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2-2010 Fourth Quarter Report and Outlook
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 Producers Encouraged by 2010 Trends

In their year-end reports to analysts and investors, most leading mills reported losses for full-year 2009, but improving conditions leading into 2010.

By the Staff of Metal Center News

Sidebars and Tables:

  • AK Steel: Mill Suppers Annual Loss
    Despite Improving Profitability
  • Alcoa: Three Unprofitable Quarters
    Lead to Losses Over $1 Billion
  • Allegheny Technologies: Fourth-Quarter Lifts
    ATI to Profitable 2009
  • Carpenter Technology: Carpenter Returns
    to Profitability
  • Nucor: Loss for the Year
    Despite 4th Quarter Gain
  • Steel Dyamics: 'Business Improved
    as Year Progressed'
  • U.S. Steel: Steelmaker Sees Losses
    in All Four Quarters

AK Steel
MIll Suffers Annual Loss
Despite Improving Profitability
AK Steel continued its year-long trend of improved profitability with its best quarter since third-quarter 2008. The West Chester, Ohio-based steelmaker reported a net income of $39.8 million for its fourth quarter, compared to a net loss of $430.6 million during the same period in 2008.

AK Steel reported net losses in the first two quarters of 2009, then returned to modest profitability in the third quarter. For the full year, AK reported a net loss of $76.8 million.

“AK Steel met the severe economic crisis of 2009 head-on and emerged as a stronger company,” James L. Wainscott, chairman, president and CEO of AK Steel told investors and analysts during the company’s quarterly conference call. “Our quick action and relentless focus on the fundamentals in 2009 allowed us to return to operating and net profitability by the third quarter, and we expect to build upon that success in 2010.”

Despite the encouraging trend line, the overall performance was not up to what the company expects, Wainscott said. “It was our first annual loss since 2003, and we have no intention of a repeat performance. We expect to be solidly profitable for the year 2010.” 

The company reported net sales of $1.32 billion, 9.5 percent below the $1.46 billion totaled during the same period in 2008, but 26.7 percent better than the previous quarter. For the full year, net sales totaled $4.08 billion, down 46.7 percent from 2008.

AK Steel shipped 1.4 million tons during the fourth quarter, up 27.6 percent from fourth-quarter 2008 shipments of 1.1 million tons. AK Steel’s average selling price for 2009 was $1,036 per ton, approximately 20 percent below its 2008 average of $1,303 per ton. 

The decline in shipments and revenues reflects the significant decline in the economy and the resultant decline in demand for steel products, especially in the first half of 2009.  

“As was the case in 2009, we expect sequential quarterly improvements in 2010 as we enjoy higher shipments and higher prices. We expect the first quarter to be the weakest,” Wainscott said.

The company’s fourth-quarter figures represented an 85 percent improvement from the record low shipments of 740,000 tons in the second quarter. “We’re still not where we want to be, back to pre-recession production and shipment levels, but we are absolutely moving in the right direction,” Wainscott said.

The company’s capacity utilization, down near 50 percent in the first quarter, was up to 70 percent by the fourth quarter. During the first few weeks of the new year, AK was making steel at nearly 85 percent of capacity, a figure it expects to maintain.

AK officials expect first-quarter 2010 shipments to approximate fourth-quarter 2009 levels, while average selling prices rise 4 to 5 percent.  The company also anticipates lower operating and maintenance costs.

Wainscott said many of AK’s largest carbon steel customers, particularly automotive and service centers, are in much better positions entering 2010. The auto build rate is expected to jump more than 20 percent in 2010, as inventories of automobiles were down to 53 days at the end of 2009 vs. 93 days at the end of 2008.

A similar situation exists with the service center market, as carbon flat-rolled inventories were at 2.6 months on hand at year’s end, compared to 3.6 months the previous year. 

Currently, the company’s weakest market is its electrical steel division, as the supply chain is still working through excess inventories of the material. Electrical steel destocking may last into the second quarter, Wainscott said.

Additionally, the company’s growing international presence in the electrical steel market was dealt a blow when the Chinese Ministry of Commerce issued preliminary duties of 22 percent on the company’s product. The company is challenging the determination.

“We are disappointed by the decision, and are cooperating with (Chinese officials) to impress upon them that the preliminary findings lack a factual or legal basis. If they continue to impose duties on our electrical steel products, we expect to appeal to the WTO to vigorously challenge the imposition of those duties,” said Wainscott. AK expects a final determination by the Chinese ministry this spring.

While AK Steel battled the recessionary conditions of the previous year, it ultimately enjoyed a better performance than some of its steelmaking peers. Wainscott said such a performance would continue to pay dividends going forward.

“We’ve helped ourselves in this down market to build on relationships and gain a little bit of market share,” he said. “I think we’ve been able to capitalize on some of the operating difficulties others have had.”

Alcoa
Three Unprofitable Quarters
Lead to Losses Over $1 Billion
Alcoa reported a net loss of $277 million in the fourth quarter, driven by $275 million in restructuring costs, ending a year with only one profitable quarter.

The Pittsburgh-based aluminum company had reported $77 million in net income during the third quarter. Though it was back in the red in the fourth quarter, its most recent results were still a substantial improvement over the same three months in 2008 when Alcoa lost $1.19 billion.

Revenues for fourth-quarter 2009 totaled $5.4 billion, an 18 percent increase from the third quarter of 2009. All markets but aerospace, industrial gas turbines and construction improved from the previous quarter. Revenues in fourth-quarter 2008 were $5.7 billion.

For full-year 2009, Alcoa reported a net loss of $1.15 billion on revenues of $18.4 billion. This compares to a loss of $74 million on revenues of $26.9 billion in 2008.

“This was a tough year for the aluminum industry—a price crash, demand destruction and credit crunch. Yet today, Alcoa is stronger than when the year started,” said Klaus Kleinfeld, Alcoa president and CEO. “We reshaped our cost structure and portfolio for profitable growth. And we built cash reserves to weather current economic uncertainties and invest in opportunities for future growth. Alcoa will benefit from those achievements for many years to come.”

Company officials were enthused by the fact Alcoa finished the quarter in a cash-positive position, the first time that’s been accomplished since the second quarter of 2008. Alcoa generated free cash flow of $761 million in the quarter, an improvement of $947 million from the third quarter.

“We pulled back capacity and eliminated costs. We did it upstream, midstream and downstream,” said Charles McLane, executive vice president and chief financial officer. “We pulled back capacity at many locations to meet decreased demand. We could have continued to run the volumes that had no demand, assumed the costs and put it into inventory. We would have been on the road to disaster.”

The company exceeded all targets on its cash sustainability program for the year, slashing overhead, procurement and capital spending. On the personnel side, Alcoa reduced its headcount by 21,400 workers, and plans to cut 3,200 more. The company estimates 75 percent of the job cuts are permanent.

“The cash sustainability program is an extraordinary success, exceeding every target we set. Facing continued headwinds from energy and currency costs, the entire company is committed to continuing those efforts in 2010,” Kleinfeld said.

Among its operating segments, Alcoa reported income of $37 million in its aluminum flat-rolled division, an increase of $27 million from the previous quarter. Continued improvement in pricing in North American and select European facilities, combined with ongoing success of the cash sustainability savings, more than offset weak end-market conditions that lowered shipments by 2 percent, officials said.

In its engineered products and solutions segment, after-tax income of $57 million in the fourth quarter was 24 percent lower than the third quarter.

Continued destocking in aerospace and weakness in the building and construction markets, coupled with further declines in industrial gas turbine sales, more than offset the benefits of marginally improved commercial transportation markets and cash sustainability efforts, Alcoa officials said.

Allegheny Technologies
Fourth-Quarter Lifts
ATI to Profitable 2009
Allegheny Technologies Inc., Pittsburgh, reported net income for fourth-quarter 2009 of $37.8 million, pushing the company into profitability for the full year. Net income for 2009 totaled $31.7 million.

“The fourth quarter was by far our best quarter in 2009 as we began to see signs of stabilization and cyclical recovery in many of our markets,” said L. Patrick Hassey, chairman, president and CEO. “ATI’s fourth-quarter performance benefited from better volume, pricing and mix for certain products, lower raw materials costs, and improvements to our cost structure.”

The company reported net sales of $815.7 million during the quarter and $3.05 billion for the full year. Those numbers were well off the sales of $1.15 billion for fourth-quarter 2008 and $5.31 billion for the full year.

“ATI was profitable in 2009 in spite of the most challenging global recession in nearly 75 years. Our balance sheet is strong. Cash on hand at the end of the year was nearly $709 million, and net debt to total capitalization was 15.3 percent. We achieved nearly $173 million in gross cost reductions in 2009, exceeding our goal of $150 million,” Hassey said.

Among product segments, the company’s flat-rolled segment saw a 9 percent increase among its high-value products, but standard-grade product shipments remained essentially flat compared to the previous quarter. However, average prices for standard stainless products increased 22 percent compared to third-quarter 2009 primarily due to higher base selling prices and raw material surcharges.

In its high-performance metals segment, demand for nickel-based alloys from the aerospace market improved, while titanium and titanium alloy demand began to stabilize as jet engine supply chain inventories adjusted to production schedules and aftermarket demand. Shipments of the nickel-based alloys increased 21 percent, while shipments of titanium alloys declined 5 percent compared to third-quarter 2009. Shipments of exotic alloys improved as a result of projects for the chemical process industry and growing demand from the nuclear energy market.

“Looking ahead, we expect to see gradual and steady improvement in most of our global markets in 2010. We plan to continue to improve our cost structure through a 2010 target of at least $100 million of new gross cost reductions,” Hassey said.  

Carpenter Technology
Carpenter Returns to Profitability
Carpenter Technology Corp., Wyomissing, Pa., bounced back from a quarterly loss with net income of $3.5 million during its second fiscal quarter ended Dec. 31. The company had reported a loss of $9.3 million during the previous quarter.

“Results for the second quarter were as expected—below the same quarter last year but higher than our September quarter,” said Gregory A. Pratt, chairman and interim president and chief executive officer. “We are encouraged by the early signs of momentum we are seeing in certain segments of our business. This strengthens our conviction that volume, revenue and margin will continue to grow as the second half of our fiscal year progresses.”

Excluding surcharge revenue, net sales were $207.3 million, 24 percent lower than last year. Total pounds sold in the second quarter were 19 percent lower than the second quarter a year ago.

Among Carpenter’s markets, aerospace sales were $113.5 million in the second quarter. Excluding surcharge revenue, aerospace sales were down 27 percent on 26 percent lower volume. Aerospace results reflect lower demand for materials due to excess inventories in the supply chain, officials said.

Industrial market sales were $62.3 million. Industrial sales decreased 16 percent on 19 percent lower volume. The year-over-year results reflect lower sales in virtually all applications due to weak manufacturing demand. However, compared to the first quarter, shipments increased in line with improvements in various industrial production indices.

Consumer market sales were $24.4 million, a decrease of 10 percent from the second quarter of fiscal 2009. Compared to the first quarter, consumer volumes increased nearly 7 percent.

Sales outside the United States in the second quarter were $85.6 million. International sales represented 32 percent of total sales in the second quarter of fiscal 2010, compared to 36 percent in the prior year. The year-over-year reduction reflects declines in energy, aerospace and automotive demand, especially in Europe and Mexico, Carpenter officials said.

“In the second quarter we saw the first steps along the road to business recovery,” said Pratt. “Higher volumes, improved mix and cost savings drove improvement in our operating margin. While our business is beginning to show good momentum, we recognize the pace of economic recovery this calendar year could vary. We will remain focused on cost reduction and operational excellence, while pursuing growth opportunities.”

Nucor
Loss for the Year
Despite 4th-Quarter Gain
Nucor Corp., Charlotte, N.C., reported net earnings of $58.9 million for the fourth quarter of 2009, an improvement over losses in the three previous quarters. Nucor suffered a net loss for the year, however, totaling $293.6 million—down sharply from net earnings of $1.83 billion in 2008.

Nucor’s consolidated net sales decreased 6 percent in the fourth quarter of 2009 to $2.94 billion. This compares to sales of $3.12 billion in the previous quarter, and sales of $4.15 billion in the fourth quarter of 2008. Tons shipped to outside customers totaled 4,638,000 in the fourth quarter of 2009, a decrease of 9 percent from the previous quarter, but an increase of 8 percent over last year’s fourth quarter. The average sales price per ton was up 4 percent from the third quarter, but down 35 percent from fourth-quarter 2008, reported Nucor officials in their year-end conference call last month with investors and analysts.

For full-year 2009, Nucor’s consolidated net sales decreased 53 percent to $11.19 billion, down from $23.66 billion for 2008. Average sales price per ton decreased 32 percent, while total tons shipped to outside customers decreased 30 percent from 2008 levels.

Company officials noted that fourth-quarter results were significantly affected by reduced earnings in Nucor’s downstream, long products and scrap businesses. However, its sheet mills benefited from the absence of high-cost pig iron inventories. The average scrap and scrap substitute cost per ton in 2009 was $303, a decrease of 31 percent from the $438 average in 2008.

Nucor’s capacity utilization declined in the fourth quarter due to seasonal issues separate from the general economic slowdown, officials said. Overall, steel mill utilization decreased from 69 percent in the third quarter to 58 percent in the fourth quarter, but remained well above the 48 percent level of last year’s fourth quarter. For full-year 2009, Nucor’s mill utilization rate averaged 54 percent, down from 80 percent in 2008.

“Our liquidity position remains strong with $2.24 billion in cash and cash equivalents and short-term investments and an untapped $1.3 billion revolving credit facility that matures in November 2012,” said Dan DiMicco, chairman, president and CEO of Nucor, which continued its record of 37 consecutive years of increases to its regular quarterly dividend.

“Going forward, we believe that the most challenging markets for our products will be those associated with residential and non-residential construction, which continue to show little, if any, strength,” DiMicco added. “While we expect improvements of approximately 5 percent in steel mill shipments in the first quarter, we also expect significant increases in both sales prices and scrap costs.”

Nucor sees opportunity in its export business in 2010. Its goal is to ship 15 percent of its total steel production to international markets, up from 11 percent in 2009.

Among Nucor’s current initiatives is the addition of 850,000 tons of capacity at its Memphis SBQ mill; the successful startup of its second Castrip plant in Blytheville, Ark.; production of coiled rebar and wire rod to begin in the second quarter at its Kingman, Ariz., plant; and expansion of heat-treated plate production.

Power, wind energy, bridge construction and automotive markets are showing the most promise early in the year, said John Ferriola, Nucor COO of steelmaking operations. “Also, we continue to see demand for expedited orders from service centers due to their lean inventories. Any increase in demand from distribution will have to be met by increased production, and Nucor is ready to respond quickly.”

Acknowledging that “the market still stinks,” however, DiMicco said Nucor is being very cautious about the speed of recovery in steel consumption, and the ramp-up of production. “Right now real demand is still struggling mightily across the board, but at some point the inventory part of demand will give way to end-use demand. At the end of the day, the market will be the disciplinarian and will dictate at what levels companies will operate.”

Steel Dynamics
‘Business Improved as Year Progressed’
Steel Dynamics Inc., Fort Wayne, Ind., reported net income of $26.7 million for the fourth quarter of 2009, but a net loss of $8.2 million for the fiscal year ended Dec. 31.

By comparison, fourth quarter 2008 showed a loss of $82.7 million, while full-year 2008 net income totaled $463.4 million. Net sales for the fourth quarter of 2009 were $1.2 billion, 3 percent lower than the fourth quarter of 2008. Full-year 2009 net sales were $4.0 billion, 51 percent lower than net sales of $8.1 billion in 2008.

“Our fourth quarter results were within the range we bracketed in December,” said Keith Busse, Steel Dynamics chairman and CEO. “Our steel operations met our expectations in the fourth quarter, achieving an operating profit of $108.3 million.”

SDI benefited in particular from continued strong sales of flat-rolled and engineered-bar steels, Busse said. SDI’s OmniSource scrap division generated an operating profit of $4.6 million in the quarter, with weaker results due to lower margins and reduced volumes. Continued losses in the steel fabrication segment and costs related to the start-up of Mesabi Nugget also detracted from fourth quarter’s results, he added.

Steel shipments for the fourth quarter totaled 1.2 million tons, 6 percent lower than the third quarter of 2009, but 24 percent higher than the fourth quarter of 2008. The average steel selling price increased $48 per ton from $627 in the third quarter to $675 in the fourth quarter, which compares to $913 per ton in the fourth quarter of 2008. The average ferrous scrap cost per ton charged in the fourth quarter increased $29 compared to the third quarter.

Steel shipments for the year 2009 totaled 4.0 million tons, 28 percent lower than the 5.6 million tons shipped in 2008. Year-to-year average selling price per ton decreased $322, from $973 in 2008 to $651 in 2009. SDI’s average ferrous scrap cost per ton charged in 2009 was $232 compared to $421 in 2008.

In metals recycling, OmniSource’s ferrous shipments for the fourth quarter totaled 1.2 million tons, 7 percent lower than the third quarter of 2009, but 34 percent higher than the fourth quarter of 2008. In the fourth quarter, OmniSouce provided 49 percent of the ferrous scrap purchased by SDI’s steel mills. Fourth quarter nonferrous shipments were 202.8 million pounds, 7 percent lower than the third quarter of 2009, but 14 percent higher than the fourth quarter of 2008.

Total ferrous scrap shipments in 2009 were 4.1 million tons, 27 percent lower than shipments of 5.6 million tons in 2008. Forty-seven percent of SDI’s ferrous scrap requirements were supplied by OmniSource. Nonferrous scrap shipments in 2009 were 780.1 million pounds compared to 911.8 million pounds in 2008, 14 percent lower.

“Looking back at 2009, and in light of the extraordinary steel-market and economic conditions the country faced throughout the year, the company’s performance was reasonably good,” Busse said. “With the exception of operations depending on nonresidential construction, our business improved as the year progressed. 2009 was a tough year, but we came through this extraordinary period much better prepared.”

SDI officials reported a slight improvement in business conditions entering 2010, calling demand for flat-rolled, engineered bar and merchant bar steel products, as well as recycled metals, “robust.” Demand for structural steel and building components remains very weak, however.

“Our flat-roll steel business, inclusive of The Techs, continues to run at a high rate of capacity utilization. OmniSource continues to operate at about 75 percent of capacity. Our first-quarter outlook is for stronger profitability in both our steel operations and in metals recycling,” Busse said.

U.S. Steel
Steelmaker Sees Losses in All Four Quarters
United States Steel Corp. posted its fourth straight quarterly loss to run its yearly losses to more than $1.4 billion in 2009. The Pittsburgh-based steelmaker posted a fourth-quarter loss of $267 million, its smallest net loss of the year.

“We reported a modest improvement in fourth quarter results as compared to the third quarter mainly due to higher average realized prices, increased shipments and higher utilization rates for our flat-rolled operations, primarily driven by North American automotive and service center markets, and the return to profitability of our tubular operations,” U.S. Steel Chairman and CEO John P. Surma told investors and analysts during the company’s quarterly conference call. 

The steelmaker’s fourth-quarter loss was an increase of 11.8 percent from the third quarter of 2009, when the company reported a loss of $303 million. For the full year, the company’s losses totaled $1.4 billion, compared to net income of $2.1 billion in 2008.

Net sales during the quarter totaled $3.4 billion, a 19 percent improvement compared to the previous quarter. Shipments of 4.7 million tons during the quarter were up 12 percent from the third quarter.

Fourth quarter results for the flat-rolled segment improved from the third quarter, primarily due to the benefits of higher average realized prices, increased shipments and reduced facility restart costs. Shipments improved by 18 percent to 3.2 million tons while average realized prices increased by 5 percent to $633 per net ton.

In response to increased customer order rates, at the end of the fourth quarter the company was operating six of its seven steelmaking facilities. Activity remained idled at the Lake Erie Works facility due to an expired labor agreement. Additionally, the No. 14 blast furnace at Gary Works was shut down for maintenance. It is expected to come back online during the first quarter.

“The difficult steps we took are enabling our company to take advantage of what appears to be the very early stages of an overall economic recovery,” Surma said. “Improved order rates in late 2009 have allowed us to increase our operating levels, and spot market prices have been increasing. It appears customers in several of our product lines are increasing their inventories to more normal levels.” Raw steel capability utilization rates for the quarter increased to 64 percent vs. 58 percent in the third quarter.

The company’s tubular segment returned to profitability in the third quarter, with operating income of $39 million. The improvement from third quarter results was mainly due to the benefits of higher shipments, operating efficiencies and the favorable effect of adjustments related to employee layoff benefits and last-in, first-out inventory liquidations that totaled approximately $10 million.

Tubular shipments increased by 37 percent to 207,000 tons, a significant increase but still well below historical levels. Shipments were largely driven by increased demand for alloy and heat-treated seamless tubular products, due in part to the continuing development of shale natural gas resources. U.S. Steel also began to experience increased activity at its welded pipe facilities in East Texas.  Average realized prices decreased by less than 1 percent to $1,462 per net ton. 

U.S. Steel plans to spend $530 million on capital expenditures in 2010, up modestly from 2009, though it is beginning to formulate plans for greater spending in the years that follow. The company is looking at several strategic investments, including pursuit of coke and coke substitutes due to existing batteries nearing the end of their useful lives; enhancements to tubular operations to serve customers’ increased focus on shale natural gas resources; and changes to allow increased participation in the automotive market to accommodate increasingly stringent vehicle emission and safety requirements.

Surma said these projects are higher on the agenda than any possible merger or acquisition activity. “We have a lot of really important strategic, high-value, high-return projects that we can deploy our capital against very effectively and very efficiently. That doesn’t mean if something comes along that’s attractive (we wouldn’t consider it), but right now our attention is directed at some of the projects that have sustainable long-term value potential to the company.”

Looking forward, Surma said the company expects to report an operating loss in the first quarter comparable to the fourth-quarter results, as gradually improving business conditions are not fully reflected in operating results.

“We continue to experience improved order rates from several of our end markets. Automotive, service center, converter and appliance customer order rates in North America and Europe are at or near their highest levels in the last 12 months, while in other markets, such as construction in North America, demand remains soft. But due to the low levels of inventory and the anticipated seasonal increases in activity at the end of the first quarter, our construction order book remains stable,” Surma said. “While we are becoming more optimistic, primarily due to improvements we are starting to see in the manufacturing sector, we remain cautious in our outlook for end-user demand.”

 

 

  
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