales topped 812,000 units. The January and February production levels are expected to be even lower than the December pace, but sales are expected to remain comparable. So while it will take some time, things are slowly coming back into balance. On top of that, auto sales are likely to get some help from improved credit availability,” Wainscott said.
2008 marked another record year for electrical steel shipments at AK Steel, though the company expects shipments to decline by 10 to 15 percent this year. “However, this softness may be short-lived as planned economic stimulus and targeted infrastructure investments should stimulate future electrical steel demand,” Wainscott said.
Demand for stainless steel products remains depressed. Given the recessionary economy and falling nickel prices, buyers have been reluctant to purchase. Adding to the weakness in stainless is a surge of imports, primarily from Asian countries.
“Past experience has shown that these cycles have a tipping point when it becomes apparent to buyers that prices have bottomed. Our sense is that we could see this begin to occur in the March or April timeframe,” Wainscott said.
“If there is a silver lining in all the economic chaos, it’s that carbon service center inventories are at their lowest levels since 2002,” he added. “This will be a very strong positive when demand returns.”
Alcoa Suffers Big Loss in 4th Quarter
Plummeting aluminum prices and reduced demand caused a sizable fourth-quarter loss for Pittsburgh-based Alcoa. The aluminum maker reported a loss of $1.19 billion for the final three months of 2008.
Aluminum prices that fell 35 percent during the quarter, and 56 percent from their peak in July, coupled with a sharp drop in demand from all markets, were responsible for the tremendous quarterly loss, executives said. Alcoa’s earnings fell more than $1.5 billion from the $306 million gain posted the previous quarter and even further from the $638 million profit during the same period in 2007.
Net sales demonstrated the sharp drop in demand from all end-use markets. Sales totaled $5.69 billion, down 18.4 percent from the previous quarter and off 19.1 percent from the same period in 2007.
Alcoa responded to the changing market with restructuring efforts on several fronts. “We are taking wide-ranging measures to address the economic downturn,” Klaus Kleinfeld, president and CEO of Alcoa, told investors and analysts during the company’s year-end conference call. “We have streamlined our portfolio to focus on businesses where Alcoa is the recognized leader, curtailed production to adjust to weakened demand, reduced global headcount and achieved significant savings in key raw materials.”
Efforts undertaken in 2008 to cut costs include securing long-term power commitments for nearly half its smelting capacity, swapping its soft alloy extrusion business to gain ownership of two smelters, divesting its packaging and consumer business interests and reducing its global headcount by 15,000.
Alcoa also halted all non-essential capital expenditure projects. The investment freeze does not include the San Luis refinery expansion in Brazil, as a cost-benefit analysis determined stopping the project would be more costly than completing it. The company estimates its total capital spending for the year at $1.8 billion, nearly half the total for 2008.
“From curtailing smelting capacity, to ascertaining the critical need for capital projects, to reducing our cost base through new sourcing of raw materials, to the most recent announcement of headcount reductions and targeted divestitures, we are systematically determined to control our cash position. We have been, and will continue to be, aggressive and quick to react in an ever-changing market. We will manage our cash at all times, but we will never compromise our values,” said Chuck McLane, executive vice president and chief financial officer.
Among its operating segments, Alcoa’s flat-rolled products division suffered a particularly difficult three months, reporting an after-tax operating loss of $98 million, down $127 million from the previous quarter. Declines in all markets, coupled with service center destocking, cut non-can shipments by 20 percent.
“Continuing declines in end-markets hit flat-rolled products segments the hardest,” McLane said. “Destocking is impacting distribution channels particularly hard during this downturn, drying up demand for common alloy sheet and plate.”
In normal years, the company would have seen orders rebound following the summer vacation period, but customers did not resume normal buying patterns, McLane said, blaming the collateral affects of the financial crisis for the poor demand.
Additionally, Kleinfeld said, the outlook for first-quarter 2009 isn’t much better, with weakness persisting in most markets. Because distributor inventories are so low, however, the pickup will be immediate as soon as demand strengthens
But Alcoa is not anticipating a growing market for the year ahead. The company projects global consumption will be 2 percent lower in 2009 than 2008, on top of the 3 percent drop in 2007. Total worldwide consumption is projected to be just over 36 million metric tons.
ATI Enjoys Second Best Year in 2008, Seeks Break-Even in 1Q
Allegheny Technologies, Pittsburgh, overcame plummeting fourth-quarter demand to post earnings of $110.9 million, 25.5 percent behind the $147.9 million in income from the same period in 2007. Sales for the quarter totaled $1.11 billion, 12.6 percent below the $1.27 billion reported during the fourth quarter of 2007. For full-year 2008, ATI’s net income totaled $565.9 million on sales of $5.31 billion. This compares to a net income of $747.1 million on sales of $5.45 billion in 2007.
“2008 was the second best year for sales and earnings per share in the history of ATI. This was accomplished even with supply chain disruptions and schedule pushouts in the aerospace market and an unprecedented fall in demand from many of our other markets during the fourth quarter,” President and CEO L. Patrick Hassey, told analysts and investors during the company’s quarterly conference call.
Hassey said the company’s transformation into a globally focused, diversified specialty metals company allowed it to thrive in difficult conditions. During the year, ATI reported shipment increases in several of its high-value products. Titanium shipments for the year totaled 47 million pounds, a 15 percent increase vs. 2007. Grain-oriented electrical steel shipments were up 9 percent and exotic alloys improved 6 percent compared to 2007. Direct international shipments accounted for 28 percent of sales for the year.
While the company remained profitable in the fourth quarter, it is not immune from the weak market conditions. Hassey said three major events are posing a challenge for the company as 2009 begins: the continuing credit crisis freezing new-project lending in some of markets; the uncertainty of the global recession and the resulting lack of forward visibility for customers; and the short-term impact of the precipitous drop in primary metal prices during the fourth quarter 2008. All of these factors are expected to negatively affect the company’s earnings in the first quarter, he said.
The declines in raw material costs during the fourth quarter were unprecedented, Hassey said. Nickel dropped 46 percent from September to December, while chromium fell 51 percent, molybdenum fell 71 percent, iron units were down 59 percent and titanium scrap was off 15 percent. As a result of these declines, surcharges to selling prices will be significantly lower in the first quarter. The surcharge on 304 stainless will decline more than $1 to 41 cents.
“This serious drop in raw materials represents a significant mismatch between raw material costs and the surcharge selling price due to our manufacturing cycles between melt and finishing,” Hassey said. “We expect this mismatch to negatively impact first-quarter results by approximately $70 million.”
Much of the difference between the two prices would ordinarily have been absorbed during the fourth quarter, but the drop in volume prevented such an occurrence. With this anticipated loss, the company believes ATI’s first-quarter results will be “at or near break-even,” Hassey said.
Most of the expected hit will be felt in the company’s flat-roll division, which has the bleakest outlook of any of its segments. Demand from markets related to consumer spending is down across the board, and service center customers are expected to continue to order only on an “as-needed basis.”
The company has responded to the declining demand by reducing its headcount. The flat-roll division is operating with about 80 percent of its workforce, just one cost-cutting measure undertaken. “We have targeted at least $150 million in new gross cost reductions in 2009,” Hassey said. “Each of our businesses has further contingency plans in place that can be implemented if current conditions decline.”
Other ATI segments have a more positive outlook. Demand will be down a little in aerospace, for example, but remain at reasonable levels, the company estimates.
Hopes to Operate Profitably Through the Downturn
Carpenter Technology Corp., Wyomissing, Pa., reported income from continuing operations of $29.8 million for its second fiscal quarter ended Dec. 31. This compares with record second-quarter income of $57.1 million for the same quarter a year earlier. Second-quarter net sales of $361.8 million were down 18 percent from the prior year on 10 percent lower volume.
“Our second-quarter results reinforce the strength of our company despite the broad decline in economic activity,” said Anne Stevens, chairman, president and chief executive officer. “Although economic conditions in most of our markets are difficult, Carpenter is in a solid position to operate profitably through this downturn.”
“While we do not expect to see a recovery in the near term,” said Stevens, “the long-term prospects in our key markets of aerospace, energy and medical remain strong and we are well positioned. Through the current downturn, our management is aggressively cutting costs and conserving cash. We are closely focused on improving our operations to respond to the lower demand expected during the next few quarters.”
Referring to key markets, Carpenter executives reported that aerospace market sales declined by 8 percent in the second quarter vs. the same period last year to $154.7 million. This reflects lower demand for materials used in jet engines, while sales for fastener applications remained strong.
Energy market sales totaled $41.2 million, down 24 percent compared with a year ago, on 20 percent lower volume. Most of the decline was from softer demand in oil and gas exploration as excess inventory continues to build up in the supply chain.
Power generation sales and shipments fell somewhat as demand weakened in the U.S. for large, high-end industrial gas turbines.
Industrial market sales were $88.6 million, down 16 percent compared with the second quarter a year earlier. This reflects lower sales of materials used in valves and fittings, fasteners and wire rod, partially offset by stronger demand for products used in welding and general industrial applications.
Consumer market sales were $26.8 million, a decrease of 32 percent from the second quarter of fiscal 2008. This decline was the result of lower sales in all segments, especially housing and electronics.
Automotive market sales were $25.3 million, a decrease of 46 percent from a year earlier. The continuing weakness in the auto sector has not abated as manufacturers in the U.S. implement more plant closings and global automakers reduce production.
Carpenter’s sales outside the United States in the second quarter totaled $130.3 million, a decrease of 14 percent, primarily due to weakness in Europe.
“The recession is impacting demand globally,” said Stevens. “Even as most of our markets weaken, we are successfully growing our position with several important customers and implementing new product initiatives with others. Our strong competitive position and focus on niche, high-value products allow us to operate profitably with less exposure to the pressures faced by more commodity-oriented businesses.”
Nucor Reports Record Earnings in 2008
Evaporating demand for steel during the fourth quarter was not enough to keep Nucor Corp. from reporting a profitable quarter and another year of record earnings. The Charlotte, N.C.-based steelmaker announced earnings of $105.9 million during the quarter and a record $1.83 billion for the full year.
The quarterly earnings were off 71 percent from the $364.8 million earned in the previous fourth quarter. Earnings for the full year were up 25 percent from the $1.47 billion recorded in 2007.
Sales in the fourth quarter declined 6 percent to $4.15 billion, and were off 44 percent compared to the $7.45 billion posted in the previous quarter. For the full year, net sales increased 43 percent to a record $23.66 billion.
The sales and earnings dips in the fourth quarter were the product of the monumental decline in end-use steel demand and the consumption of higher-cost raw materials purchased earlier in the year, Nucor executives said.
The company’s average sale price per ton increased 30 percent from the fourth quarter of 2007, but decreased 13 percent from the third quarter of 2008. Tons shipped to outside customers totaled 4,294,000 tons in fourth-quarter 2008, a decrease of 27 percent from the fourth quarter of 2007 and down 36 percent from the third quarter of 2008.
“The record sales and earnings achieved by Nucor in 2008 were accomplished in spite of the unprecedented economic and steel market conditions that we experienced in the fourth quarter,” Chairman, President and CEO Dan DiMicco told analysts and investors at the company’s quarterly conference call. “Our team is focused on continuing Nucor’s long tradition of taking advantage of economic downturns to grow even stronger.”
Though Nucor officials expressed confidence in the company’s ability to remain profitable through any market, fueled by its variable cost structure, DiMicco made it clear that the outlook for 2009 is quite cloudy.
“Our current view on the economy can be summed by the fact we didn’t give any guidance for the first quarter. Visibility is very limited. Anybody out there speculating on how 2009 is going to end up is kidding themselves,” DiMicco said.
The speed at which the steel market recovers is largely dependent on how the economy reacts to the availability of credit. He expressed hope that the new administration will take action to stimulate the economy immediately
“The financial crisis has to be resolved. That’s the administration’s No. 1 responsibility,” DiMicco said. “Nos. 2 through 20 is creating more jobs. It’s that simple—and that difficult.”
While encouraged that infrastructure is a part of the new stimulus package proposed by the Obama administration, he called for a renewed commitment to manufacturing, as well. “We need to invest in America by creating jobs that add long-term value in the critical areas of energy, infrastructure and manufacturing. A better and stronger economy will be one that actually makes things. By contrast, the economy of the past two decades has been one built around greed, financial manipulations, excessive leverage and short-term gratification.”
In previous down markets, Nucor experienced substantial expansion. DiMicco is not counting out similar growth in this environment, considering the company’s strong financial position. Before the bottom fell out of the credit market, Nucor was ready to act on more than $2 billion worth of acquisitions. Though those moves were put on hold, the company remains in contact with the parties involved, he said.
Internally, Nucor will reduce capital expenditures to an estimated $400 million in 2009, down from $1 billion in 2008. The larger investment last year was the result of increased outlays at its SBQ mill in Memphis, its galvanizing facility in Decatur, Ala., and its new Castrip facility in Arkansas. Construction is nearly complete on all three projects.
Steel Dynamics Inc.
Steelmaker Posts Rare Quarterly Loss
Steel Dynamics Inc. capped off the best year in company history with its worst quarter. The Fort Wayne, Ind.-based steel producer reported a net loss of $83 million in the fourth quarter, but a record year-end income of $463 million.
“It’s strange to be reporting the best year in company history and at the same time reporting the worst quarter,” Chairman, President and CEO Keith Busse told investors and analysts during the company’s fourth-quarter conference call. “We’re thankful to have that quarter behind us.”
Sales in the fourth quarter dipped 53 percent to $1.2 billion, and were 17 percent lower than the $1.5 billion reported during the previous quarter. Net sales for the year grew to a record $8.1 billion, nearly double the previous record of $4.4 billion reported in 2007. The increase in sales for 2008 was primarily due to the 2007 acquisition of OmniSource Corp. and additional metal recycling operations, plus higher average selling prices for steel and recycled metals during the year.
However, it was the steep decline in the value of scrap that helped lead to the fourth-quarter loss. The company’s steel and metals recycling operations incurred losses of $26 million and $10 million, respectively, due to reductions in inventory values.
“When scrap goes from $875 per ton for prime goods to $175 per ton month by month by month until it reaches bottom, you can imagine the losses were substantial,” Busse said. However, having consumed most of the older, higher-cost raw materials, the company believes “the processing division will be back in the black in the first quarter, and we’ll have an operating profit.”
Following strong performances in both the steel and metals recycling segments for the first three quarters of 2008, the significant weakening in order activity first seen by the company’s flat-roll division and in metals recycling in late September broadened to other steel operations as the fourth quarter progressed. Compared to the third quarter, fourth-quarter 2008 steel shipments of 942,000 tons were down 34 percent, ferrous metals shipments of 898,000 tons were down 49 percent, and non-ferrous metals shipments of 177 million pounds were down 27 percent.
The company’s flat-roll division booked only about 20,000 tons per week in orders during the month of October and November, “hardly enough to sustain profitable rates in a declining environment,” Busse said. Orders bumped back to about 30,000 tons per week in December and remained that way into the new year.
“It’s not real exciting, but it’s probably a 60 percent operating rate,” Busse said. The company expects to continue to run at a 55 to 60 percent rate during the first quarter, then up to 80 percent in the second quarter as destocking bottoms out.
SDI is operating under a different set of assumptions for its structural division, which began its decline later in the cycle than flat-roll. The market remained in decent shape through November, but started to collapse in December and will continue its slide at least through the first half of the first quarter, SDI executives said.
The declining demand, coupled with SDI’s new mill operating well below full output, leaves SDI’s structural division at about 33 percent of capacity. “We’re not forecasting that will change substantially, but we think it will improve as the year goes along,” Busse said.
The structural market could get a boost from the proposed federal stimulus package, though Busse expressed disappointment at the amount of money pledged to infrastructure in President Obama’s plan.
“Out of the $850 billion package, the rumor of $90 billion to $110 billion worth of spending is pathetically low. The economy is going to get the biggest bang for its buck, in GDP terms, out of infrastructure spending whether it’s roads and bridges, schools and hospitals or energy projects,” Busse said. “A lot of steel will be used, but it isn’t just steel that’s going to benefit. All basic industry will benefit. I was really expecting to see a stimulus package that perhaps was in the $300 billion to $500 billion range. I’d like to see more hard dollars spent in the stimulus package on hard infrastructure.”
Though the outlook is murky, Busse envisions that SDI will operate at about two-thirds to 70 percent of capacity in 2009, significantly below the 80 percent rate in 2008. “It’s a pretty bleak year, but even without much improvement in pricing, we’re in excellent shape in regard to raw materials. We should be able to generate a reasonable operating profit and have a year comparable to the one we had in 2008,” he said.
Strong 2008 Results Belie Tough Quarter Ahead
Though it anticipates an operating loss in the first quarter as the global economy continues to struggle, Pittsburgh-based United States Steel Corp. reported surprisingly strong results for fourth-quarter and full-year 2008.
In their year-end quarterly report to analysts and investors last month, U.S. Steel executives said the company earned a fourth-quarter net income of $308 million, down from third-quarter net income of $919 million, but up from fourth-quarter 2007 net income of $35 million. For full-year 2008, U.S. Steel earned a net income of $2.13 billion, compared with full-year 2007 net income of $879 million.
“Although the global economic situation negatively affected fourth-quarter results, we had an outstanding year in 2008, with record net sales, income from operations and net income. Our strategic acquisitions positioned us to realize substantial benefits from strong global market conditions during most of 2008,” said U.S. Steel Chairman and CEO John P. Surma.
The company reported fourth-quarter 2008 income from operations of $549 million, compared with income from operations of $1.327 billion in the third quarter of 2008 and $116 million in the fourth quarter of 2007. For full-year 2008, income from operations totaled $3.096 billion vs. $1.213 billion for the year 2007.
U.S. Steel’s flat-rolled production declined significantly in the fourth-quarter as the company temporarily idled several facilities and reduced operations at others in response to reduced customer demand. It idled the hot-end at Hamilton Works in November, followed by Granite City Works, Great Lakes Works and Keetac iron ore operations in December, reducing production to just 45 percent of capacity in the fourth quarter
U.S. Steel Europe, operating at just 51 percent of capacity, recorded an operating loss in the fourth quarter mainly due to lower shipments and average realized prices,.
Fourth-quarter tubular results hit a record, actually improving from the third quarter, as average realized prices increased and markets for tubular products remained favorable.
“We expect an operating loss in the first quarter as results continue to reflect the extremely difficult global economic environment” Surma added. “We do not know when conditions may improve, but we are well positioned to fully participate in a market recovery when it occurs. In the meantime, we continue aggressive efforts to maximize liquidity and reduce costs, and will take additional actions as market conditions warrant.”
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