Price Hikes Outpacing Demand?
By Myra Pinkham, Contributing Editor
Mills are raising the price of galvanized to cover their increased costs, but some experts doubt demand for the rust-resistant coated steel will be sufficient for the price hikes to stick.
U.S. demand for hot-dip galvanized steel saw slow, steady improvement in 2010 and is expected to continue that trend in 2011. It has not improved nearly as much as recent price increases would indicate, however.
HDG price hikes, like those for other flat-rolled steel products, are more cost-driven than demand-driven and may not be sustainable, say the experts. The latest round of price hikes announced by Nucor Corp. and AK Steel Corp. would increase HDG sheet prices to about $945 a ton (for base price plus a G-90 coating weight on 1-millimeter thick material), according to American Metal Market. If successful, they could lead to further increases later in the year.
“Pricing has definitely gone up more rapidly than demand. Demand has been okay, but nothing earth shattering,” says Bill Sternard, vice president of purchasing for Viking Materials Inc., Minneapolis.
In 2010, the United States consumed about 12 million tons of HDG, up from 8 million in 2009, but still well below the old normal of 15 to 16 million, says Richard McLaughlin, managing director of Hatch Beddows, Pittsburgh, Pa. “At least it is moving in the right direction,” he adds.
Most of the recent increases have been in base prices, says Ray Culley, general manager of marketing and commercial services for Severstal North America, Dearborn, Mich., who notes that galvanizing extras tend to change based on the cost of zinc and tin.
Zinc is also expected to increase, says Josh Spoores, marketing manager for Majestic Steel USA Inc., Cleveland, who wrote in his December Spoores Report that Goldman Sachs forecasts zinc will average about $1.40 a pound in 2011, up about 33 percent from current levels.
Galvanized steel lead times have been moving out since late September, which is a sign that at least some of the price increases will stick, says Christopher Plummer, managing director of Metal Strategies Inc., West Chester, Pa. HDG lead times currently extend about seven to eight weeks with at least one mill placing its order book on an inquiry-only basis.
“Spot market orders had to compete with mill production schedules, which were already tight. The influx of orders on a limited production schedule shifted lead times even further, stimulating price increases,” Spoores says. With production schedules full, mill demand for scrap increased greatly at a time when less prime scrap is generated due to seasonally slower manufacturing, he adds. “Record global production is pushing raw material prices (including for pig iron, coking coal and iron ore) higher.”
“Even with the price increase announcements coming fast and furious, we are lucky to just keep up with the cost,” says Keith Busse, chairman and chief executive officer of Steel Dynamics Inc., Fort Wayne, Ind.
Some of the increased HDG demand may be pre-buying in reaction to pricing movements, rather than a reflection of true consumption. “I think that a lot of orders placed in November were service centers and other large buyers getting a jump on prices,” Spoores says.
“Service centers and some OEMs had been sitting on the sidelines, just buying what they needed, being very cautious about the state of the economy,” says Culley. “But recently, the combination of stable growth in key markets and the price announcements by the mills—which were needed to recover raw material costs—have caused them to re-enter the market.”
Service centers may be buying more, but they are monitoring the market very carefully, Plummer says. “They don’t want to pre-buy too much and get stuck holding high-priced material. They still have been keeping their inventories very lean.”
“Service centers will eventually pay the numbers,” Busse says, “but they continue to be careful about building up inventories. They might be operating with a little more buffer, but inventories won’t jump up significantly.”
In fact, if demand increases in 2011 as many expect, some service centers may need to source galvanized from other distributors to fill holes in their stocks, Spoores says.
Some sources expressed concern that the added capacity at ThyssenKrupp Steel USA’s new mill in Calvert, Ala., could inflate the supply and put pressure on prices. The company plans to start up the No. 1 HDG line at the mill by the end of this month, followed by the No. 3 and No. 4 lines late in the second quarter. Mindful of the market conditions and startup uncertainties, however, it plans a slow, gradual ramp-up, says Bob Holt, vice president of sales and marketing. While the mill will have the capacity to produce 600,000 tons of galvanized annually, the company has not yet determined how much it will bring to market.
“We believe the galvanized market in general has more than enough total capacity. However, we also believe that the capacity for high-quality galvanized and galvannealed suitable for exposed applications and applications requiring advanced high-strength steels is in short supply, particularly in the South and other areas of the NAFTA market. We will also be looking at export opportunities both within and outside of NAFTA. This has always been the focus of our market strategy,” Holt says.
On the demand side, the HDG market was 40 percent higher in 2010 vs. a year earlier, although it remains well below levels before the economic downturn, reports Paul Lowrey, managing director of Steel Research Associates LLC, Pittsburgh, Pa. Much of that rebound was driven by EBC, he says, “everything but construction,” and most notably automotive.
The automotive sector is picking up nicely, says McLaughlin at Hatch Beddows. Ford’s plan to raise its first-quarter production by 11 percent, for example, “gives the feeling that automotive is into a sustained recovery.”
North American automotive production in 2010 totaled about 11.8 million vehicles. “They are projected to increase even further in 2011 to about 12.2 million units with some upside potential,” Culley says, noting that the auto market has been helped by improvements in consumer confidence and credit availability.
Similarly, agricultural demand for galvanized steel products—both for farm equipment and grain bins—is going strong, boosted by high commodities prices, Spoores says.
Other observers point to strength in additional galvanized steel consuming markets including general machinery, pipe and tube, furniture and appliances. “In general, stampers and fabricators are busier than they have been in a while,” says Sternard at Viking Materials.
The same cannot be said for construction, which has been one of the biggest laggards in the economic recovery, with nonresidential construction down 60 percent from its peak in 2007 and new housing starts down 70 percent from their peak in 2005, Lowrey says.
Construction products account for a significant portion of galvanized demand, along with durable goods such as appliances and HVAC units that are placed in new structures. “In my view, construction activity is the real wildcard for HDG market growth in 2011,” Lowrey says.
There was a glimmer of hope for the housing market in November when the U.S. Commerce Department reported a nearly 7 percent gain in single-family home building. “Builders are very cautiously adding to their diminished inventories in preparation for the spring buying season and an anticipated modest revival in buyer demand when the economy shows more signs of improvement,” says Bob Jones, chairman of the National Association of Home Builders, Washington, D.C. “That said, we are still looking at a very low level of housing production, due largely to builders’ inability to obtain construction financing.”
The construction market could remain depressed until 2012, Culley says. Nonresidential construction might even improve before housing, which would be highly unusual. “While existing home inventories have come down a little, they are still at about 10.5 months of supply and that will likely hold back new construction.”
Plummer does not expect the HDG market to grow at the same 30 to 40 percent rate as in 2010, as that was coming off of a very low base, “but hopefully it will continue to improve by high single-digit or low double-digit percentages.”
No Big Gains for Independent Galvanizers Yet
The independent hot-dip galvanizing business was decent but not spectacular in 2010 and is expected to improve only marginally in 2011.
“There are some big jobs in the pipeline that will eventually have a trickledown effect on the small fabricators who usually send metal to independent galvanizers, but they haven’t broken loose. Companies haven’t allocated funds for them yet,” says Phil Rahrig, executive director of the American Galvanizers Association, Centennial, Colo.
“It isn’t a question of waiting for credit availability to ease. They have money,” he says. “But in this general economic malaise, people are sitting on their cash, looking for signs of sustained positive economic growth. They are not seeing it quite yet.”
Independent galvanizers—companies that galvanize finished parts for OEMs and fabricators—reported sales that were even or down a few percent in 2010, an improvement over 2009. They expect volume to be flat or up a few percent in 2011. Those in the North benefited from some inventory building among construction-related OEMs. “It is different in the South, probably because there are fewer OEMs there,” Rahrig notes.
He remains cautiously optimistic that 2011 will be marginally better for independent galvanizers, perhaps up to 5 percent. “We would need to see some more stability in Washington before we see any real improvement, including a new surface transportation bill,” he says.
Galvanizers could see additional business from the alternative energy market. “It seems as if solar energy projects are popping up everywhere,” Rahrig says. New transmission lines are needed to get energy to users from solar and wind energy generators. “That means increased demand for galvanized poles and hardware.”
Demand from the conventional oil and natural gas producers remains somewhat weak, given all the restrictions being placed on drilling, Rahrig says. “Natural gas prices are too low right now to prompt companies to pick up construction activity.”