11-2009 Carbon Flat-Roll Outlook
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Carbon Flat-Roll Outlook True Demand in Sight?
Orders are up. Prices are decent. Has steel turned the corner? Many remain skeptical.

By Myra Pinkham, Contributing Editor

On the surface, it appears the carbon flat-roll market improved significantly this spring and summer, raising hopes that the economy’s recovery was finally gaining traction. But some backsliding in steel orders this fall lends credence to the widespread view that recent gains are largely smoke and mirrors, and that true demand remains weak.

There is no question the market has gotten better, albeit from a very low base, says John Tumazos, principal of John Tumazos Very Independent Research LLC, Holmdel, N.J. In fact, Paul Scott, managing consultant for the London-based CRU Group’s steel team, notes that flat-roll apparent consumption increased an astounding 25 percent in the third quarter from the second quarter of this year. U.S. Midwest prices jumped nearly 50 percent to $586 a ton in October, up from $395 in June, one of the strongest three-month increases ever seen.

This does not reflect substantial improvement in the fundamental underlying demand, however, contends industry analyst Charles Bradford, a partner with Affiliated Research Group in New York. Rather, mill order books have filled up because service centers and OEMs are now placing orders again instead of living off of their inventories.

The American Iron and Steel Institute in Washington, D.C., reports that U.S. mills shipped 5.57 million net tons of steel in August, up 5.7 percent from July but still 37.1 percent below levels of August 2008. The month-on-month growth included a 6.8 percent increase in hot-rolled sheet shipments, as well as a 2.8 percent increase for galvanized sheet and strip and a 9.9 percent increase for cold-rolled sheet.

In turn, this sparked a number of integrated mills to restart idled capacity. In its 18th consecutive weekly gain, and the 25th in the past 26 weeks, U.S. raw steel output climbed 2.3 percent to 1.51 million tons for the week ending Oct. 24, AISI reports. This brought the mill capacity utilization rate to 63.2 percent.

Production over 63 percent represents a major improvement compared to the first week of January when mill capacity utilization dipped to 36.3 percent. During the corresponding week last year, however, mills were producing at a 70.5 percent rate, and their peak last summer was over 90 percent.

Even though mills have increased production, real demand has not picked up at all, maintains Dan DiMicco, chairman, president and CEO of Nucor Corp., Charlotte, N.C. “What has happened is that our customers have gotten to the point they can’t take out inventories any more. This has resulted in apparent and true demand becoming equalized, causing everyone’s order entry to pick up. But real demand hasn’t actually changed from where it was about a year ago.”

What has changed is U.S. apparent sheet consumption, which CRU estimates was 2.95 million short tons in September 2009—down 36.8 percent from 4.68 million tons a year earlier. Much of the difference is the result of extreme destocking on both the service center and OEM levels.

Total steel inventories held by service centers fell 45.7 percent to 5.79 million tons in September, or 2.3 months on hand, compared with 10.66 million tons, or 2.9 months on hand, a year earlier, according to the Metals Service Center Institute, Rolling Meadows, Ill.

During the same period, service center shipments declined 31.4 percent. With inventories declining more rapidly than shipments, it appears that service centers continued to work down their stock levels as recently as September, despite widespread assertions that inventories have “bottomed out.”

Jim MacBeth, senior vice president of carbon steel operations at Reliance Steel and Aluminum Co., Los Angeles, notes that customers are replenishing their inventories but continue to be very cautious. Service centers are in the market only to satisfy their real needs. “We are not speculating,” he says.

Flat-roll demand has picked up for service centers, says Lisa Goldenberg, chief operating officer of Delaware Steel Co., Fort Washington, Pa. “It still isn’t stellar, but it is better than terrible now.”

Service centers are benefiting from OEMs that are hesitant to place large orders with the mills, so they are looking to distributors, says Bill Hickey, president of Lapham-Hickey Steel Corp., Chicago. “We are seeing lower inventories throughout the supply channel. People are now looking for steel immediately, but in smaller quantities.”

Caution seems warranted even though business is relatively brisk, says distributor Jim Barnett, president of Grand Steel Products Inc., Wixom, Mich. “We are treading on the ice and it doesn’t appear to be thick,” he says, noting that most inquiries are from companies that need metal tomorrow as opposed to orders with longer lead times. Fill-in rather than bread-and-butter business, in other words. “That leads me to believe that long-term prospects don’t appear to be as bright.”

Richard McLaughlin, steel specialist for Deloitte Consulting, Pittsburgh, suggests a whole new paradigm may be developing in regards to how much flat-rolled steel the supply chain requires. If lower end-use demand persists for a prolonged period, as many believe, there will be less need for the market to inventory steel.

Tom Marshak, vice president, commercial, for Severstal North America Inc., Dearborn, Mich., is among those who believe such a change is in the air. “Service centers are trying to operate at a whole new level. In the past, they were comfortable with two and a half to three months of inventory on hand. Now they are talking about taking out 20 percent and continuing to live at that level.”

CRU’s Scott says most of the destocking by service centers and OEMs has run its course, and some have begun restocking to fill in holes. There has even been a bit of a pickup in real flat-roll demand, he says, especially in the automotive market. But he is among the many who question whether the boost from the short-lived Cash for Clunkers government incentive program is sustainable.

Nucor’s DiMicco calls the artificial demand created by Cash for Clunkers nothing more than “a sugar high,” which has already worn off. U.S. car and light truck sales by the top seven automakers in September were off 41.9 percent from August, and down 25.5 percent compared to September 2008.

“The [earlier] pickup in auto demand occurred partly to replenish dealer inventories that had been worked down through the Cash for Clunkers program,” says Scott. The program, which prompted the sale of about 690,000 vehicles during its two-month life, has boosted auto production and steel consumption in the fourth quarter. “But the question is whether, once the auto supply chain is replenished, consumers are ready to come to the plate and buy more vehicles. I think the answer is no,” adds Scott.

“The cars that were bought through the Cash for Clunkers program would have been purchased later. It just pushed sales forward. I don’t see anything pushing further sales. Consumers are still very cautious and conservative,” agrees Bill Jones, vice chairman of O’Neal Industries Inc., Birmingham, Ala.

Right now auto production is exceeding sales, which could mean that once dealer stocks are replenished, vehicle production could be ratcheted down again, Barnett adds.

Goldenberg offers a more positive take on the government’s effort to stimulate the economy by stimulating car sales. “I think Cash for Clunkers renewed the spirit of the automotive market. It gave the market a psychological oomph, which has kept things moving even after the program was over.”

“Now that its inventories have been liquidated, automotive could be one of the best markets next year,” says Tumazos.

Another automotive optimist, Marshak expects a good supply-demand balance next year, with vehicle sales rising from about 10 million this year to 12 million in 2010.

Other flat-roll end-uses remain weak, however, especially nonresidential construction, which could falter through 2010, Marshak says. “Who wants to build office complexes or industrial buildings when there is plenty of office space for rent and when there is excess warehouse space?” he asks. Appliance sales, which depend on the still-struggling home construction and remodeling sectors, will likely see a 15 to 20 percent decline this year before flattening out next year, he says. The outlook for pipe and tube is a mixed bag, with irrigation pipe and structural and mechanical tubing faring a little better than oil country tubular goods, which are suffering from an oversupply situation.

The cutbacks in steelmaking capacity, combined with the recent uptick in demand, have actually created a short supply of carbon flat-roll, say the experts, at least until the mills have a chance to bring some production back online. The tightness in supply has prompted five flat-roll price increases in 12 weeks, causing hot-rolled coil prices to jump nearly 50 percent. The last time steel prices increased so dramatically, eight leading steelmakers— ArcelorMittal USA Inc., U.S. Steel Corp., Nucor Corp., Gerdau Ameristeel Corp., Steel Dynamics Inc., AK Steel Holding Corp., SSAB Swedish Steel Corp. and Commercial Metals Co.—were hit with a number of antitrust class-action lawsuits filed by steel buyers alleging they had colluded to keep steel prices high. The steelmakers deny the charges. Those lawsuits are currently in the courts and could take several years to resolve.

In the last few weeks, flat-roll prices have fallen back a bit from about $586 to $550 a ton, according to CRU. Current price levels are not likely to attract more foreign steel imports, analysts agree, especially with certain overseas economies, such as China, experiencing greater economic growth than the United States, and with the weak U.S. dollar making imports less attractive.

In recent months, some flat-roll mills have restarted idled capacity, while others have announced plans to follow suit. There is much debate about whether increased steel production is justified by the market conditions or premature and potentially damaging to steel pricing and ultimately the market’s recovery.

McLaughlin says the fact that flat-roll prices have been trending lower in recent weeks could be an indication that more capacity has come back than the market could absorb. Should supply continue to increase while demand either remains flat or declines, flat-roll prices could deteriorate further, possibly as low as $500 per ton by January, Scott says. “Thereafter we will likely see a small bounce in the spring or summer of next year, but it won’t be anything dramatic. It won’t be until 2011 that there will be a significant pickup in demand,” he adds.

That would be just about when the new ThyssenKrupp Steel USA carbon sheet mill starts ramping up in Alabama (see related story below).

Another subject of debate is whether the flat-roll market is undergoing a structural change that will result in some of the currently idled capacity being permanently closed. Russia’s Severstal, for one, has been the subject of speculation that it may be looking to sell off or close its North American operations. Severstal made a major investment in a new mill in Columbus, Miss., just prior to the economy’s collapse. Marshak asserts that Severstal remains committed to the North American market and will, if the time is right, “pull the trigger” and bring its idled facilities— Wheeling, W.Va., and Warren, Mich.—back on stream. “It has been our strategy to run our currently operating facilities as full out as possible and then determine if we will bring more capacity on line,” he says.
ThyssenKrupp’s Southern Startup Stays on Track
 
While a considerable amount of U.S. steel production capacity remains idle as the steel industry works to dig itself out of the global recession, German steelmaker ThyssenKrupp AG is planning to ramp up its new Alabama mill right on schedule.

The greenfield project in Calvert, Ala., was designed to produce 4.2 million tons of carbon hot-rolled sheet each year. A new stainless mill adjacent to the carbon facility will have a 1-million-ton capacity.

“While there certainly are challenges in this market, we are comfortable with our market entry plan and feel that the flat-rolled steel sector will be able to absorb this capacity,” says Robert Holt, vice president of sales and marketing for ThyssenKrupp Steel USA. Mary Mullins, a spokeswoman for ThyssenKrupp Stainless USA, expressed a similar sentiment about the stainless mill. “We will watch the progress of the market as we ramp up,” Holt adds. “We want to be sure that we add capacity responsibly.”

Holt notes that the start-up plan for the carbon sheet facility, which will service the growing automotive, service center, pipe and tube, construction, appliance and HVAC markets in the South, calls for its hot-strip mill to come on-stream in the spring of 2010, followed by a continuous pickling tandem mill in the early summer. An independent pickling line will come online in late summer along with the first coating line. Another coating line will be brought on stream in late October or early November. A continuous annealing line will start up toward the end of the year, followed by the construction coating line in first-quarter 2011. “This isn’t much different from our original estimates,” he says.

The stainless mill’s startup was delayed slightly from its original timeline, but is right on target with what was announced this January, says Mullins. Originally its cold-roll line was to start production at the end of this year, but it will now be brought on stream in the second half of 2010. “As previously announced, we are maintaining flexibility with the startup date of our melt shop,” she says, adding it will come on line somewhere between 2012 and 2015 depending on market conditions.

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