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August 2012
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Compressed Margins Challenge Steelmakers

Declining prices in the second quarter squeeze the nation’s largest publicly traded steel companies.

AK Steel
Non-Cash Charge Turns Profitable Quarter into Loss

AK Steel, West Chester, Ohio, reported a net loss of $724.2 million during the company’s second quarter. The second-quarter results include the effects of a non-cash charge of $736.0 million. Excluding the effects of this charge, the company’s adjusted net income for the second quarter was $11.4 million.

AK Steel reported a net loss of $11.8 million during the company’s first quarter. During last year’s second quarter, the steelmaker reported $33.1 million in net income.

Net sales for the second quarter of 2012 totaled $1.54 billion on shipments of 1.4 million tons, compared to sales of $1.79 billion on shipments of 1.5 million tons for the year-ago second quarter. Sales and shipments were both up modestly compared to the first quarter.

“During the second quarter, sluggish domestic and global economic conditions impacted shipment volumes and selling prices for our steel products,” said James L. Wainscott, chairman, president and CEO of AK Steel, during the recent conference call with analysts and investors. “Despite these market challenges, AK Steel recorded an improved operating profit and adjusted net income performance compared to the previous quarter.”

AK Steel officials reported an average selling price for the second quarter of $1,152 per ton, a 1 percent increase over the first quarter of 2012, but about 3 percent lower than the second quarter of 2011. The higher average selling price for the second quarter was primarily due to a richer product mix and increased contract sales, partially offset by lower selling prices for spot-market sales.

“Oversupply relative to demand, the actions of now bankrupt RG Steel and for-saleTK Alabama, and an increase of imported flat-rolled products all led to a decline in selling prices late in the second quarter in the United States,” Wainscott said.

AK also reported promising news for the export of one of its products. The World Trade Organization concluded China had no legal basis to impose antidumping and countervailing duties on U.S.-manufactured grain-oriented electrical steel, a major product for AK. Despite the determination, the tariffs, which have been in place since December 2009, will remain in effect while China appeals the ruling. Since the tariffs were imposed, significant new electrical steel capacity has come on line in China and the rest of the world, AK officials reported.

Also in July, members of the UAW ratified a new four-year labor agreement representing 1,250 production workers at the company’s Butler Works facility in Pennsylvania. The company has no other labor agreements expiring this year.

Wainscott said his company has not heard from customers concerned about unsettled labor situations at ArcelorMittal and U.S. Steel and how AK might be able to provide material in the event of a disruption. He said the company would be responsive, but he’s more interested in developing partnerships with customers than simply filling a temporary void in the marketplace.

“We’re not in the firefighting business. To the extent we can be helpful, we want to be there, but we want to be there for the long run,” he said.

Alcoa
Aluminum Giant Reports Loss in Second Quarter

Aluminum giant Alcoa reported a loss from continuing operations of $2 million during the company’s second quarter. The loss was a big drop from the $94 million profit recorded during the first quarter and the $322 million gain in the second quarter of 2011.

Second-quarter revenue for the New York-based producer was $6.0 billion, steady sequentially but down 9 percent compared with second-quarter 2011, primarily due to an 18 percent year-on-year decline in the realized metal price and a 17 percent decline in the alumina price.

“Alcoa maintained revenue strength and solid liquidity by driving high profitability in our mid and downstream businesses and by reducing costs and improving performance in our upstream businesses,” said Klaus Kleinfeld, chairman and CEO at the company’s quarterly conference call. “Although aluminum prices are down, the fundamentals of the aluminum market remain sound with strong demand and tight supply. Alcoa is successfully capitalizing on accelerating demand in high-growth end markets such as aerospace and automotive.”

Alcoa recorded revenue growth in the second quarter over the first quarter in several end markets, including packaging, up 5 percent; aerospace, up 4 percent; and commercial transportation, up 3 percent. Alcoa continues to project a global aluminum supply deficit in 2012 and reaffirmed its forecast that global aluminum demand would grow 7 percent in 2012, on top of the 10 percent growth seen in 2011.

In its global rolled product segment, operating income was down 1 percent sequentially and 4 percent from second-quarter 2011. Compared to the previous quarter, higher volumes and productivity gains offset less favorable price/mix and increased costs.

For the first half of 2012, Alcoa’s revenues totaled $12.0 billion, down 5 percent over the first half of 2011. The company’s income from continuing operations in the first half totaled $92 million, down sharply from $635 million in the first half of 2011.

Allegheny Technologies
ATI Reports Profitable Quarter

Allegheny Technologies Inc., Pittsburgh, reported net income of $56.4 million during the company’s second quarter, a decline of 11.8 percent from the same period of 2011. Net sales totaled $1.36 billion, slightly more than the same period last year.
 
Through six months, ATI’s net income totaled $112.6 million, down 6.4 percent from 2011. Net sales of 2.71 billion were up 0.5 percent from last year.

“Second-quarter 2012 results were similar to those achieved in the first quarter in spite of a weakening global economy, demonstrating the benefit of ATI’s diversification strategy,” said Rich Harshman, chairman, president and CEO. “We believe that the long-term secular growth trends in our key global markets remain intact. However, demand for many of our products in the second quarter was impacted by slower than expected GDP growth in the U.S. and China, and fiscal and economic uncertainties in Europe. Revenue and operating margins were also impacted by falling prices for most raw materials.”

ATI’s sales to the key global markets of aerospace and defense, oil and gas/chemical process industry, electrical energy and medical represented 67 percent of ATI sales for the first six months of 2012. Direct international sales totaled $974 million for the first half and represented nearly 36 percent of sales.

“The expected strong growth trend over the next three to five years in the commercial aerospace market remains on track,” Harshman said. “OEM backlogs remain at record levels and production rate ramps remain on schedule. However, we are now seeing some near-term softening in aftermarket spares demand due primarily to reduced profitability of the airlines and global economic uncertainty, which is negatively impacting business and consumer confidence.”

Still, Harshman said the supply chain appears to be in balance, with inventory levels being managed aggressively. The company expects this to produce a short-term pause in growth rates until the next advance in build rates.

Kaiser Aluminum
Kaiser’s Net Income Jumps 75 Percent

Kaiser Aluminum Corp., Foothill Ranch, Calif., reported adjusted net income of $20 million during the company’s second quarter, an increase of 75 percent from the same period in 2011.

Net sales during the quarter totaled $345 million, a drop from the first quarter but a slight improvement over the previous year’s second quarter. For the first six months, sales totaled $711 million, a 7.5 percent improvement from 2011. Net income of $41 million during the first six months was more than 100 percent better than 2011.

“We are very pleased with our second-quarter results which, combined with our first-quarter results, produced record value-added revenue and earnings for the first half of 2012. These results reflect higher volume driven by strong aerospace and automotive demand, improved pricing and greater overall operating leverage. Solid execution, especially at our Trentwood facility that is undergoing a Phase 4 heat-treat plate expansion, also contributed to the record results,” said Jack A. Hockema, president, CEO and chairman.

Value-added revenue of $185 million for the second quarter was up 16 percent over the prior-year period. For the first six months, value-added revenue hit a record $380 million, up 20 percent from the comparable 2011 period, reflecting strong year-over-year aerospace demand growth and an improved pricing environment.

“Overall, we continue to realize benefits from the growth initiatives and investments we have made to increase capacity, improve efficiency and quality, and expand our product offering. Our record first-half 2012 and last 12 months’ results demonstrate significant progress toward achieving the long-term potential of our platform,” Hockema said.

“As we look forward, we believe we are well positioned and have the financial flexibility to support future capacity expansion initiatives as needed to keep pace with expected demand growth for aerospace and automotive applications,” he added.

Nucor
Profits Off During Second Quarter

Nucor Corp., Charlotte, N.C., reported net earnings of $112.3 million during the company’s second quarter, down 62.5 percent from the same period in 2011. The company’s earnings were off 22.6 percent from the first quarter.

Nucor's net sales increased 1 percent to $5.10 billion in the second quarter of 2012 compared with the previous quarter, but decreased slightly compared with $5.11 billion in the second quarter of 2011. Average sales price per ton increased slightly from the previous quarter, but decreased 6 percent compared to second-quarter 2011.

Shipments to outside customers totaled 5.9 million tons in the second quarter, a slight increase from the previous quarter and an increase of 6 percent over the second quarter of 2011. Total second-quarter steel mill shipments increased 7 percent compared to the same period last year, but declined 1 percent from the previous quarter.

Second-quarter downstream steel product shipments to outside customers increased 10 percent over the second quarter of 2011 and 19 percent over the first quarter of 2012.

For the first half, Nucor reported net earnings of $257.4 million, down from net earnings of $459.6 million in the first half of last year. Net sales increased 2 percent to $10.18 billion, compared with $9.94 billion in last year's first half. Total tons shipped to outside customers increased 2 percent over the first half of 2011, while the average sales price per ton was unchanged.

Overall operating rates at Nucor’s steel mills fell from 79 percent in the first quarter to 76 percent in the second. Steel mill utilization increased from 75 percent in the first half of 2011 to 77 percent in the first half of 2012.

Nucor’s DRI project in Louisiana remains on schedule for a mid-2013 startup, though the company is not looking to expand capacity. DiMicco said the world is suffering through massive overcapacity because of economic conditions in the U.S., Europe and Asia, and thus most new capacity is not an effective use of shareholder capital.
 
“Our interest in the current time is in shoring up existing operations and strengthening vertical integration. As far as greenfield opportunities, we have talked in the recent past of another plate mill, but under current conditions in the world that is probably something that’s put on the back burner.”

Though the recent two-year $60 billion annual extension of the federal highway bill was a welcome change from the temporary extensions that preceded it, DiMicco said the commitment remains far short of the $400 billion annually that is necessary to rebuild the nation’s infrastructure.

“These are investments that must be made and will provide returns many times over during the next 50 years. They must be started now as we are years behind, and we need the millions of jobs and economic growth that are proven to come with real infrastructure investments,” he said.

Steel Dynamics
SDI’s Net Income Dips in Second Quarter

Steel Dynamics Inc., Fort Wayne, Ind., reported net income of $44 million during the company’s second quarter, down more than 60 percent from the same period in 2011. The company’s profits were comparable to the $46 million reported during the first quarter.

Net sales totaled $1.9 billion during the quarter, down modestly from both the first quarter and the second quarter of 2011.

In the first half of 2012, SDI saw net income of $90 million on net sales of $3.9 billion. By comparison, the company reported net income of $205 million on net sales of $4.1 billion in the first half of 2011.

“Overall steel demand remained steady in the second quarter with volumes increasing about 5 percent,” said Chief Executive Officer Mark Millett. “Stability in demand from the automotive, energy, construction equipment and agricultural sectors supported volumes. However, decreases in flat-roll pricing related to both supply-side pressure caused by increased imports and increased domestic capacity resulted in somewhat decreased margins as compared to both the first quarter and certainly the second quarter of 2011—a timeframe when historically high margins were achieved.”
 
Aside from metals recycling and ferrous resources, second-quarter volumes in each of the company’s operating platforms increased when compared to the previous quarter, while consolidated operating income decreased $16 million or 13 percent. The decrease in sequential quarterly operating income was the result of weakness in both ferrous and nonferrous recycled metal margins.

The company’s second-quarter margins and operating income for steel operations remained relatively consistent in comparison to first-quarter results. There was a change in the sequential quarterly earnings mix, however, as sheet operations income increased 12 percent based mostly on volume increases and long product operations decreased 10 percent based mostly on pricing declines. In spite of continued nonresidential construction market weakness, the company’s fabrication operations reported positive quarterly operating income for the first time since the first half of 2009, based on increased volumes and better utilization of manpower brought on to support expanding backlogs, executives said.

Despite increased volume, first-half 2012 net sales of $3.9 billion were 5 percent less than those achieved in the first half of 2011 and operating income decreased 43 percent. The average selling price per ton shipped in the first half was $864, a decrease of $54 per ton compared to the same period last year.

“Looking ahead, we anticipate continued demand in such sectors as automotive, manufacturing, energy and construction equipment, while transportation and agriculture appears to be tempering. We believe order rates could be somewhat uneven throughout the third quarter, as fluctuations in immediate product needs and hesitancy for customers to carry inventory persists,” Millett said.

U.S. Steel Corp.
Solid Operating Results Reported for Second Quarter

U.S. Steel Corp., Pittsburgh, reported income from operations of $330 million in the second quarter, up from $295 million for the first quarter, but down compared with income of $396 million in the second quarter of 2011. Second-quarter 2012 net income totaled $101 million, an improvement over the $219 million loss in the first quarter, which included a $399 million after-tax loss on the sale of U.S. Steel Serbia. Net sales for this year’s second quarter hit $5.02 billion on shipments of 5.4 million tons, down slightly from $5.12 billion in the same quarter last year.

“We reported good operating results for the second quarter reflecting positive results from all three of our operating segments,” said U.S. Steel Chairman and CEO John P. Surma, during his recent conference call. “Our Flat-rolled and Tubular segments had solid results considering the very fragile nature of the U.S. economic recovery. U.S. Steel Europe returned to profitability with significantly improved results, but continues to be challenged by the economic situation in the region.”

Flat-rolled second-quarter results were comparable to the first quarter. The benefits of an $8 per ton increase in average realized prices more than offset the effects of lower shipments, which reflected the adverse effect of a large increase in flat-rolled imports, the company reported.

“While the economic conditions in Europe remained challenging, second-quarter results for our European segment improved significantly compared to the first quarter,” Surma said. “Average realized prices increased due to higher spot market and quarterly contract prices. Operating costs decreased in the second quarter as a result of lower raw materials and energy costs.”

Tubular second-quarter income from operations decreased compared to the first quarter. Shipments of 493,000 tons were approximately 7 percent lower than the record levels of the first quarter as distributors rebalanced their inventory to reflect lower forecasts for drilling activity, and the company carried out a planned facility outage, Surma said. Average realized prices of $1,706 per ton remained near first-quarter levels.

Commenting on U.S. Steel's outlook for the third quarter, Surma added, “We expect operating results to be positive in the third quarter, but below our second-quarter results, reflecting the continued weakness in the North American, European and emerging market economies. Average realized prices are expected to be lower for all three operating segments with total reportable segment shipments slightly lower than the second quarter. Our Tubular segment is expected to continue its trend of solid operating profits.”

U.S. Steel currently is negotiating with the United Steelworkers for a new labor agreement covering most of its domestic operations. The current agreement expires on Sept. 1, 2012. “We anticipate reaching a competitive agreement without a work stoppage,” Surma said.


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