Steel, Aluminum Suppliers Take Hit at Year's End
Fourth-quarter and year-end financial reports from leading producers show that no company escaped the late-year downturn.
Posts $2.6 Billion Loss
The global slowdown in steel demand in the fourth quarter resulted in declining sales and income figures for the world’s largest steel company, ArcelorMittal. The Luxembourg-based steelmaker reported net sales of $22.1 billion in the fourth quarter, 21.1 percent behind the $28.0 billion reported in the fourth quarter of 2007 and 59 percent off the $35.2 billion reported during the third quarter of 2008.
The company reported a quarterly loss of $2.6 billion, which compares to profitable quarters of $3.8 billion in third-quarter 2008 and $2.4 billion in fourth-quarter 2007.
For the year 2008, ArcelorMittal reported net sales of $124.9 billion, well ahead of the $105.2 billion posted during 2007. Net income, however, was $9.4 billion, 9.6 percent behind the $10.4 billion reported the previous year.
“ArcelorMittal’s generally excellent performance in 2008 was overshadowed by the considerable slowdown in the world economy in the last quarter of the year,” said Lakshmi N. Mittal, chairman and CEO. “Our scale, strength and market leadership, however, allowed us to swiftly and decisively implement a number of operational and financial measures to adapt to the changing environment. These measures have already started to yield results.”
The company reduced net debt by $6 billion during the quarter, while improving liquidity from $12.0 billion to $13.4 billion.
“The reduction of net debt is particularly pleasing, enabled by our ability to continue to generate strong free cash flow. While the operating climate is likely to remain challenging for the first quarter, we are starting to see some signs of improvement,” Mittal said.
Still, the company anticipates EBITDA of approximately $1.0 billion during the first quarter, well behind the $2.8 billion reported during the fourth quarter and far off the $8.6 billion reported during the first quarter of 2007.
Shipments in the fourth quarter totaled 17.1 million tons, down from the 25.6 million during the third quarter and 28.0 million shipped during the fourth quarter of 2007. Full-year shipments also fell to 101.7 million tons from 109.7 million in 2007.
Total steel shipments in the company’s Flat Carbon Americas segment were nearly halved at 3.9 million metric tons for the three months ended Dec. 31, compared to steel shipments of 6.9 metric tons for the three months ended Sept. 30. This was in line with the sharp deterioration of global steel markets in the fourth quarter, officials said.
Flat Carbon Americas sales also declined to $4.5 billion for the final three months as compared with sales of $8.5 billion for the third quarter, due to both lower volumes and prices. ArcelorMittal reported an 8.7 percent decrease in the average steel selling price.
The segment recorded an operating loss of $400 million for the three months, representing a sharp decline from operating income of $600 million from the previous quarter.
In its long carbon business, total steel shipments in the Long Carbon Americas and Europe segments were lower at 4.6 million tons for the quarter, compared to 6.7 million tons for the previous quarter. Sales were also lower at $5.2 billion compared to $9.5 billion for the previous quarter, the result of lower volumes and a 20.7 percent decline in the average selling price.
Reports Net Loss in 2008
Like others in the aluminum industry, Century Aluminum Co., Monterey, Calif., reported a net loss of $700.2 million in the fourth quarter. For the full year, Century reported a net loss of $898.3 million. The 2008 loss follows on a 2007 loss of $101.2 million.
Century’s sales for the fourth quarter of 2008 were $402.2 million, 6.9 percent off the $432.1 million reported during the fourth quarter of 2007. For the year, its sales increased 9.6 percent to $1.97 billion, up from $1.80 billion in 2007.
The company’s shipments of primary aluminum for the 2008 fourth quarter were 202,259 tons, compared to 198,138 tons shipped in the year-ago quarter, a 2.0 percent increase. Total 2008 primary aluminum shipments of 803,771 tons increased 4.8 percent from the 766,951 tons shipped in 2007.
“Century has taken aggressive action in response to the global economic crisis and its impact on commodity prices,” said President and CEO Logan W. Kruger. “In the United States, we have begun implementation of the difficult actions required to bridge the current environment and lay the groundwork for a stronger company when metal markets strengthen.”
Last month, the company completed the curtailment of one potline at its Ravenswood, W.Va., smelter, and announcement plans to curtail a potline at its Hawesville, Ky., smelter. The company also implemented salaried staff reductions of approximately 13 percent at Hawesville and its corporate headquarters. Additionally, Century is reviewing its greenfield smelter project near Helguvik, Iceland, with new construction essentially halted.
Still, the company remains optimistic about its future. “We continue to view Helguvik as an excellent investment for our shareholders and remain convinced that the environment in Iceland will remain attractive to our business over the long term,” Kruger said. “In addition, our forecasts of capital and operating costs have fallen since the project’s inception.”
While the current environment remains challenging, the company remains committed to the long-term vitality of the aluminum industry.
“We continue to believe that the factors supporting the long-term growth of aluminum demand remain in place,” said Kruger. “We expect that Century’s improved liquidity and streamlined cost position will enable us to weather the current global financial crisis and prepare the company for renewed profitable growth once aluminum markets stabilize and recover.”
Sees Loss For Quarter, Full Year
Kaiser Aluminum Corp., Foothill Ranch, Calif., reported a net loss of $108 million for the fourth quarter, resulting in a net loss for the year. Kaiser reported a net loss of $69 million for 2008, compared to income of $101 million for 2007.
Consolidated net sales for the fourth quarter were $327 million, compared to $361 million reported in the prior-year quarter. Net sales were favorably impacted by strong shipments of aerospace and defense products, but were offset by a precipitous decline in industrial production and automotive demand applications.
“Our 2008 underlying results were solid on the strength of record shipments of aerospace and high-strength products due to strong demand and completion of the Trentwood heat-treat plate capacity expansion,” said Jack A. Hockema, president, CEO and chairman.
“Although full-year operating results were negatively impacted by higher energy costs and by manufacturing inefficiencies related to the implementation of strategic investment and product development initiatives, fabricated products operating income before non-run-rate items was the second best in our history.”
For the year, net sales increased slightly to $1.508 billion. The increase reflects higher shipments and higher value-added pricing in fabricated products, which was largely offset by the effect of lower shipments in primary aluminum as a result of the outage at Anglesey during 2008. Kaiser curtailed smelting operations at Anglesey upon expiration of its power contract in September 2009.
“We continue to make significant progress on our strategic investment initiatives to position the company for long-term growth and operational efficiency, and we expect our strong balance sheet and liquidity to provide financial flexibility to manage through a challenging economic environment,” said Hockema.
The company’s fabricated products segment reported an operating loss of $49 million for fourth-quarter 2008 compared to $40 million of operating income in the prior-year period. The results reflected strong aerospace and high-strength shipments, which were more than offset by a decline in demand for automotive and general industrial applications, as well as heavy destocking among distributors and across the supply chain. In addition, the severity of winter weather placed significant limitations on the Trentwood facility’s production and shipments during the month of December.
Fourth-quarter and full-year 2008 operating results in the primary aluminum segment were negatively impacted by lower production resulting from the outage at Anglesey.
Enjoys Record Results in 2008
Swedish steelmaker SSAB, driven significantly by its North American operations, reported record sales and earnings during 2008. The steelmaker reported net profit of $1.05 billion during the year, with its North American operations contributing $326 million.
Sales grew 34 percent during the year to $6.0 billion, with SSAB North America reporting sales of $1.9 billion.
SSAB managed to remain profitable during the difficult fourth quarter, reporting $108.5 million in profit during the quarter on sales of $1.4 billion. Like others in the industry, SSAB saw considerable weakness in the final three months of the year, with demand falling sharply within all customer segments and geographic markets. The company’s North American division was the only one to approach its 2007 figures, primarily due to the sharp fall in scrap prices, a flexible cost base and a stronger U.S. dollar.
The outlook for the first quarter is not promising, said Olof Faxander, president and CEO. “Due to the sharp slowdown in demand for steel as a consequence of the financial crisis, the prospects for the first quarter of 2009 are extremely weak,” Faxander said. “Prices are falling and production volumes are expected to be low. During January, the degree of utilization of our production lines was significantly below normal, and no clear signs of recovery from this level can be discerned at present.” n
Positioning for a Very Different Year
High steel prices and solid demand early in 2008 sustained leading service centers through a disastrous fourth quarter. In their year-end financial reports to analysts and investors, service center executives describe how they are girding for the tough year ahead.
Gains Market Share,
Despite Tough 4Q
Metals USA suffered a $7.0 million loss in the fourth quarter of 2008, but still posted the best year in company history. The Houston-based service center company reported net earnings of $72.6 million, nearly $60 million more than the $13.9 million reported in 2007.
Net sales for the quarter totaled $456.4 million, more than 5.5 percent better than the same three months in 2007 despite the industry-wide demand collapse during the quarter. For the year, the company reported net sales of $2.16 billion, 16.8 percent more than the previous year.
Lourenço Gonçalves, president, chairman and CEO, said the company’s improved performance was a result of gaining market share, as overall service center shipments declined 10 percent in 2008. “Despite the recessionary environment and challenging conditions for business, 2008 was Metals USA’s best year ever, which translated into record revenues and record profits,” he told investors and analysts at the company’s quarterly conference call.
As with others in the supply chain, Metals USA’s performance fell considerably in the fourth quarter compared to the third. Metals USA had reported third-quarter sales of $617.7 million and quarterly earnings of $36.0 million.
Metals USA responded to the decline in demand from its end-use customers by dramatically reducing its inventory. Inventory tonnage was reduced more than 20 percent during the quarter. “The fourth quarter seemed like an appropriate time to drastically reduce our inventories and get ready for 2009,” Gonçalves said.
But the distribution market is adapting to this level in a new way, Gonçalves said. Service centers are keeping inventory positions low by dealing more frequently with each other. “If we have an order for five items and we only have four on hand, instead of going back to the mill to buy the fifth, I go to another service center. That way I’m helping the entire service center system stay low in inventories. And I’m not the only one doing that.”
Gonçalves said his hesitancy to rely on the mills stems from the producers’ inability to hold firm on prices. “As long as mills are willing to reduce prices, I’m not buying,” he said.
Metals USA’s reduced inventory position, a phenomenon common throughout the supply chain, suggests that any surge in demand will put immediate pressure on supplies. Shortages are inevitable.
“What we are waiting for is a series of events that consumers will identify as triggers, which will give them confidence that tomorrow will be stronger than today,” Gonçalves said. “Because there is so much uncertainty, they now distrust their own customers and their own order books.”
In fact, Gonçalves said the importance of the impending stimulus bill is not in the particulars of the plan, but in the impact it will have on moving the economy. “It’s more about confidence being restored in the marketplace. The real world is out there. What’s not there is the fuel to move the real world. And that fuel is finance. Banks need to act like banks. They need to start lending again.”
The CEO said the current industrial landscape is simply unacceptable and will only be fixed by the nation’s banks. “The current capacity utilization at around 50 percent would have been adequate for the needs of the American market prior to World War II, but it can’t be enough for 2009. Such a situation is unsustainable in the long run and will be fixed as soon as normal lending practices are restored and banks are back in business.”
Among end-use markets, Gonçalves said the only one performing adequately was defense. “It’s government related and pretty much unaffected by finance. Anything affected by finance is not having as good a February as it should.”
Earnings Tumble, But Still Profitable
Earnings tumbled in the fourth quarter, though Olympic Steel managed to remain profitable during the metal-market downturn. The Cleveland-based service center company reported net income of $800,000 in the fourth quarter of 2008. Net income during the fourth quarter of 2007 totaled $4.5 million.
Net sales totaled $253.6 million during the final three months, a 7.4 percent increase from the same period in 2007. Sales dropped considerably from the third quarter, when Olympic reported revenues of $388.9 million.
Tons sold in the fourth quarter of 2008 decreased 21.5 percent to 229,000 from 291, 000 in the fourth quarter of 2007. The company shipped 268,000 during the third quarter.
“No one is immune to steel prices falling by 50 percent between September and December, and service center steel shipments dropping by about 48 percent from second quarter to year-end,” President and Chief Operating Officer David Wolfort told investors and analysts at the company’s year-end conference call.
For the full year, Olympic posted record figures in both sales and earnings. Sales for 2008 increased 19.3 percent to a record $1.23 billion. In 2007, the company posted sales of $1.03 billion. Net income for 2008 totaled $67.7 million, 167.6 percent better than the $25.3 million reported in 2007.
“We are pleased with our record 2008 sales and earnings performance, and our ability to gain market share, even with the rapid and deep economic downturn of the fourth quarter,” Chairman and CEO Michael D. Siegal said. “We enter 2009 with a particularly strong balance sheet and a significantly lower operating expense base aligned with the industry-wide decline in sales volumes.”
Like many in the industry, Olympic Steel has cut a considerable amount of inventory in recent months, shedding 19 percent of its stocks in the fourth quarter and 28 percent since the peak in mid-September.
Companies are drawing down inventories at all levels of the supply chain. “We’ve had long-term shutdowns at many of our OEMs as they’ve continued to dissolve their finished goods. During those shutdowns, they have not taken in any raw materials,” Wolfort said.
The company responded to declining business conditions by taking several measures to curtail costs during the quarter. Olympic limited temporary labor and overtime, reduced workweeks and instituted layoffs. Its cuts reduced the labor pool by the equivalent of 213 full-time employees, while also engaging in a wage freeze for non-contractual positions and a voluntary 10 percent reduction in salary by senior management. Ultimately, the measures cut expenses by $13.7 million during the quarter.
The company has resisted pleas to use high-leverage as a growth technique. Siegel believes that commitment to a low-leverage financial position is serving it well during the current environment.
“We think we’re well positioned to take care of our customers, at whatever order level they come through,” Siegel said. “We’re gearing ourselves to manage this business through the deep trough we’re in. Unlike some others, we do have the ability to buy steel.”
Olympic is also in position to buy steel service centers and anticipates further growth. “You’ll see us in new geographies. Some of these will be satellite plants as we get closer to large OEMs and enable them to be lean manufacturers,” Wolfort said.
Olympic will also look for other opportunities, “on a larger scale similar to some of our larger bulk-breaking facilities. Those are still on the horizon. We are serving customers from longer distances than we would like. We’re giving up too much margin on freight, and we want to move closer and secure those regions.”
But Olympic won’t expand simply to enter a new geography. “I don’t see us swooping in and taking somebody’s business in a market that’s performing poorly. It’s probably performing poorly for a reason,” Siegal said.
Reliance Steel & Aluminum
Still Smiling After Record 2008
Despite the difficult fourth quarter, Reliance Steel & Aluminum Co., Los Angeles, reported 2008 net income of a record $482.8 million, up 18 percent over 2007. Sales for 2008 also set a record at $8.7 billion, an increase of 20 percent over the previous year.
For the 2008 fourth quarter, net income totaled $66.3 million, down 17 percent from the 2007 fourth quarter. Fourth-quarter sales totaling $2.1 billion were actually up 26 percent from 2007’s fourth-quarter due principally to the company’s Aug. 1 acquisition of the PNA Group. With PNA’s help, Reliance increased its total tons sold by 12 percent.
“Okay, now I want everyone out there to smile,” said Reliance Chairman and CEO David Hannah to analysts and investors listening in on last month’s conference call. “I’m sure many of you haven’t done that in awhile, but we’re smiling here. We just completed the best year we’ve ever had in terms of revenues and profits. We grew the company substantially; we had record cash flow from operations; we’ve paid down a substantial amount of debt; we have outstanding people; and we’re well positioned for the improvement in business conditions, whenever and wherever that occurs,” he said.
“In the meantime, we’ll hunker down and do what needs to be done in this environment, just as we’ve done before. No one ever promised that demand and prices would only go up, so we need to stop complaining, manage intelligently, and make the best out of the existing conditions. We’ve been here before.”
Like most service centers, Reliance was surprised by the turn of events late in the year. “We had our plans ready by mid-year in anticipation of the expected change in business conditions. We did not, however, anticipate the magnitude and speed of the changes,” Hannah acknowledged. “Starting primarily in November and December, we experienced sudden declines in demand and accelerated mill pricing reductions that resulted in significant competitive pressures and deteriorating profit margins as service centers, including Reliance, focused on inventory destocking.”
“It happened very quickly and basically across the board,” added Gregg Mollins, president and COO. “The three industries that were not impacted as much were energy, agricultural equipment and aerospace. All of the others, such as ship and barge building, nonresidential construction, railcar and semiconductor, were all down.”
In response to the difficult market conditions, Reliance reduced its working capital needs to increase cash flow and pay down debt. It cut its workforce by about 7 percent or 800 jobs, reduced hours at many operations and closed a few small facilities.
Simultaneously, the company focused on inventory reductions, Mollins said, cutting inventory in the quarter by about $500 million, or 23 percent. “Reducing our inventory certainly had a very positive effect on our cash flow, but the reverse was also true on our gross profit margins.” Reliance’s fourth-quarter gross profit margin of 21.4 percent was its lowest since becoming a public company in September 1994. “Margins will be one of our biggest challenges going forward, as the push to reduce inventory throughout our industry has never been greater,” he added.
Company officials declined to offer any forecasts for the first quarter due to the continuing uncertainty about the economy. “We have not seen any meaningful change in business activity levels so far in 2009. Pricing for most all of our products does seem to be at or near the bottom, but there is still intense competitive pressure in the marketplace as service centers continue to adjust inventory levels downward to better align them with demand,” Hannah said.
“There’s no doubt that it’s very difficult out there. November and December were probably the most challenging months I’ve ever seen, and January and February [were] not much better. However, we’ve worked through difficult times before and we expect to do so again,” he concluded.
‘Proud of Record, But ‘08 is History’
Russel Metals Inc., Mississauga, Ont., reported record earnings of $228.5 million in 2008, more than double its 2007 net earnings of $111.2 million. Net earnings for the fourth quarter totaled $29.0 million, up 14.6 percent vs. fourth-quarter 2007 despite a $35.7 million write-down of inventory due to the dramatic decline in steel prices.
Like all other companies, Russel reported a sharp decline in demand and steel pricing in the fourth quarter in both its metals service centers and steel distributors segments due to the general economic malaise affecting both Canada and the United States.
Russel’s energy tubular products segment earnings for the fourth quarter totaled $32.6 million, up from fourth-quarter 2007’s $12.8 million, despite the unprecedented drop in oil and gas prices late in the quarter.
“We are proud of our record earnings for 2008. However, that is history,” said Bud Siegel, president and CEO. “We are now completely focused on the current economy and how it impacts our customers and Russel Metals. We are taking action to preserve capital and position the company to continue to be in a strong financial position when the recovery occurs.”