5-2009 First-Quarter Report and Outlook
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Losses Pile Up for Producers
In their recent conference calls with analysts and investors, steel and aluminum producers report losses suffered during a first quarter characterized by declining metal prices and evaporating demand.

By The Staff of Metal Center News

AK Steel
50% Decline in Sales Results in 1Q Loss

Net sales plunged nearly 50 percent for AK Steel during the first quarter of 2009. The West Chester, Ohio-based steelmaker reported net sales of $922.2 million, down 48.5 percent from the same period in 2008.

Declining sales led to a loss of $73.4 million for the quarter. For the same period in 2008, AK Steel reported a net income of $101.1 million.

Quarterly shipments of 778,800 tons were down 50.6 percent from the 1.6 million tons shipped in the comparable three months of 2008. The company’s average selling price of $1,184 per ton actually increased 4 percent from the $1,135 per ton during the first quarter, though it was down 13 percent from the $1,359 per ton in the fourth quarter of 2008.

The year-over-year increase in average selling price resulted from a higher percentage of stainless and electrical steel shipments, partially offset by lower spot market prices. The decrease in the average selling price from the fourth quarter of 2008 to the first quarter of 2009 resulted primarily from lower spot market prices and lower surcharges.

“Despite the worst market conditions in decades, AK Steel employees responded with outstanding cost and quality performances in the first quarter,” said James L. Wainscott, chairman, president and CEO. “The hard work our company has performed over the past five years allowed us to endure a quarter of record low steel shipments, and positions us well to make the most of improving markets the balance of the year.”

AK Steel said it expects shipments in the second quarter of 2009 to be approximately 800,000 tons, slightly higher than the first quarter. The company anticipates that its second-quarter 2009 average per-ton selling price will be approximately 4 percent below the first-quarter 2009 level. AK Steel expects to benefit from lower operating and raw material costs in the second quarter, and to incur an operating loss of approximately $50 million, a 50 percent improvement from the first quarter.

Alcoa
Managing Through Price, Demand Decline

The overall economic downturn and historic decline in aluminum prices resulted in a substantial quarterly loss for Pittsburgh-based Alcoa. The aluminum maker reported a 27 percent sequential drop in revenue resulting in a loss of $480 million for the first quarter of 2009.

Revenues for the first quarter totaled $4.1 billion, down from $5.7 billion in fourth-quarter 2008, and off 36 percent from the comparable quarter last year. The sharp drop in revenue was the result of the economic downturn on Alcoa’s end markets—automotive, transportation, building and construction, and aerospace. As demand weakened during the quarter in those markets, realized metal prices fell an additional $558 a ton, a 26 percent price decline, resulting in prices that are now about 60 percent lower than in the summer of 2008.

“Alcoa responded swiftly with a program that dramatically repositions our balance sheet and operational cost structure,” said Klaus Kleinfeld, president and CEO of Alcoa. “The result has been a rapid increase in liquidity during the quarter and significant operational cost savings.”

The company’s flat-rolled products segment suffered a $62 million loss during the quarter, though that signified an improvement of $36 million compared to the prior quarter. The segment benefited from productivity gains, the closure of the Bohai foil facility in China, and favorable currency impacts. In contrast, revenues declined 21 percent from the prior quarter, driven by significant volume declines across all market segments.

During the quarter, the company launched wide-ranging operational initiatives to reduce costs, increase cash, and improve liquidity. Procurement efficiencies and reduced overhead will eliminate more than $2.4 billion in annual costs by 2010.

“Our operational measures are already beginning to bear fruit in all our businesses,” said Kleinfeld. “In our primary products segments, for example, since the third quarter of 2008, we have reduced the cost of producing alumina and aluminum by 33 and 30 percent, respectively.”

During the quarter the company completed temporary curtailments of approximately 18 percent of its global smelting output. In addition, a plan to curtail an incremental 100,000 metric tons per year in May was announced, bringing total curtailments to approximately 20 percent of output.

Allegheny Technologies
‘Remaining Profitable a Worthy Accomplishment’

Allegheny Technologies Inc., Pittsburgh reported first-quarter net income of $5.9 million on sales of $831.6 million.

“While we will never be satisfied with being marginally profitable, our ability to generate positive results in the first quarter demonstrates the ongoing transformation of ATI into a uniquely positioned, globally focused, diversified specialty metals company,” said L. Patrick Hassey, chairman, president and CEO. “ATI remained profitable and continued to generate positive cash flow in spite of the most challenging global economic conditions we have ever seen and a significant negative impact from out-of-phase raw material surcharges and indices.”

Sales for the quarter totaled $831.6 million, 38 percent lower than the first quarter 2008 as a result of lower selling prices and shipments. Direct international sales represented 29.4 percent of total sales, compared to 27.6 percent for the 2008 comparable period. Compared to the first quarter 2008, sales decreased 19 percent in the high-performance metals segment, 49 percent in the flat-rolled products segment and 43 percent in the engineered products segment.

In first-quarter 2008, ATI reported net income of $142.0 million on sales of $1.34 billion.

In the high-performance metals segment, demand for titanium alloys and nickel-based alloys from the aerospace market was at lower levels as the supply chain adjusted to aircraft production schedule pushouts and reduced demand from the aeroengine aftermarket. Shipment volumes for titanium alloys and nickel-based alloys declined 6 percent and 10 percent, respectively, compared to the 2008 fourth quarter.

In the flat-rolled segment, demand for certain high-value products, such as grain-oriented electrical steel and industrial titanium products, was at reasonably good levels relative to economic conditions. Demand for most of the company’s stainless products was weak particularly from consumer markets such as automotive, appliance and residential construction. Shipments of standard stainless products decreased 40 percent while high-value product shipments declined 22 percent.

Carpenter Technology
Sales, Profits Fall in Quarter

Carpenter Technology Corp., Wyo-missing, Pa., reported net income of $13.1 million during its third quarter, which ended March 31. Quarterly income was down 75 percent from the same period in 2008.

Net sales for the quarter totaled $330.0 million, down 34.8 percent from the $506.4 million reported during the first three months of 2008.

“As we announced last month, our revenue decline this quarter reflected continued slowness in global industrial activity and higher customer inventories,” said Anne L. Stevens, chairman and chief executive officer. “Low oil prices have reduced demand in our energy segment, which had been a key growth driver in recent years. Also, demand in aerospace slowed significantly in the quarter.”

During the quarter, the company incurred $2.1 million in costs associated with the closing of its Crawley, UK, metal strip manufacturing facility, which will allow the company to reduce fixed costs and utilize existing production capacity more efficiently.

“We continue to take the appropriate actions to reduce manufacturing and other costs to adjust to the lower production levels. We also made considerable progress in reducing inventory levels during the quarter,” said Stevens. “Our focus is to deliver positive free cash flow and preserve our strong balance sheet, while continuing the strategic initiatives needed to prepare for the eventual market recovery.”

Total pounds sold in the third quarter declined 31 percent from the third quarter a year ago. Volumes shipped by the premium alloys operations segment decreased 25 percent as a result of lower demand in the aerospace and energy markets. Pounds sold by the advanced metals operations segment dropped 33 percent due to lower industrial, automotive and consumer demand.

Aerospace market sales were $146.7 million in the third quarter, down 29 percent compared with the same period a year ago. The decline reflected reduced airplane builds and lower overall passenger miles, compounded by excess inventory in the jet engine supply chain. In the aerospace fastener segment, sales of nickel-based and titanium fasteners also began to slow.

Industrial market sales in the third quarter were $79.1 million, down 28 percent compared with the third quarter of fiscal 2008. The decline reflects strong competitive pricing pressures in more commodity-oriented applications and reduced overall demand for materials used in valves and fittings, fasteners, and general industrial applications, company officials said.

Energy market sales of $35.0 million represented a decline of 36 percent from the third quarter a year earlier. The decline in energy sales primarily reflected lower oil and gas exploration activity in the face of weak demand for oil and excess inventory in the supply chain. Declining market demand and high customer inventories were also beginning to affect sales to the power generation market, Carpenter officials said.

“Looking ahead, we anticipate weaker demand in the fourth quarter due to conditions in most of our markets. This, in combination with continued negative effects from our second-half inventory reductions, as well as costs to close the UK facility, will result in negative earnings for that quarter. Current indications are that end-market conditions will remain soft for the balance of the calendar year,” said Stevens.

Nucor
Company Suffers First Quarterly Loss

Nucor Corp. suffered its first losing quarter in the company’s 43-year history, reflecting the overall doldrums in the steel industry. The Charlotte-based company posted a loss of $189.6 million during the quarter.

Nucor had earned $409.8 million during the same three months of 2008, and still posted a profit of $105 million during the fourth quarter of last year when the steel market began to soften.

Dan DiMicco, chairman, president and CEO of Nucor, told investors that the bleak economic climate that led to the losing quarter is not showing signs of improving.

“In fact, conditions have continued to worsen with each successive month so far in 2009. There are few signs of improvement at this time. I wish I was able to provide a more encouraging report, but as always our team will tell it exactly as it is. It’s extremely ugly out there.”

Nucor’s sales declined 47 percent to $2.65 billion compared to the first quarter of 2008. Tons shipped were off 43 percent to outside customers, on top of a 7 percent decrease in the company’s average selling price per ton.

Sales were off 36 percent from the fourth quarter of 2008, the result of a 14 percent decrease in tons shipped and a 26 percent decline in the selling price.

The company’s steel mill utilization rate decreased to approximately 45 percent in the first quarter from 92 percent in last year’s first quarter and 48 percent in the fourth quarter. Total energy costs increased approximately $11 per ton from the first quarter of 2008 to the first quarter of 2009 and increased $5 per ton from the fourth quarter of 2008 as a result of the capacity utilization.

“We’ve never seen this low a utilization in the history of our company. I’m not sure the steel industry has seen anything close to this since maybe the Great Depression or around World War II,” DiMicco said. “This is unprecedented. We are being impacted by complete disappearance of business with respect to steel orders.”

Nucor’s previous low utilization rate was near 70 percent during the early part of the decade.

Nucor officials said the dramatically lower production rates of the company’s mills have further slowed the rate at which its sheet mills are consuming higher cost iron units, in particular pig iron inventories, which were purchased prior to the collapse in both the economy and scrap/pig iron pricing in last year’s fourth quarter. The company expects that the impact from higher cost scrap will disappear during the second quarter. If these current production rates continue, the overhang from the high cost pig iron will, however, continue to impact results through the third quarter.

Despite the down quarter, Nucor’s board of directors declared its 144th consecutive quarterly cash dividend, payable May 12.

Looking forward, the company says continued low operating results, lower pricing and the consumption of high-cost pig iron inventories will negatively impact earnings and likely lead to a greater second-quarter loss than the one posted in the first quarter.

“It’s a very realistic view of the world ahead of us,” DiMicco said of the forecast, which was more pessimistic than some others issued by domestic steelmakers. “Our looking forward forecast is based on realism, not wishes or pipedreams.”

SDI
Better Results Expected in 2Q

Fueled by net sales down more than 50 percent from a year earlier, Steel Dynamics reported its second consecutive quarterly loss during the first three months of 2009. The Fort Wayne, Ind.-based steelmaker reported a net loss of $88 million during the quarter, which followed a fourth-quarter loss of $83 million.

In contrast, Steel Dynamics posted net income of $143 million during the first quarter of 2008.

Net sales for the quarter totaled $815 million, a 57 percent decline from the same period in 2008. Net sales were also off 33 percent from the $1.2 billion reported during the previous quarter.

“The first quarter was obviously not a strong quarter for any of our operating units,” said Keith Busse, chairman and CEO, “During the first quarter our steel mills operated at 46 percent of capacity, ferrous metals recycling at about 42 percent of processing capacity, and fabricating operations at about 45 percent. Unfortunately, we have still not seen clear signs of increasing demand, as our orders remain relatively steady month-to-month at these reduced rates.”

The first quarter’s operating loss, which included an $83-million inventory adjustment, was predominantly in steel operations. Without the inventory valuation adjustment, steel operations would have shown an operating profit of approximately $17 million, or $22 per ton shipped. The major factors impacting the quarter’s operational results were the continued deterioration in steel shipping volumes and the consumption of scrap valued at levels much higher than current market prices, company officials said.

First-quarter steel shipments of 743,000 tons were 54 percent lower than first-quarter 2008 shipments of 1.6 million tons, and were 21 percent lower than fourth-quarter 2008 shipments of 942,000 tons. In addition, the company’s average steel selling price declined $193 per ton, down to $720 in the first quarter from $913 in the fourth quarter of 2008.

“The valuation adjustments to our scrap inventory at the end of the first quarter, principally at the flat-roll division, to current market prices positions us for improved profit margins for flat-roll steel shipments in the second quarter. On the long products side, profit margins remain healthy, but could contract somewhat in the second quarter because of lower selling values. In all of our operations, the key challenge in the coming quarters will be to increase throughput,” Busse said.

Timken
Steelmaker Bucks Industry Trend

The Timken Company bucked the industry trend and posted a modest profit during the first quarter of 2009. The Canton-based steelmaker reported net income of $900,000 during the first three months of the year. The figure represented a tremendous decline from the $84.5 million reported during the same period in 2008, but defied the pattern of losses throughout the industry.

First quarter sales of $960.4 million were down 33 percent from the first quarter of 2008. Significant volume declines due to weaker demand across most of the company’s end markets and the impact of lower surcharges were responsible for the declining sales figures.

“It’s now clear that the impact of the recession on the demand for our products will be deeper and longer lasting than we anticipated. In the short term, we are managing the company with a heightened emphasis on cash flow,” said James W. Griffith, Timken president and CEO. “At the same time, we are taking actions to structure the company for profitability, even at current levels of demand, including efforts to strengthen our portfolio while improving the competitiveness of our manufacturing base.”

Timken is implementing further reductions in its manufacturing workforce targeted to better align capacity with demand. By the end of this year, the total reduction in operative and professional employment is expected to exceed 7,000 positions, or over 25 percent of the workforce since the beginning of 2008.

Sales for the company’s steel group, including inter-group sales, were $248.6 million, a decrease of 42 percent from $425.0 million for the same period last year. The decline was driven by lower demand across all market sectors, ranging from the service center sector, down approximately 15 percent, to the automotive sector, down approximately 60 percent from the same period a year ago. Sales were also affected by a decline in raw-material surcharges of approximately $80 million from the first quarter last year.

The company now expects the impact of the global recession to continue through the rest of the year with sales in most of its market sectors down significantly from last year. Steel group sales are expected to decline 55 to 65 percent for the year due to lower surcharges and lower demand across all sectors.

U.S. Steel
Flat-Rolled, Europe Results Depressed

United States Steel Corp., Pittsburgh, reported a net loss of $439 million during the first quarter, a dramatic turnaround from both the previous quarter and the same quarter in 2008. U.S. Steel had posted net income of $290 million during the fourth quarter of 2008 and income of $235 million during the same quarter last year.

Net sales for the quarter totaled $2.75 billion, a 38.9 percent decline from the previous quarter and 47.1 percent behind the $5.20 billion reported during the first quarter of 2008.

“Weak customer demand for flat-rolled products, coupled with customers’ efforts to reduce inventories, have resulted in very low order rates and further downward pressure on prices for our flat-rolled and U.S. Steel Europe segments,” U.S. Steel President John Surma told investors and analysts.

The company’s flat-rolled division operated at 38 percent of raw steel capability in the first quarter of 2009 compared to 45 percent in the fourth quarter of 2008, and shipments decreased 24 percent to 2.1 million net tons. Average realized prices decreased by $90 per net ton to $715 per net ton. The decline in results also reflected continuing employee and other costs for idled facilities, which totaled approximately $230 million for the first quarter.

First-quarter tubular results decreased significantly compared to the fourth quarter of 2008 due to lower shipments and average realized prices, idled facility carrying costs, and the division’s $18 million portion of the accrual for estimated future layoff benefits.

“Our tubular operations have also experienced a severe downturn primarily as a result of reduced drilling activity due to lower oil and gas prices, high inventory levels and unprecedented levels of unfairly traded and subsidized tubular imports from China,” Surma said.

During the quarter, U.S. Steel further consolidated production through temporary idling of additional facilities. The company continues to operate domestic facilities at Mon Valley Works, Gary Works, Fairfield Works, plus its Lake Erie Works coke-making facilities, Minntac iron ore operations, Lorain Tubular and Fairfield Tubular. All remaining major facilities have been temporarily idled.

Looking ahead to the second quarter, U.S. Steel executives say the continued difficult global economic environment will result in an expected loss, with order books at low levels and carrying costs from idled facilities continuing to be incurred. “Extremely short lead times coupled with the uncertainty surrounding financial markets and key steel-consuming industries such as automotive and construction make it difficult to forecast beyond a very short horizon,” Surma said.

The company has slashed its capital spending budget to $410 million, primarily consisting of required environmental and infrastructure projects already under way. The company’s capital spending was originally estimated at $740 million, a slight increase from the $735 million in 2008.




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