Recovery Builds Momentum
Despite all the persistent economic doom and gloom, makers of steel and aluminum reported a universally strong first half, in their second-quarter conference calls with analysts and investors.
Compiled by the Staff of Metal Center News
Steelmaker Reports Rising Sales, Income
AK Steel reported second-quarter net income of $33.1 million, an increase over the second quarter of 2010 and the previous quarter. The West Chester, Ohio-based steelmaker reported net income of $26.7 million during the same period of 2010, a 23.6 percent increase.
Net sales for the quarter totaled $1.8 billion on shipments of 1.50 million tons. Both totals were improvements on the $1.6 billion in sales of 1.45 million tons in the same period of 2010.
For the first six months of the year, AK Steel reported net income of $41.8 million. Net sales for the first half totaled $3.37 million, up substantially from the $3.0 million reported during the same period of 2010. Shipments for the first half of 2011 totaled 2.9 million tons compared to 2.8 million in the first half of 2010.
The company said its average selling price for the second quarter of 2011 was $1,185 per ton, a 7 percent increase over the $1,109 per ton in the first quarter of 2011, and about 8 percent higher than the $1,101 per ton reported for the second quarter of 2010.
“AK Steel’s second-quarter results represent another quarter of solid progress as we continue along the road to recovery in 2011,” James L. Wainscott, chairman, president and CEO told investors and analysts during the company’s second-quarter conference call. “In fact, despite experiencing much higher iron ore prices than anticipated, we achieved our best quarter in the past six quarters in terms of shipments, operating profit, net income and earnings per share.”
AK Steel said it expects shipments in the third quarter of 2011 to be between 1.40 and 1.45 million tons. The company anticipates that its average per-ton selling price will be about 1 percent lower and that raw material costs will be higher than it experienced for the second quarter of 2011. As a result, the company expects to generate an operating profit of approximately $15 per ton for the third quarter of 2011.
The outlook excludes the financial effects of the incident involving an electric steelmaking furnace at the Butler Works that was damaged at the start of July. “Following an outstanding startup period, the new EAF experienced a breakout of molten metal on the first of July. Most importantly, no one was injured as a result of this incident,” said Wainscott. Following repairs, the company expects the furnace to resume operations by the end of September.
Also during the quarter, the company shut down its Ashland coke plant. AK is procuring coke from third-party producers to fulfill short-term needs while still seeking a more permanent solution to its raw material sourcing.
“We have a great steel company, but our costs are too high, especially our steelmaking input costs,” Wainscott said. “That’s not an excuse, it’s a fact, and we’re working to remedy the situation.”
The company has been in talks with parties around the globe about taking an equity interest in iron ore properties or iron ore substitute ventures. Though progress has been made, Wainscott said, the company has not reached an agreement yet.
“It will begin to balance the scales, rather than be 100 percent in the spot market, or 100 percent ownership. There’s probably a percentage somewhere around the middle we’ll move toward,” he said.
Among its chief markets, the company continues to see strength from its automotive customers, who have mostly worked through the supply disruptions caused by the earthquake in Japan and are returning to more normal production schedules. Auto inventories remain in good shape, Wainscott said.
The same can be said about stocks at the distributor level. Historically, carbon flat-rolled inventories averaged 2.4 months of supply, but that figure was down to 2.0 months on hand at the end of June, according to MSCI numbers.
“It’s fair to say service center buying activity has moderated somewhat, particularly late in the second quarter, as buyers have settled into a cautious buying mode. With short lead times available, service centers are simply buying what they need, and only when they need it, no more, no less,” Wainscott said.
Aluminum Giant Sets Quarterly Records
Alcoa’s second-quarter income from continuing operations totaled $326 million—a jump of 138 percent compared to the year-ago quarter and up 6 percent from the previous quarter. The New York-based aluminum giant reported second-quarter revenue of $6.6 billion, up 27 percent from the year-ago quarter and 11 percent from first-quarter 2011.
“We turned in another strong quarter, with solid revenue and earnings growth,” said Alcoa Chairman and CEO Klaus Kleinfeld. “Across the company, our team is delivering outstanding results through our constant focus on execution and by reinventing what customers believe is possible through innovation.”
The sequential increase in income from continuing operations was driven by higher quarterly revenue (up 11 percent), higher alumina shipments (up 8 percent) and higher realized pricing for both alumina (up 7 percent) and aluminum (up 6 percent). This was somewhat offset by a weaker U.S. dollar, along with higher energy and materials costs, the company said.
Both Alcoa’s Flat-Rolled Products and Engineered Products and Solutions segments turned in record quarterly performances. Flat-Rolled Products set a record for adjusted EBITDA at $193 million, while Engineered Products and Solutions’ 19 percent adjusted EBITDA margin was an all-time quarterly best, the company said.
For the first half of 2011, Alcoa’s revenues totaled $12.5 billion, up 25 percent over the first half of 2010. Income from continuing operations in the first half of 2011 hit $635 million, compared to a loss from continuing operations of $57 million in the first half of 2010. Net income in the first half of 2011 was $630 million.
Looking ahead, Alcoa projects continued growth in all major end markets on a global basis, including aerospace (7 percent), automotive (4-8 percent), commercial transportation (7-12 percent), packaging (2-3 percent), building and construction (1-3 percent), and industrial gas turbines (5-10 percent). For the year, Alcoa projects aluminum demand to grow 12 percent on top of the 13 percent growth seen in 2010.
“Although the economic recovery is uneven, the overall outlook for Alcoa, and for aluminum, remains positive. Demand for aluminum continues to rise and so does growth in our major markets. These factors support our projection that aluminum demand will grow 12 percent this year and will double by 2020,” Kleinfeld said.
2Q Sales Increase 28 Percent
Allegheny Technologies Inc., Pittsburgh, reported net income for second-quarter 2011 of $64.0 million on sales of $1.35 billion, up significantly from $36.4 million on sales of $1.05 billion reported in the same period last year. Some of the return is attributable to ATI’s acquisition of Ladish Co. Inc. in May.
For the six months ended June 30, ATI’s net income totaled $120.3 million on sales of $2.58 billion. This compares to net income of $59.9 million on sales of $1.95 billion in the prior-year period.
“We continue to see strong secular growth in our key global markets,” said Rich Harshman, chairman, president and chief executive officer. “In the second quarter of 2011, sales increased 28 percent compared to the same period in 2010, and increased 10 percent compared to the first quarter of 2011.”
ATI’s total titanium mill product shipments in the second quarter were 12.1 million pounds, an increase of nearly 24 percent compared to the second quarter of 2010. Titanium shipments in the Flat-Rolled Products segment were 4.9 million pounds, an increase of 90 percent. Total titanium mill product shipments were over 23.5 million pounds for the first six months of 2011, a 24 percent increase compared to the first six months of 2010.
In the company’s High Performance Metals segment, shipments of nickel-based alloy and specialty alloy mill products increased 31 percent. In the Flat-Rolled Products segment, shipments of high-value products increased 15 percent.
“Operating profit improved significantly in our High Performance Metals and Flat-Rolled Products segments,” Harshman said. “Flat-Rolled Products segment operating profit was over 10 percent of sales, reflecting a strong high-value product mix, which offset soft demand and low base prices for our standard stainless sheet and plate products. The supply chain for our standard stainless products reduced their inventories as surcharges declined and U.S. GDP weakened in the second quarter.”
The company reported good progress in integrating ATI Ladish since completing the transaction on May 9. “We are pleased with customer reaction to the combination of ATI Ladish’s operations with ATI’s High Performance Metals businesses. ATI is now a fully integrated supplier, from raw material (for titanium) and melt (for other specialty alloy systems) through highly engineered finished components. This provides enhanced value to our customers and expands ATI’s profitable growth opportunities,” Harshman said.
ATI expects to begin construction of a Flat-Rolled Products segment hot-rolling and processing facility later this summer.
“The on-going debate about the U.S. budget deficits and debt ceiling, combined with the European debt crisis, is having a negative impact on consumer confidence. In spite of these challenges, we remain optimistic about the current demand and the secular growth opportunities over the next several years in our key diversified global markets,” Harshman said.
Strong First-Half Earnings in the Books
ArcelorMittal, Luxembourg, the world’s largest steel company, reported strong earnings for the second quarter and the first half of the year.
Second-quarter EBITDA increased by 21.5 percent to $3.4 billion, compared to the same period in 2010. For the first six months of this year, EBITDA grew by 32.9 percent to $6.0 billion, the company reported.
Steel shipments in the second quarter were flat year on year at about 22.2 million metric tons, but the earnings per ton were 22 percent higher than second quarter 2010.
“As expected, the company delivered a strong performance in the second quarter, underpinned by higher steel selling prices. Although the third quarter will experience some seasonal impact, we do not expect this to be as pronounced as last year. Overall, the group’s performance in the second half of 2011 should compare favorably with the second half of 2010,” said Lakshmi N. Mittal, chairman and CEO of ArcelorMittal.
ArcelorMittal’s net income for the six months ended June 30 totaled $2.6 billion, up from $2.3 billion in first-half 2010. Total steel shipments for the six months hit 44.1 million metric tons, up from 43.3 million tons in the same period last year.
Sales for the six months ended June 30 increased 25.9 percent to $47.3 billion, up from the $37.6 billion in first-half 2010. Sales were higher during the first half of 2011, compared to the first half of 2010, primarily due to higher average steel selling prices, up 22.7 percent, and slightly higher steel volumes, up 1.9 percent.
ArcelorMittal also realized a gain of $461 million from the spinoff of its stainless steel operations in the first quarter into a separate company called Aperam.
Strong Finish to Fiscal Year
Carpenter Technology Corp., Wyomissing, Pa., reported net income attributable to Carpenter (excluding the Latrobe Specialty Metals acquisition) of $25.5 million for the quarter ended June 30, up fourfold from the $5.9 million for the same quarter last year.
“We finished the year with another strong quarter of operating performance,” said William A. Wulfsohn, president and chief executive officer. “Revenue growth is outpacing volume gains as we continue driving our mix management and pricing initiatives. These actions, combined with our cost focus, are translating top-line growth momentum to our bottom line.
“Over the past year, we have seen strong, sustained demand for our products. As a result, we are actively seeking ways to expand our capacity to facilitate further growth. We have announced a facility expansion in Reading targeting premium remelt, forge finishing and annealing operations and we are proceeding with capacity investments in our Dynamet titanium wire fastener and Powder Products businesses. Our recent agreement to acquire Latrobe Specialty Metals, while providing many strategic benefits, will also help expand our capacity and facilitate further growth,” he added.
Carpenter’s net sales for the fourth quarter totaled $483.6 million, up 33 percent from the prior year. Total pounds sold in the fourth quarter were 12 percent higher than the fiscal year 2010 fourth quarter. Gross profit was $77.0 million compared with $43.7 million in the fiscal year 2010 fourth quarter.
For the full year, Carpenter’s net income was $71.0 million, up from 2010 net income of $2.1 million.
Carpenter’s aerospace market sales were $194.1 million in the fourth quarter, up 24 percent compared with the same period a year ago. Aerospace results reflect continuing strong demand for engine components driven by high build rates.
Industrial market sales were $105.8 million, up 24 percent compared with the fourth quarter of fiscal year 2010. The year-over-year results reflect the impact of mix management and pricing actions, as well as demand growth for higher value materials for fittings. In addition, powder metal sales used for tool steel products were up significantly.
Energy market sales of $70.5 million increased 189 percent from the fourth quarter a year earlier. A significant increase in demand for materials used in industrial gas turbines drove the growth and positive mix in this segment. The oil and gas segment continued to grow due to increases in directional drilling activity, the Amega West acquisition and higher pricing. Strong growth trends should continue in energy through fiscal year 2012, the company predicted.
Automotive market sales were $37.7 million, an increase of 21 percent from a year earlier. The revenue growth is attributable to mix management efforts that caused increased participation in higher value turbo charger and fuel system components, with a corresponding reduction in lower value products. These efforts are expected to better position Carpenter to participate in the trend toward premium stainless and high-temp alloys used in the next generation technologies that support higher fuel economy.
“Demand growth remains strong in our strategic end markets,” said Wulfsohn. “Several of our largest customers are seeking to expand and extend our supply contracts. Carpenter revenue, excluding Latrobe, is still expected to grow by more than 10 percent in fiscal year 2012.
“We are also excited about the Latrobe acquisition as it plays an important role in Carpenter’s growth strategy. Latrobe has a well-positioned business portfolio that is also benefiting from strong customer demand. We expect the combined business will enable production efficiencies that will result in expanded production capacity The combined entities also have a larger critical mass to justify the next major increment of premium capacity expansion.”
Long-Term Prospects Positive
Kaiser Aluminum Corp., Foothill Ranch, Calif. reported net income of $5 million for second-quarter 2011, compared to $11 million in the first quarter of 2011 and no net earnings for the prior-year second quarter.
Value-added revenue of $160 million for the second quarter of 2011 was comparable to the first quarter and increased $12 million or 8 percent from the prior-year second quarter reflecting the favorable impact of recent acquisitions and improving demand.
“We are pleased with the improvement and progress we made during the quarter. Solid demand across our end-market applications, combined with the benefit of our recent acquisitions, continued to drive higher sales and higher adjusted EBITDA,” said Jack A. Hockema, president, CEO and chairman.
“As we look to the future, we are very optimistic about our prospects for growth. We have a strong aerospace order book and are well positioned to meet the growing demand with previous investments in plate capacity and with the recently announced expansion of our Kaiser Alexco aerospace extrusion facility. In addition, the ramp-up of our Kalamazoo, Mich., extrusion facility continues to gain momentum, and we expect that EBITDA margins will continue to improve as we realize price increases and improving cost benefits from Kalamazoo,” Hockema added.
Profits Jump Despite Market Conditions
Nucor Corp., Charlotte, N.C., reported consolidated net earnings of $299.8 million for the second quarter of 2011—an increase of 88 percent over the previous quarter and 229 percent compared with the same quarter last year. These increases were achieved despite the rebalancing by customers of supply chain inventories, the impact on the manufacturing sector of the devastating Japanese earthquake and tsunami, and the lost sales, production and shipments due to the weather-related power outages and historic river flooding in North America, noted company officials.
For the first half of the year, Nucor reported consolidated net earnings of $459.6 million, up 276 percent from $122.0 million in the first half of 2010.
Nucor’s consolidated net sales increased to $5.11 billion in the second quarter of 2011, up 6 percent from $4.83 billion in the first quarter of 2011 and 22 percent from $4.20 billion in the second quarter of 2010. The average sales price per ton increased 13 percent from the first quarter of 2011 and 21 percent from the second quarter of 2010.
Nucor’s tons shipped to outside customers totaled 5,598,000 in the second quarter, a decrease of 6 percent from the first quarter, but a 1 percent increase from the year-ago quarter. Total second-quarter steel mill shipments increased 6 percent over the second quarter of 2010, but were down 6 percent from the first quarter of 2011. Second-quarter downstream steel products shipments to outside customers increased 3 percent over the second quarter of 2010 and 12 percent over the first quarter of 2011.
In the first half of 2011, Nucor’s consolidated net sales increased 27 percent to $9.94 billion, compared with $7.85 billion in last year’s first half. Average sales price per ton increased 21 percent, while total tons shipped to outside customers increased 5 percent over the first half of 2010.
The average scrap and scrap substitute cost per ton used in the second quarter of 2011 was $444, an increase of 5 percent over the $424 in the first quarter of 2011 and an increase of 19 percent over the $373 in the second quarter of 2010. The average scrap and scrap substitute cost per ton used in the first half of 2011 was $433, an increase of 26 percent over the $345 in the first half of 2010.
Overall operating rates at Nucor steel mills in the second quarter declined to 71 percent from 80 percent in the previous quarter, but were unchanged from last year’s second quarter. Steel mill utilization increased from 72 percent in the first half of 2010 to 75 percent in the first half of 2011. Second-quarter utilization rates were negatively affected by downtime caused by weather-related events and resulting power outages, company officials said.
Nucor has begun construction, primarily infrastructure, on its new 2.5-million-ton direct reduced iron facility in Louisiana. The management team is largely in place and purchase contracts have been issued for most of the major equipment. The DRI plant is scheduled for startup in mid-2013.
“As we expected, our profitability significantly improved from the first quarter to the second quarter as price increases for steel mill products caught up with higher raw material costs. Demand in end markets such as automotive, heavy equipment, energy and general manufacturing continues to incrementally improve, benefiting special bar quality, sheet and plate products,” said Nucor Chairman and CEO Dan DiMicco.
“However, new domestic supply in the sheet market and increases in imports of sheet steel have begun to put significant pressure on prices and margins. Unless the supply/demand/pricing dynamics reverse themselves, the sheet market will be the most challenging for the industry in the third quarter,” he added.
While not robust, markets associated with residential and nonresidential construction are stable and slowly improving. “Despite the challenges throughout this downturn, our combined construction-related businesses (steel mills and downstream facilities) have remained strong profit contributors,” DiMicco said.
Net Income Doubles in Second Quarter
Steel Dynamics Inc., Fort Wayne, Ind., reported net income of $99 million during the second quarter, a jump of more than 200 percent from the same period in 2010. The steelmaker reported net income of $49 million during the same period a year ago.
Net sales for the quarter totaled $2.1 billion, an increase of 31.3 percent from the same quarter in 2010. Net sales in the first quarter totaled $2.0 billion, though net income was slightly higher at $106 million.
“Quarter over quarter, operational earnings were essentially the same, although from different sources,” said Keith Busse, chairman and CEO. “Operating income from our steel operations increased $21 million, but was offset by a decrease in our metals recycling and ferrous resources operations of $36 million.”
SDI’s second-quarter 2011 steel shipments totaled 1.5 million tons, 15 percent higher than the second quarter of 2010 and nearly the same as the first quarter of 2011. The average external steel selling price per ton shipped in the second quarter was $947, an increase of $57 per ton compared with the previous quarter and $118 per ton compared to the same quarter last year.
Flat-rolled division production of hot-band during the quarter was the highest ever for SDI. More than 750,000 tons of hot-band were produced, supporting downstream galvanizing and painting operations.
“I would guess steel volume will be off a little because of the June snag in order entry, at least on flat-roll. We’re expecting steel production and shipments to sag somewhat in the third quarter. With service centers not having a lot of inventory, there will be some periods of unevenness in order entry, but I believe we’ll have a better fourth quarter,” Busse said.
Steel pricing has softened recently and may be down as much as $60 in the third quarter, Busse said, but he expects a comparable bounce back in the fourth quarter.
So far, SDI has not seen a significant effect on the market from the planned activity of RG Steel, ThyssenKrupp’s Alabama facility or Severstal’s Mississippi operation. “We don’t see it as a downward pressure. It’s more talk than impact at the moment,” Busse said.
SDI continues to proceed cautiously in its plans to construct another flat-rolled mill, likely somewhere in the South, to service the pipe and tube market. “If you took the board’s temperature, it’s improving, becoming more positive on the project. It’s affordable, still in the billion dollar range, and it won’t come on line until 2014, which ought to be an entirely different economic climate. I think the board’s concern is more about where the nation is heading and what the barriers are to continued expansion of our economy,” Busse said.
“Looking ahead to the second half of 2011,” he concluded, “we believe continued slow improvement in the U.S. economy is possible and anticipate continued, yet uneven, buying activity as service center inventory levels remain relatively low and consumption by such sectors as automotive, transportation, energy, industrial, agricultural and construction equipment remains steady to growing slightly. Barring any unforeseen changes in the economic climate, the third quarter should be fairly solid.”
Posts Record 2Q Earnings
The Timken Company, Canton, Ohio, reported sales of $1.3 billion in the second quarter of 2011, an increase of 31 percent over the same period a year ago. The increase primarily reflects growing demand in the company’s broad industrial markets, as well as favorable effects from pricing, material surcharges and currency.
The company’s second-quarter income from continuing operations increased 49 percent to $121.5, up from $81.4 million a year ago. Improved demand, mix, surcharges and pricing more than offset higher raw material and logistics costs, as well as increased selling and administrative costs.
“Timken’s strategy is working. We’re benefitting from an enhanced portfolio, executing well and have positioned the company to capitalize on attractive global markets,” said James W. Griffith, Timken president and chief executive officer. “We are on pace to achieve record sales and earnings for the full year.”
Among recent developments, the company completed a $200 million acquisition of Philadelphia Gear and announced plans to establish a Wind Energy Research and Development Center for advanced bearing systems in large wind turbines.
For the first half of 2011, Timken posted sales of $2.6 billion, up 34 percent from the same period in 2010. Stronger demand across industrial sectors drove the increase, along with favorable pricing, surcharges and currency effects.
Sales for the company’s steel segment, including inter-segment sales, totaled $505.1 million in the second quarter, an increase of 49 percent from $338.1 million for the same period last year. Stronger demand, particularly in the oil and gas and industrial market sectors, and surcharges contributed to the improvement. Second-quarter earnings totaled $72.1 million, up 68 percent the same period a year ago.
For the first six months of 2011, steel segment sales were $986.6 million, up 62 percent from the first half of last year. Earnings for the first half totaled $132.1 million, or 13.4 percent of sales, compared with $62.9 million, or 10.3 percent of sales, for the same period a year ago.
Timken now expects a full-year sales increase of 25 to 30 percent in 2011 over 2010. The revised outlook reflects the company’s second-quarter performance and stronger-than-expected demand in its steel and process industries segments, as well as the benefit expected from the Philadelphia Gear acquisition.
First Profitable Quarter in Two Years
United States Steel Corp., Pittsburgh, reported second-quarter net income of $222 million, its first profitable quarter since 2009. The company lost $86 million in the first quarter and $25 million in the same quarter of 2010.
The company reported second-quarter 2011 income from operations of $300 million, compared to a loss from operations of $91 million in the first quarter and operating income of $198 million in the second quarter of 2010.
“Our operating results improved significantly from the first quarter, driven primarily by higher average realized prices and stable raw materials costs in our Flat-Rolled segment,” said U.S. Steel Chairman and CEO John P. Surma. “U.S. Steel Europe segment results were slightly lower, reflecting significantly lower shipments and capacity utilization and increased raw materials costs, partially offset by higher average realized prices. Tubular segment results were in line with the first quarter of 2011.”
Flat-rolled income from operations improved significantly from the first quarter of 2011 to $95 per ton. The increase was driven largely by an $83 per ton increase in average realized prices, as the company realized the benefits from increases in spot and contract prices. Shipments were in line with the first quarter and costs for raw materials remained stable, reflecting iron ore, coal and coke positions. While the company continues to operate Hamilton Works’ coke batteries, the steelmaking and finishing facilities remained idled throughout the quarter due to an ongoing labor dispute.
U.S. Steel’s raw steel capability utilization rate in the second quarter was 81 percent for the Flat-Rolled segment. Excluding Hamilton Works, the raw steel capability utilization was 90 percent for the second quarter.
Results for the European operations were lower than the first quarter of 2011. Shipments decreased by 21 percent to 1.1 million tons, while average euro-based transaction prices improved due to increased contract proceeds and higher spot market prices early in the quarter. Raw materials costs increased during the second quarter, reflecting higher coal and iron ore costs. “We continue to face challenges in Serbia, including complete reliance on purchased coke, a less favorable product mix, a slower recovery in the Balkan region and an increase in lower-priced imports,” Surma said.
Tubular results were in line with the first quarter of 2011. Average realized prices increased by 8 percent to $1,565 per ton as price increases took effect and product mix improved. Increases in average realized prices were primarily offset by higher costs for hot-rolled bands, supplied by the company’s Flat-rolled segment, and purchased rounds.
“The United States and Europe continue to face an uneven economic recovery. The continuing fiscal uncertainty in the U.S. and Europe is not helping the situation. Reflecting the effects of a slowing economy, we expect to report an overall lower operating profit in the third quarter. However, we expect significant improvement in our Tubular operating income compared to the second quarter of 2011,” Surma said.
The company expects flat-rolled results for the third quarter to decline compared to second-quarter 2011, reflecting lower average realized prices on monthly index-based contracts and spot market business as increasing capacity and imports have placed pressure on current transaction prices.
Surma does see some hope for a turnaround in the pricing direction for steel. “There doesn’t seem to be a great buildup of inventory. If overall demand is in a relatively good place, that [inflection point] may be in front of us not too far away.”
Like others in the industry, U.S. Steel remains concerned about rising raw material costs. Surma told analysts the company is exploring the use of direct reduced iron to offset the significant increases in metallurgical coal and coke.
“One option we’re evaluating is producing DRI, using our own iron ore and competitively priced natural gas. DRI produced using our own iron ore could be used to improve our blast furnace yields and could be a cost-effective substitute for scrap in our steel shops or in an electric arc furnace, if we were to supplement our integrated production routes with this type of facility. An EAF could also enhance operating flexibility over broader range of market conditions,” Surma said.