Hard Year Ends on a Soft Patch
By Myra Pinkham, Contributing Editor
Steel’s growth is closely tied to economic recovery and the impact of added capacity in 2011.
After gaining ground since last year, the carbon flat-rolled market hit a soft patch this fall—one that will likely continue at least through the end of the year. How quickly it firms up depends on the rate of growth in the U.S. economy and the effects of new steelmaking capacity coming on stream.
“Right now flat-rolled demand is stagnant, and we expect that to continue for the rest of the year,” says John Ferriola, chief operating officer of steelmaking operations at Nucor, Charlotte, N.C. “We don’t see it getting any better or any worse.”
Demand for flat-rolled steel actually strengthened during the summer, but then fell sharply in mid-September, says Keith Busse, chairman and chief executive officer of Steel Dynamics Inc., Butler, Ind.
It is now going through a negative “minicycle” that could last about six months, says Tom Marchak, vice president commercial for Severstal North America, Dearborn, Mich. “Starting in late January, we should start to see improvement,” he predicts.
As demand fell, so did prices. After declining from a peak of about $717 a ton in April to $581 a ton in August, prices for hot-rolled sheet rose again to nearly $620 a ton in September before falling back to $560 a ton in late October, reports Amy Bennett, senior steel analyst for Metal Bulletin Research. Much of that volatility has to do with the fluctuating cost of scrap and other steelmaking raw materials, she notes. “When raw material prices were up, the mills used it as an excuse to raise their prices. Now that raw material prices are down again, steel buyers are saying it is their turn and that prices should go down.”
The economy’s still the culprit
Analysts, mill and service center executives say steel’s recent softness is a symptom of the general malaise in the marketplace. While, technically, the recession is over, GDP growth has remained very low and at times could even dip into negative territory, says Josh Spoores, marketing manager for Majestic Steel USA Inc., Cleveland, and author of The Spoores Report.
“Historically, it takes GDP growth rates of over 3 percent for steel consumption to rise. More than two years after the onset of this economic crisis, the economy continues to sputter with less than 2 percent GDP growth, and with unemployment and underemployment stuck at alarming levels,” says Daniel DiMicco, Nucor chairman, president and chief executive officer.
Further complicating matters, credit is very tight and could remain restrictive until at least the middle of next year, says Richard McLaughlin, managing director of Hatch Beddows, Pittsburgh.
“We aren’t really in a recovery,” maintains Nick Sowar, global steel leader for Deloitte & Touche LLP, Cincinnati. “We are somewhere between moving forward and a recession.”
Charles Bradford, a partner with the New York-based Affiliated Research Group, sees it differently. He says the market is in the early stages of recovery, but from a financial rather than a more traditional recession. “In a standard, demand-driven recession, once you work down inventories you are okay. But in a financial recovery, there is no incentive to hire people. Manufacturers don’t need more workers. They are hoarding cash. Because of that, it will take more time to recover.”
Jim Barnett, president of both Grand Steel Products Inc., Wixom, Mich., and the Association of Steel Distributors, believes that both the U.S. economy and the flat-rolled steel market, while moving very slowly, are heading in an upward direction. That view is supported by recent ASD polls, which show that distributors generally dismiss the idea of a double-dip and feel the market will eventually right itself. “I don’t think we are in a new normal,” Barnett says. “We went through a tremendous economic hit and we are just now coming out of it.”
“There is a lot of uncertainty out there,” says Thomas Modrowski, chief executive officer of Chicago-based Esmark Steel Group. “Many people don’t understand what the new health care legislation will mean, what will happen to the Bush tax credits and, in general, what is happening in Washington.”
“Customers are keeping their cards close to the chest and require very short lead times,” adds Patrick Murley, chief executive officer of New Star Metals Inc., Lombard, Ill. “Their expectations about their businesses are very uncertain.”
Steel’s on the mend
Overall, the light carbon flat-roll market, excluding discrete plate, is shaping up to reach about 52 million tons in 2010, estimates Paul Lowrey, managing director of Pittsburgh-based Steel Research Associates. “While this will be 35 percent higher from the dreadful environment in 2009, it will still be 25 percent lower than the ‘old normal’ of 70 million tons,” the 10-year average for the period 1998-2007, he says.
Recovery, especially earlier this year, was driven by automotive production, as well as inventory replenishment, he says. Any rebound in construction activity, either residential or nonresidential, has been noticeably lacking.
Automotive may be losing some steam, as sales have moderated in recent months. MBR’s Bennett notes that auto sales have not picked up this fall as they normally do after the summer slowdown.
Busse blames some of that on the auto industry itself. “I believe that the consuming public would purchase autos at a 12.5 million annual rate if they could, but the automakers are only willing to produce vehicles at an 11.5 million rate because they are skittish. Because of that, dealerships can’t get enough vehicles in their showrooms. Inventories are very lean. I think the automotive industry could do better.”
Lowrey predicts automakers will produce 11.8 million vehicles this year in North America, rising to 12.5 million in 2011. That’s a big improvement from the 8.6 million produced in 2009, but still well below the “old normal” of 16 million just a few years ago.
Experts say “yellow goods,” such as agricultural, mining and construction equipment, as well as fabricated goods and energy-related products, are experiencing relatively strong demand. Construction-related steel sales continue to suffer, however.
In fact, the nonresidential construction market is weaker than it was a year ago, says David Hannah, chairman and chief executive officer of Reliance Steel & Aluminum Co. in Los Angeles, “and I don’t think that it will see any meaningful improvement until 2012 or so.”
One very dim light at the end of the tunnel is the American Institute of Architects’ architecture billings index, which reflects construction spending nine to 12 months into the future. The index inched up in September for the fourth consecutive month to 50.4, topping the 50 percent threshold that indicates a growing market for the first time since January 2008.
“This is certainly encouraging news, but we will need to see consistent improvement over the next few months in order to feel comfortable about the state of the design and construction industry,” says Kermit Baker, AIA’s chief economist. Many obstacles still stand in the way of an accelerated recovery in construction spending, he adds.
Another positive indicator for the construction market comes from the housing side, with the National Association of Home Builders reporting an increase in builder confidence in October—the first increase in its NAHB/Wells Fargo housing market index in the past five months. “However, because most builders still have no access to credit for building homes, there is real concern we will not be able to meet the pent-up demand when consumers are ready to get back to the market. This problem threatens to severely slow the housing and economic recovery,” says Bob Jones, NAHB chairman.
Lowrey estimates the nonresidential construction market will fall to 700 million square feet this year, down from 800 million square feet in 2009 and less than half the “old normal” of 1.6 billion square feet. Housing starts should stay flat compared with last year at about 600,000 units, but down sharply from the “old normal” of 1.7 million units.
Service centers right-size inventories
“Inventories throughout the industry are in fine shape,” says Reliance’s Hannah. The Metals Service Center Institute, Rolling Meadows, Ill., estimated U.S. steel inventories at 2.4 months of supply at the end of September.
Ron Sardaro, senior vice president of Metalwest LLC, Brighton, Colo., says inventory levels have trended lower than historical averages as fear of devaluation from downward price momentum has kept buyers cautious.
Flat-rolled inventories at service centers have increased in the last eight to nine months, Spoores notes, but only to match demand. “Service centers remember how they got burned in 2008 and have gotten away from the cycle of inventory building and destocking. For the most part they just buy what they need.”
Nucor is seeing increased quoting activity from service centers for large buys, Ferriola says. “That could mean we are at the bottom of the cycle.” Likewise, Severstal has seen an uptick in inquiries, which could lead to actual buys as soon as November or December, Marchak says.
One advantage of the current low inventory level is that any pickup in orders will have an immediate effect throughout the supply chain. In fact, service centers’ months on hand could dip below 2.0 months if there is any appreciable demand increase, says Ladd Hall, executive vice president in charge of Nucor’s flat-rolled group. That is not likely to happen this year, he adds.
Mills attempted two rounds of carbon steel price increases earlier this year, at $40 per ton each, prompting some prebuying by service centers, “but it does not appear it was done to an extreme,” Sardaro says. “Prices again are coming under pressure. There seems to be a basic belief that price increases attributed to raw material price escalation would be trumped by the poor demand environment.”
MBR’s Bennett says some modest hedge buying did cause service centers’ flat-rolled inventories to increase slightly in September after declining a bit in August. Shipments, however, also fell 1.4 percent for the month. After the first round of price increases went partly through, the second round was met by strong resistance. Since then steel prices have been sliding.
“We have definitely lost more than we gained,” says SDI’s Busse. “The only good thing is that resource costs also backed up, so we haven’t lost profit margin.”
McLaughlin at Hatch Beddows does not expect further fallbacks in flat-rolled prices, especially with the idling of some blast furnaces. Among them are furnaces at Severstal North America’s mill in Sparrows Point, Md., and at U.S. Steel’s mill in Hamilton, Ont.
The big question on many minds is what will happen as new flat-rolled capacity hits the market. “If additional capacity comes on stream and demand remains stagnant, it will create a pricing challenge,” Ferriola says.
All told, steelmakers have announced plans to add another seven million tons of annual capacity over the next two years, Lowrey says. This does not include the new, 4.9-million-ton ThyssenKrupp Steel USA LLC facility now ramping up in Calvert, Ala. (see related article on page 26).
Among mill additions is a 1.7-million-ton expansion at Severstal Columbus (formerly known as SeverCorr), in Columbus, Miss., and a 1-million-ton reheat furnace at California Steel Industries, Fontana, Calif. SDI may also go ahead with plans for a new flat-roll mill, pending board approval.
Notably, the added capacity of the giant new ThyssenKrupp mill has raised some concerns about the potential for oversupplying a weak market. “It will take some time before ThyssenKrupp is running at full capacity, and hopefully market conditions will improve by then,” McLaughlin says. “The same is true of the new capacity that Severstal North America is bringing on,” with its Phase II expansion at Severstal Columbus. Severstal is also adding a pickle line, tandem cold mill and an exposed hot-dip galvanized line in its Dearborn, Mich., plant.
For the most part, the flat-rolled capacity additions were planned and their construction started prior to the downturn, Lowrey notes. Nevertheless, they could push the industry’s current operating rate of 67.2 percent even lower. “I believe the new capacity will be the tipping point,” he says. “Something has to give.” Marchak believes industry capacity utilization could drop as low as 63 percent before it finds a floor, probably in December.
Both mills and distributors expect flat-roll sales to continue improving in 2011, “but it will continue to be choppy,” says Murley at New Star Metals. “Not every day will feel like a recovery. Some days will seem like one step forward and two back.” 2012 remains a wild card, Marchak says. n