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5-2011 First-Quarter Report & Outlook: Mills
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2011 Starts Off Strong 

In their first-quarter conference calls with analysts and investors, executives from the industry’s leading publicly held mills and service centers all reported big improvement in sales and earnings as the economy gained momentum.

AK Steel
Strong Start in First Quarter
AK Steel, West Chester, Ohio, reported net income of $8.7 million for the first quarter of 2011, four times the $1.9 million returned in the first quarter of 2010. Net sales for the first quarter totaled $1.58 billion on shipments of 1,423,100 tons, up 12 percent from net sales of $1.41 billion on shipments of 1,385,800 tons for the year-ago first quarter. The company’s average selling price for the first quarter was $1,109 per ton, 9 percent higher than both the first quarter and fourth quarter of 2010.

The company reported an operating profit of $19.5 million, or $14 per ton, for the first quarter of 2011, compared to an operating loss of $154.6 million, or $114 per ton, for the fourth quarter of 2010.

“AK Steel and our employees again found a way to win by adhering to our core principles in the face of continued economic headwinds,” said James L. Wainscott, chairman, president and CEO. “Despite slightly lower shipments than we estimated, and continued high raw material costs, we improved operating income by more than $174 million compared to the fourth quarter of 2010.”

AK Steel forecasts shipments in the second quarter of 2011 of 1.50 million to 1.55 million tons, reflecting a strong increase over first-quarter 2011 shipments. It expects its second-quarter average per-ton selling price to be about 7 percent higher compared to the first quarter, resulting in an operating profit of approximately $65 per ton.

Alcoa
Excellent First Quarter for Aluminum Maker
Alcoa’s recovery continued through the first quarter as the New York-based aluminum company reported net income of $309 million, up 20 percent from the previous quarter. The company posted a net loss of $201 million during the same quarter in 2010.

First-quarter income from continuing operations was the highest for the company since before the recession in the second quarter of 2008. Similarly, the company’s adjusted EBITDA of $955 million was the best quarterly performance since third-quarter 2008.

“It was an excellent first quarter as we improved profitability across all business segments, set profit records in our midstream and downstream businesses and grew substantially,” Alcoa Chairman and CEO Klaus Kleinfeld told investors and analysts during the company’s quarterly conference call.  

Revenue for first-quarter 2011 totaled $6.0 billion, an increase of 22 percent over first-quarter 2010 and up 5 percent compared to fourth-quarter 2010.

The improvement over fourth-quarter 2010 was driven by higher realized prices for alumina and aluminum and growing demand for aluminum products in major end markets, along with productivity improvements. These were offset somewhat by a weaker U.S. dollar, along with higher energy and materials costs.

Alcoa reaffirmed the company’s projection that global aluminum demand would grow 12 percent in 2011 on top of the 13 percent growth rate in 2010. “Our outlook for the rest of 2011 and beyond remains very positive due to the world’s growing population, increasing urbanization and aluminum’s advantages as a light, strong and recyclable material,” Kleinfeld said.

End markets showed continued revenue growth in the first quarter, including automotive, up 30 percent; aerospace, up 7 percent; packaging, up 14 percent; industrial products, up 13 percent; and commercial transportation, up 12 percent, compared to the previous quarter. Compared to first-quarter 2010, revenues were up 20 percent in aerospace, up 45 percent in packaging, up 26 percent in building and construction, and up 37 percent in commercial transportation.

Both the company’s Flat-Rolled Products and Engineered Products and Solutions segments turned in record performances for the quarter. Flat-Rolled Products’ adjusted EBITDA was a first-quarter record at $173 million. Engineered Products and Solutions set a record for highest-ever adjusted EDITDA margin at 18.4 percent.

Flat-Rolled Products revenue in the first quarter was $1.96 billion, up 32 percent year-over-year and 17 percent sequentially. Growth was driven by stronger pricing in North America and Europe, a better mix of products and higher volumes, somewhat offset by alloying cost pressure and rising regional premiums. Both Russia and China continue to see positive trends, with third-party volumes up approximately 60 percent in Russia and 90 percent in China, compared to first quarter 2010, company officials reported.

Engineered Products revenue in the first quarter totaled nearly $1.25 billion, up 16 percent year-over-year and 3 percent sequentially. Improvements were driven by volume and productivity improvements. 

Alcoa expects continued growth in all of its end markets, with auto, heavy truck and industrial gas turbines all up 5 to 10 percent in 2011. However, in North America, can packaging is expected to be flat and commercial building down 4 to 8 percent for the year.

“We expect aerospace to grow 7 percent in 2011, strongly driven by commercial aircraft demand. Boeing and Airbus have backlogs of six years,” Kleinfeld said.

Regional premiums will continue to remain high due to limited scrap availability, an issue that shows no signs of abating. “We’ve seen a pretty strong tightening in the scrap market. That’s one of the reasons we continue to see some people go away from scrap, because it’s just not available and they have to go with primary aluminum. It will continue to increase, particularly on the China side, which has a 20 percent recycled content target through 2020,” Kleinfeld added.

Allegheny Technologies
ATI Benefits from Strong Growth
in Key Titanium Markets
Allegheny Technologies Inc., Pittsburgh, reported net income for first-quarter 2011 of $56.3 million on sales of $1.23 billion, a threefold improvement from the $18.2 million in income in the year-ago quarter. 

“We continue to see 2011 marking the resumption of strong secular growth in our key global markets. We are off to a good start,” said L. Patrick Hassey, chairman and CEO in his recent report to investors. “In first-quarter 2011, sales increased 36 percent compared to the same period in 2010 and shipments for most of our products increased significantly.”

ATI’s shipments of titanium and titanium alloys increased 11 percent in the company’s High Performance Metals segment, while the Flat-Rolled Product segment saw a 52 percent increase to a record 4.7 million pounds.

“Our key global markets—aerospace and defense, oil and gas/chemical process, electrical energy and medical—remain strong,” Hassey said. “Orders from the aerospace market continue to strengthen. We believe we are at the beginning of a significant aerospace up cycle. Major OEMs are telling their supply chains to get ready for production increases to unprecedented build rates by 2013 for both legacy and next-generation aircraft.”

In the oil and gas/chemical process industries, ATI has won supply agreements for major projects including the largest desalination plant and sourgas pipelines ever to be built. The company is also closely watching the electrical energy market in Japan following the natural disaster that shut down the Fukushima Daiichi nuclear power plant. “We expect global demand for grain-oriented electrical steel may begin to improve as the electrical distribution grid in the affected area is rebuilt. We believe Japan will rely more on natural gas power generation in the short-term, which could positively impact ATI’s sales to the gas turbine market and to the markets for exploration, processing and transportation of liquefied natural gas,” Hassey said.

ATI forecasts higher base prices for most of its products, leading to revenue growth of 15 to 20 percent in 2011.

Carpenter Technology
Specialty Alloys Supplier Sees Progress
Carpenter Technology Corp., Wyomissing, Pa., reported net income for its third fiscal quarter ended March 31 totaling $28.5 million, up from $2.1 million reported in the same quarter last year.

“The business performed well this quarter as we are seeing progress from our growth and profit improvement strategies,” said William A. Wulfsohn, president and CEO. “In particular, there is now visible impact on our bottom line from our mix management and pricing actions. As we expected, our operating margin improved significantly, and we remain confident we will achieve our fiscal year goals for revenue growth and profit improvement.”

Carpenter’s net sales for the third quarter totaled $464.2 million, up 38 percent from the prior year. Total pounds sold in the third quarter were 16 percent higher than the fiscal year 2010 third quarter.

Reporting on specific markets, company officials said aerospace market sales were $195.7 million in the third quarter, up 30 percent compared with the same period a year ago. Aerospace results reflect continuing strong demand for engine components in support of high build rates. Industrial market sales were $103.6 million, up 42 percent compared with the third quarter of fiscal year 2010, reflecting demand growth for higher-value materials for fittings and semiconductor applications. Energy market sales of $53.9 million increased 136 percent from the third quarter a year earlier. This overall increase reflects the Amega West acquisition, sharply higher demand and price increases for materials used in oil and gas applications, and a broader product offering of high-value materials used in industrial gas turbines.

Consumer market sales were $40.7 million, an increase of 26 percent from the year-ago third quarter, as demand for higher-value materials used in sporting goods applications outpaced sales of lower-value materials used in housing. Automotive market sales were $37.2 million, an increase of 34 percent from a year earlier, as the company saw a payoff from its efforts aimed at increasing sales of higher-value turbo charger, engine fastener and fuel system components supporting new technologies. Its medical market sales were $33.1 million in the third quarter, up 10 percent from a year ago.

“We continue to see strong demand for our higher margin products, and are well positioned for significant growth in our key end markets of aerospace and energy. As demand continues to grow, we will need to increase our capacity further in downstream operations. We currently anticipate fiscal 2012 capital spending in the range of $150 million to $200 million,” Wulfsohn said.

Nucor
Minimill Returns to Profitability
During Strong First Quarter
Nucor Corp., Charlotte, N.C., reported net earnings of $159.8 million during the company’s first quarter, an increase of 416 percent over the same period in 2010. It was also a reversal of the company’s fourth quarter, when the minimill company reported a loss of $11.4 million.

“It was the ability to get the pricing to recoup the raw material costs sooner than expected that allowed us to have a strong quarter, and we fully anticipate that trend to continue as we go through the second quarter,” said Dan DiMicco, Nucor’s president, chairman and CEO.

Nucor’s first-quarter net sales increased 32 percent to $4.83 billion, compared with $3.65 billion in the first quarter of 2010, due to a 22 percent increase in the average sales price per ton and a 9 percent increase in total tons shipped to outside customers. Net sales increased 25 percent compared with the fourth quarter of 2010 due to a 12 percent increase in both total tons shipped to outside customers and in the average sales price per ton.

Overall operating rates at the company’s steel mills increased to approximately 80 percent in the first quarter, compared to 73 percent in the same quarter of 2010 and 68 percent in the previous quarter. Nucor’s operating rates also exceeded the overall U.S. average of 74 percent utilization.

“On the steelmaking side, the recovery continues to be slow and uneven between the industrial and energy sectors and the residential and nonresidential construction sectors. Steel buyers have shown more caution as market prices have escalated during the first quarter,” said John Ferriola, president and chief operating officer.

Supply in the sheet market has increased with recent blast furnace restarts and greater import offerings, though service center inventories remain relatively low, he said.

“We continue to see evidence of improvements in real demand in several markets important to Nucor. These include energy, heavy equipment, agriculture, truck trailers and bridge building markets,” Ferriola added.

One important end market for Nucor that remains weak is nonresidential construction, though company officials believe the bottom has been reached.

“The direction from here on will be up, but it won’t be a rapid increase through the remainder of this year. It will probably grow in 2012 at a greater pace than 2011, but speculating as to the relative strength is not appropriate,” DiMicco said.

Nucor officials noted an increase in imports, though they believe the overall environment is not conducive to heavy purchasing of foreign product. “Customers are buying just what they need and bringing it in just when they need it. In that kind of a circumstance, imports are a challenge for our customers because of the long lead times and the large volumes that are necessary for those orders,” Ferriola said. “While we are aware of the potential and we are watching it carefully, we feel confident we can react to any sharp increase in imports.”

In January, Nucor received an air quality permit from the Louisiana Department of Environmental Quality for the direct reduced iron making facility to be located in St. James Parish, La. The permit allows for the construction and operation of two plants with a combined annual DRI production of 5.5 million tons. Nucor broke ground on a 2.5-million-ton DRI facility in March. In addition to a second DRI facility, future plans for the Louisiana site may include a coke plant, blast furnace, pellet plant and steel mill.

Additionally, the company started a new heat-treat line at its Hertford County, N.C., facility and began accepting orders in February. Officials report activity has exceeded expectations in terms of both volume and grade development, with the operation already running at full capacity. That level of production wasn’t anticipated until the fourth quarter.

“This investment allows Hertford County to grow into more high-margin products. And it allows us to shift and improve the product mix allocation between our two plate mills and four sheet mills to improve margins at those facilities,” Ferriola said.

Steel Dynamics
SDI’s Net Income Climbs
64 Percent in First Quarter
Steel Dynamics Inc. reported first-quarter net income of $106 million, a 64 percent increase from the same period in 2010. The Fort Wayne, Ind.-based steelmaker’s improvements were even more dramatic compared to the previous quarter, when it reported net income of $7.8 million.

SDI posted first-quarter net sales of $2.0 billion, 25 percent better than the first quarter last year and a similar improvement on the $1.5 billion in sales during the previous quarter.

First-quarter 2011 steel shipments totaled 1.5 million tons, 4 percent higher than the first quarter of 2010 and 10 percent higher than the fourth quarter. The average steel selling price for the first quarter of $890 per ton was up $137 from the previous quarter and $154 from the same quarter last year.

SDI’s first-quarter flat-rolled shipments included 314,000 tons of hot-rolled coil, 85,000 tons of pickled and oiled, 48,000 tons of cold-rolled, 95,000 tons of hot-rolled galvanized, 52,000 tons of cold-rolled galvanized, 88,000 tons of painted product and 28,000 tons of Galvalume.

“Our first-quarter earnings were significantly higher than our fourth-quarter results based on both volumes and margins at our steel and metals recycling operations,” said Keith Busse, chairman and CEO. “These results were led by our sheet steel and SBQ bar operations.”

Busse said the company’s Engineered Bar Products and Flat-Roll divisions continue to operate at essentially full capacity. The company scheduled a 10-day outage at Engineered Bar in April for maintenance, which is unlikely to affect second-quarter shipments much. Sheet steel demand continued to be strong as the company entered the second quarter, Busse said.

“Unfortunately, the sustained weakness in the non-residential construction market remains a challenge for our structural and fabrication operations. Our commitment to rail as a complement to our structural operations remains strong, as first-quarter rail shipments were 31,000 tons, our highest quarterly volume so far. We are encouraged by our progress entering this market and plan to increase our participation throughout 2011,” Busse said.

Busse also noted that the price of steel has backtracked from its highs in the $900 per ton range to the mid $800s. “I don’t think it’s any big surprise the market has tempered a little bit. There’s good likelihood, as the economy continues to grow, that [price] could move forward somewhat,” he said.

At quarter’s end, SDI announced a joint venture with Spain’s LaFarga Group to construct a 180-million-pound copper bar mill. SDI will own 55 percent of the venture, which will be located in Allen County, Ind. Construction of the $40 million facility will begin this summer.

The mill will refine No. 2 copper scrap into electrical grade metal that will be continually cast and rolled into rod suitable for drawing down into very fine electrical wire. “There are some 20-plus plants operating worldwide utilizing this equipment, but currently none in the U.S. based on scrap. This partnership leverages OmniSource’s broad supply base for No. 2 copper scrap,” says Mark Millet, newly promoted president and chief operating officer of SDI.

Similar progress has not been made on SDI’s plans to construct another steel mill in the United States. The company has completed the engineering and market analysis phases, but has made no other decisions regarding the proposed facility. The plan is to construct a 1.7-million-ton mill with a broader product line to give the company a foothold in the heavy-wall pipe and tube market. “We think there’s a good opportunity in an economy that gains a head of steam,” Busse said. “There may be more to report later, but nothing new for now.”

Looking ahead in 2011, management at SDI remains optimistic. “We are seeing the continuation of improvements in the U.S. economy and still anticipate increased steel consumption throughout the year as sectors such as automotive, transportation, energy, industrial, agricultural and construction equipment maintain momentum,” Busse said.

U.S. Steel
Steelmaker Forecasts Profitable Second Quarter
United States Steel Corp. Pittsburgh, reported a first- quarter 2011 net loss of $86 million—an improvement over the $249 million loss in the previous quarter and the $157 million loss in the same quarter last year.

“We reported better first-quarter operating results in comparison to the fourth quarter as improving economic conditions and firm customer demand led to increased average realized prices, shipments and raw steel capability utilization for our North American and European flat-rolled operations. The improvements were partially offset by increased raw materials costs,” said U.S. Steel Chairman and CEO John P. Surma.

First-quarter results for the company’s Flat-rolled segment improved as average realized prices increased by $63 to $720 per ton. Shipments increased by 3 percent to 4.0 million net tons as customer demand for carbon flat-rolled products continued to moderately increase in line with economic growth, Surma said.

U.S. Steel’s raw steel capability utilization rate in the first quarter was 77 percent for the Flat-rolled segment, 5 percent higher than fourth-quarter 2010, despite the fact that the Hamilton Works’ iron and steelmaking facilities remained idled throughout the quarter due to an ongoing labor dispute.

U.S. Steel Europe’s shipments increased by 17 percent to 1.4 million tons due to increased customer demand, driven by improved economic conditions, reduced imports and lower customer supply chain inventory levels. USSE operated at 92 percent of raw steel capability for the first quarter, a 15 percent increase over the previous quarter as the company restarted its blast furnace at U.S. Steel Serbia.

U.S. Steel’s Tubular results were lower than the fourth quarter as costs for hot-rolled bands and rounds supplied by its Flat-rolled segment increased, while average realized prices decreased due to product mix and competitive market conditions. Shipments increased by 10 percent to 425,000 tons, but the average realized price decreased by $57 to $1,447 per ton, the company reported.

“We expect to report a significant overall operating profit [in the second quarter], primarily due to the realization of price increases in our Flat-rolled segment,” Surma said. “Order rates for most customer groups remained firm throughout the first quarter. While recent order rates have moderated, we remain cautiously optimistic that improving global economic conditions will further stimulate end-user demand.”

  
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