Uncertain Price Leaves Market Hanging
Excessive supplies of flat-rolled steel, worsened by rising foreign imports, put prices in question for 2015, even as demand improves.
Despite downward pressure on prices, the outlook for the flat-rolled sheet market is largely positive, say the experts. Much depends on some key unknowns: Will domestic producers file threatened trade actions? Will imports increase or decrease? Will industry consolidation stabilize recent price mini-cycles? And will the nation’s economic recovery accelerate?
Demand for carbon sheet has been fairly strong over the past two years, supported by gains in such large steel consuming markets as automotive, energy and agriculture. The pickup in both residential and nonresidential construction, and its effect on such related markets as home appliances and HVAC, has also boosted business, says Bill Hickey, president of Chicago-based Lapham-Hickey Steel Corp.
Further improvement in the U.S. economy should benefit steel producers and distributors, as well, adds James Bouchard, chairman and chief executive officer of Esmark, Inc., Chicago Heights, Ill. GDP growth of 3 percent or more translates into new demand for steel, particularly flat-rolled sheet, he says. The U.S. economy grew at an annualized rate of 4.6 percent in the second quarter, which bodes well for the steel sector.
Overall, U.S. sheet consumption was up 8.2 percent year to date through August, including a 7.2 percent increase for hot-roll, a 10.5 percent increase for cold-roll and a 10.0 percent increased for galvanized. Service center flat-rolled product shipments were up 4.8 percent for the year, reports Christopher Plummer, managing director of Metal Strategies, Inc., West Chester, Pa. He expects even better growth in 2015 with the likelihood of improving markets, more industry consolidation and lower raw materials costs.
But while demand and business sentiment are much improved in the flat-roll sector, it comes off “a terrible low” for the industry, notes Lisa Goldenberg, president of Delaware Steel Co., Fort Washington, Pa. The strength is not spread across all markets; a disproportionate amount is attributable to automotive. Overall, she describes the rate of growth as “slow, steady and painful.”
Currently, the flat-rolled market is “satisfactory, at best,” says Jon Kleinman, procurement manager at Klein Steel Service Inc., Rochester, N.Y., identifying overcapacity as the main culprit.
Others have been more direct, pointing their fingers at imported steel sheet. Imports’ share of the U.S. steel sheet market hit 19.8 percent in August, up from 14.7 percent a year earlier. While the share held by hot-rolled coil imports was unchanged at about 14.3 percent, foreign mills’ share of the cold-rolled market jumped to 21.5 percent from 8.1 percent a year earlier. Their share of the galvanized steel market increased to 22.7 percent from 16.9 percent in August 2013, reports Metal Strategies.
Jeff Simon, president and chief executive officer of O’Neal Flat Rolled Metals, Brighton, Colo., likened this year to a roller coaster ride. It started off fast, then headed south due to a combination of extreme weather issues and plummeting scrap and raw material costs. Then it picked up in the spring, leveled out during the summer, and eased to a crawl as mill lead times shortened and prices softened in October.
Hot-rolled prices fell to $654 per ton as of mid-October from a peak of $675 in August. Cold-roll saw a similar softening to $769 per ton from $789 in the same period, according to Metal Strategies.
U.S. transaction prices for galvanized sheet are flat or up slightly, says Jim Barnett, president and chief executive officer of Grand Steel Products, Inc., Wixom, Mich. While base prices have slipped by $10-$20 per ton, coating extras have been bolstered by rising zinc prices. “There could be some slippage in galvanized transaction prices in the next 90 days or so even with the extras expected to continue to rise,” he says.
Amy Bennett, principal consultant for Metal Bulletin Research, doesn’t expect mills to try to increase domestic prices this year. Such a move, combined with the recent strengthening of the dollar, could prompt greater purchases of foreign steel.
The U.S. dollar is stronger than it has been for eight years, giving a big cost advantage to foreign companies, notes Charles Bradford, partner and metals analyst for the New York-based Metals Industries Advisory Group. The U.S. flat-rolled market continues to outshine other parts of the world, which makes it a target for foreign producers.
“The growth rate in China has been declining. Europe continues to struggle. Brazil is depressed, as well. It is natural to expect that imports will continue to flow to the United States,” says Simon.
In domestic mills’ favor is the widespread view that prices may decline, which makes foreign orders a dicey proposition. As U.S. prices slide, the gap between domestic and foreign steel will narrow. “I don’t think prices will crash, but nevertheless there is fear they will,” says John Anton, director of the steel service of IHS, Inc.
Another factor is the possibility of trade case filings on cold-rolled and coated steel imports. The mere threat of such filings has discouraged buyers from ordering steel, particularly cold-roll, from certain Chinese mills, says Lynn Lupori, managing consultant for Hatch Management Consulting, Pittsburgh. The spread between foreign and domestic prices was quite wide a few months ago, but has since begun to narrow, casting doubt on the likelihood of trade action, she adds.
The specter of an antidumping case has achieved the desired effect without actually spending the money to file one, says Barnett. At least for the short term, cold-rolled imports have declined. The same is true for coated steel, though to a lesser degree. Cold-rolled imports declined 4.7 percent month on month in August, according to Commerce Department data.
Currently, it’s questionable whether buying foreign hot-roll is worth the risk, says Mark Chuvala, director of supply chain for carbon steel products at O’Neal Flat Rolled. The official differential for hot-rolled coil as of mid-October was only $30-$40 per ton. Even if late-year deal making widens the gap to $70-$80 per ton, most service centers will still be reluctant to pull the trigger for fear the price will decline while the steel is in transit from far overseas.
By many estimates, the pricing gap for cold-rolled and galvanized steels is even wider at $120-$130 per ton. That difference is wide enough to tempt some service centers to place foreign orders, Chuvala says, especially those located close to ports that would benefit from lower freight costs. He’s skeptical about a trade case filing. “The deeper we go into this, the more it seems the [domestic] mills are losing steam as far as proving injury.”
But Goldenberg at Delaware Steel believes the trade cases are still a distinct possibility. “The petitioners just want to be sure it is a fast ball down the middle,” she says. “If they are going to do it, they want to be sure they do it right.”
Industry consolidation in the headlines
In the past 15 months, the domestic steel industry has seen a burst of consolidation, the implications of which are still shaking out. Four major deals have been announced, including:
The acquisition of ThyssenKrupp's Calvert, Ala., mill by a consortium led by ArcelorMittal and Japan’s Nippon Steel. The mill has been renamed AM/NS Calvert;
Steel Dynamics, Inc.’s purchase of the Columbus, Miss., steel mill from Russia’s OAO Severstal;
AK Steel Corp.’s purchase of Severstal’s Dearborn, Mich., mill;
And Nucor Corp.’s acquisition of Gallatin Steel Co., Ghent, Ky., from ArcelorMittal and Gerdau SA.
According to court filings, U.S. Steel Corp. is considering the sale of its U.S. Steel Canada unit, which includes its Hamilton and Lake Erie Works. Industry observers speculate that the Canadian mills are most likely to attract interest from a private equity firm or foreign steelmaker rather than a current domestic player.
While hopeful that the recent industry consolidation will increase pricing discipline, Kleinman at Klein Steel Service doubts it will have much effect on the current oversupply. “It could just result in different operators for certain facilities rather than much rationalization of capacity,” he says. “I hope there will be some reduction of supply, or at least some control of supply.”
While praising the new operators of these facilities, Esmark’s Bouchard questions whether these acquisitions will help to smooth the pricing mini-cycles that have kept the market guessing since the economic downturn. So far, the deals have not reduced capacity, and could actually result in increased production in the future, which will put even more pressure on steel prices. “[Rationalization] hasn’t materialized yet, but I think it will eventually happen,” he says.
Although she doesn’t believe the recent deals will increase volatility, Lupori doubts they will smooth out pricing either. “I don’t see how just changing the operators of the facilities will have much of an impact,” she says.
Hickey sees it differently. “With the top five steelmakers substantially increasing their share of the domestic market, at some point pricing should stabilize,” he predicts.
As a group, ArcelorMittal, U.S. Steel, Nucor, AK Steel and Steel Dynamics will have an 83.1 percent share of the domestic market next year, Plummer estimates, up from a 71.6 percent share last year. Over time, these acquisitions will be “decidedly positive” for the flat-rolled sheet market, he says. “It isn’t that capacity is likely to be rationalized. In fact, there could be incremental increases in capacity at Calvert, Dearborn, Columbus and Gallatin,” he admits. “But the new owners have the money and expertise to run the facilities more efficiently and are more likely to maintain greater pricing discipline.”
Anton at IHS holds a similar view. As long as imports are fairly traded, this concentration of production could result in more pricing stability, he says.
Several sources expressed concern about a major new flat-roll mill currently under construction adding capacity to an already oversupplied market. Big River Steel, LLC, Osceola, Ark., plans to bring 1.7-3.4 million tons of capacity to the market in up to three phases, with its first phase to come online in 2016.
“There’s no possibility demand will increase enough by then to absorb that capacity,” asserts Bouchard, echoing the sentiment of many other executives.
John Correnti, Big River’s chief executive officer, says he isn’t looking to knock heads with other minimills, but rather to aim for such higher-end products as advanced high-strength steels and electrical steels—market segments that are exhibiting particularly strong growth and, therefore, are in tighter supply.
However, as Plummer observes, “History tells us that the targeted mix of a new mill doesn’t always come to fruition,” citing both the Calvert and Columbus mills as examples.