Bar Mills Too Bullish?
Demand for high-quality steel bar is on the upswing, but so is production at the mills. Will the
market be able to absorb all this new capacity?
By Myra Pinkham, Contributing Editor
Demand for special bar quality steel products has recovered nicely on the back of strength in both the automotive and energy sectors. What is uncertain for SBQ producers and distributors is how new mill production capacity and plummeting oil prices will affect the market next year.
While the year started slowly, SBQ demand was experiencing double-digit increases by the fourth quarter, says Jim Desmond, president and chief operating officer of Earle M. Jorgensen Co., Lynwood, Calif.
In fact, U.S. SBQ consumption is expected to finish the year up 10.3 percent after declining about 2.9 percent in 2013, says Christopher Plummer, managing director of Metal Strategies Inc., West Chester, Pa.
Even more striking is that many domestic mills saw their SBQ shipments jump 20-25 percent this year—quite a turnaround from the 9.8 percent decline in 2013, Plummer says. This gain is at least partially attributable to an 11.2 percent decline in imports, compared with the 12.6 percent increase in imports last year.
“Over the past few years, the automotive market has driven strong demand for SBQ. Now we’ve started to experience improved demand from other, non-automotive applications,” says Mark Marcucci, president of Gerdau Special Steel North America, Jackson, Mich. The reshoring of manufacturing, as well as increased localization of content, especially in the automotive sector, also have played a part in SBQ’s resurgence, executives say.
The engineered bar market is actually on the backside of a sizable inventory correction that took place in 2012 and 2013, Plummer explains. The major SBQ consuming sectors—automotive, energy and industrial equipment—were among the first to recover from the economic downturn. By 2011, SBQ demand was outpacing the production capacity at the time. Alarmed by the lengthening lead times, customers panicked and double ordered, from both domestic and foreign mills, to make sure they would have enough material. With their customers overstocked, and SBQ imports still on the increase, domestic mills saw their shipment volumes decline by about 10 percent in both 2012 and 2013. But today, after two years of destocking, inventories have tightened up once again, Plummer says.
The pipeline of product from steel producers to original equipment manufacturers is now probably at its lowest inventory level since the financial crisis, Marcucci says. In some cases, it is just a few weeks between when the steel is shipped and vehicles roll off the assembly lines. “In addition, the tightness in SBQ supply has not allowed customers to build safety stocks to protect their delivery commitments.”
Desmond at EMJ says some service centers filled holes in their inventories with foreign steel earlier in the year when SBQ mills experienced problems making on-time deliveries due to spikes in demand. The shortfalls varied by product, but lead times for quenched and tempered material extended to about 20 weeks versus 10 to 12 weeks a year earlier.
The SBQ turnaround is more than just a function of an inventory correction. It reflects the growth of the economy as a whole, experts say, and especially the strength of the automotive sector. North American auto production jumped 5.5 percent in 2014 to just under 17 million light vehicles and is expected to increase another 3.6 percent to 17.6 million vehicles next year. About 56 percent of those vehicles are light trucks. That’s a big plus for SBQ producers, says Plummer, as trucks use up to twice the SBQ of passenger cars.
“We continue to see growth of demand in the automotive sector, not only with increases in North American output but continued localization of content by the New Domestic automakers,” says Ted Thielens, executive vice president of Canton, Ohio-based Republic Steel. Asian car brands such as Toyota, Honda, Nissan, Hyundai and Kia are increasingly sourcing materials from nearer to their new U.S. manufacturing facilities.
Demand for heavy-duty trucks also has accelerated along with the U.S. economy. Metal Strategies estimates that production of heavy-duty trucks increased by 22 percent, and medium-duty trucks by 14 percent, through the first nine months of the year.
Over 40 percent of SBQ is used for “mobile on highway” applications, Plummer says, but its other major end markets include energy and industrial equipment.
Demand for high-quality bar products from the energy sector has been quite strong this year, says Shawn Seanor, executive vice president for Canton, Ohio-based TimkenSteel Corp. Not only is the U.S. drill rig count up 9.4 percent, but the number of feet drilled is up about 10 percent due to the longer laterals with horizontal drilling.
Crude oil prices continue to decline, however, which may slow drilling activity, say the experts. By mid-November, the West Texas Intermediate oil price had fallen to $75 per barrel, a level that many see as the breakeven point for profitability. Seanor says the falling oil price has not affected demand for SBQ in energy-related applications—at least not yet. He believes, even at $75 to $80 per barrel, oil remains economically viable. “Our customers continue to be busy,” he says.
Joe Druzak, president and chief executive officer of Kreher Steel Co., LLC, Melrose Park, Ill., doubts energy-related SBQ demand will hold up for long at these levels. “If oil prices remain below $85-$90 per barrel for any period of time, the energy companies could pull in their horns and rethink some of the projects they now have on the drawing board,” he says.
Likewise, low natural gas prices around $4 per MMBtu provide little incentive for energy companies to increase drilling. That could change, however. Regulators currently are considering 10-15 liquefied natural gas export terminal licenses, which could boost natural gas demand and prices.
Demand for heavy equipment is a mixed bag. Dave Trump, vice president of sales and operations for Kreher’s Illinois region, notes that construction equipment is a wild card. “It depends on whether Congress finds a way to fund a long-term highway bill. Until they do, demand will be just okay.”
Still, heavy equipment shipments are up, with construction equipment leading the way with a 5.7 percent gain through September, Plummer says. Mining equipment is just starting to rebound after a severe downturn, but is still suffering from weak coal and iron ore prices. Agricultural equipment shipments, which were strong last year, are down 3.5 percent this year as farm income takes a hit due to lower grain prices resulting from bumper crops.
In total, Plummer estimates domestic SBQ consumption will be up 10.5 percent this year and another 3.2 percent in 2015. Domestic shipments will do even better, increasing 18.9 percent this year and another 6.2 percent next year, partly due to increased localization of auto components.
The big question is whether this is enough to absorb all the capacity additions in North America. Plummer estimates about 2.5 million tons of additional SBQ production capacity will have come online from 2012-2017, much of it targeted at automotive applications. Just about all the major SBQ producers—Nucor, Gerdau, Steel Dynamics, TimkenSteel, Republic and Grupo Simec—have expansions in the works. In total, they represent a 30 percent increase in the rated production capacity in place prior to 2012.
All of those investments, other than a 600,000-ton greenfield plant planned by Grupo Simec in Mexico, are brownfield expansions at existing facilities. Grupo Simec already operates an SBQ plant in Mexico. Its new plant, to begin production by 2017, will expand its Mexican SBQ offering to include up to 6-inch diameter bars.
Prior to these investments, Industrias CH, parent company of Grupo Simec and Republic, was the No. 1 North American SBQ producer, followed by Timken, Gerdau and Nucor. Today, after adding 800,000 tons of production at four plants, Nucor is the leader with 2.4 million tons of SBQ capacity.
Much of the newly added capacity still needs to be qualified by OEMs, meaning the product currently produced is only being used for lower-end applications. Many of the melt shops at the facilities where the new capacity is coming on line have already gone through the vendors’ qualification, so that should smooth the process, Plummer says.
Ambitious expansion by so many bar producers raises the question of whether the market will actually have enough need for SBQ to absorb all the new capacity, especially if imports increase. Several mills commented on this during their recent third-quarter conference calls. Mark Millett, president and chief executive officer of Steel Dynamics, for one, said: “We are confident that our trusted customer relationships, built on quality and on-time delivery, will allow us to increase our market share to fully utilize the added 325,000 tons of capacity in the coming year.”
Lynn Lupori, managing consultant with Hatch Management in Pittsburgh, is confident the growing U.S. economy will create enough demand to absorb the new capacity, especially if it displaces large-diameter SBQ imports.
Some executives, including Druzak at Kreher Steel, are concerned that the additional mill capacity might create an oversupply that affects prices, especially in light of declining raw material costs. “The mills are confident the demand will be there. If that isn’t the case, it could be an interesting few years,” he says.
EMJ’s Desmond says prices could come down if the new capacity is not fully absorbed. A series of three price hikes this year raised the base price of SBQ by about $120 per ton. It’s unlikely the mills could get the market to accept another increase with so much steel on the horizon. SBQ base prices are currently stable and likely to remain so through next year as long as the automotive and energy markets remain strong, he says.
“If consumer confidence continues to improve, it’s possible this additional capacity could be absorbed, but I’m not sure all of it will. There will be a lot of metal coming into the market,” Desmond concludes.