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Headwall: Soft Landing Expected by Metals Sector

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MCN Editor Dan Markham Steel pricing will remain healthy, the corporate tax rate will increase and service centers will sit out the great carbon footprint reduction effort. Those were just a few of the conclusions from Headwall Partners 2024 Steel & Metals Outlook Survey.

Headwall Partners is a corporate finance and strategic advisory firm specializing in mergers and acquisitions, debt, equity and restructuring for companies in the industrial metals space. It conducts an annual survey, now eight years in, of senior executives from the North American metals supply chain, including integrated producers and minimills, recycling operations, service centers and processors serving the carbon steel, aluminum and other alloys segments. 

The majority of the 52 respondents are at the chairman, president or CEO level. Companies range from small private to large public enterprises, serving a variety of end markets. 

Perhaps the most notable takeaway from this year’s survey is the overwhelming consensus on the direction of the macroeconomy as a result of the interest rate hikes from the Federal Reserve. Approximately nine in 10 respondents anticipate a soft landing, with inflation settling between 2 and 4 percent over the next three years. The other 10 percent see a recession in the offing. 

Consistent with that outlook is the executives’ view of their own companies’ fortunes. Almost 70 percent are either optimistic or strongly optimistic about their businesses over the next three years compared with the prior three years. Still, about one-fifth of the respondents expect no growth to negative growth in that same time frame. 

Along those lines, respondents anticipate growth in demand for both steel and aluminum in the coming years. Seventy percent believe there will be a modest (63 percent) or strong increase (7 percent) in steel demand in the next three to five years, while only 6 percent expect a modest decrease. The outlook is even more optimistic on the nonferrous side, with 78 percent forecasting a modest (65 percent) or strong (13 percent) increase, while just 2 percent envision a modest decline. 

So what will threaten the expectations for 2024? For many executives, it’s the same issue that has vexed them for the past four years, the availability of a skilled workforce. Half of the respondents cited that as a major problem, followed by inflation at 33 percent. The U.S. presidential election was tabbed by 25 percent of the respondents as a risk to their companies’ performance this year. Rounding out the rest of the options were cost and availability of capital (21 percent), new capacity startups and energy costs (10 percent), supply constraints (8 percent) and increased animosity with China (6 percent). 

On the capacity front, executives believe the new additions to the steel space should be absorbed with little impact, as 54 percent responded. Only 15 percent believed the capacity growth will have a negative impact. That trend was even more extreme in the aluminum sector, with 64 percent expecting no impact and just 6 percent expecting any kind of negative impact on the sector.

Steel executives are relatively split on whether the coming years will produce more or fewer imports, while aluminum industry participants expect a greater number of imports. For both materials, however, the status quo is supported by approximately half the respondents. 

Overall, four-fifths of respondents believe the average price for hot-rolled coil will sit approximately where it is now, in a range between $800 and $1,000. Twelve percent predict it will average between $600 and $800 and half that many believe it will range from $1,000 to $1,200, while another 2 percent see the average above $1,200. 

On the aluminum side, about half the respondents pegged the LME ingot spot price per ton to range between $2,300 and $2,600, while almost one-third predicted the price would range from $2,000 to $2,300. An equal number (8 percent) guessed the price would range below $2,000 and from $2,600 to $2,900. 

Beyond supply and demand, most of the respondents expect to invest in measures to reduce their carbon footprint as a result of the growing push for decarbonization, though only 21 percent envision committing more than 10 percent of expenditures to that end. 

On the other end, one-third of the companies don’t anticipate spending any money on decarbonization efforts, which Headwall notes that primarily comes from its respondents from the service center/distribution sector, where opportunities for reduction are limited given the existing low footprint of most facilities. Sadly, most respondents (82 percent) who do invest in these technologies don’t expect to receive a price premium as a result of their reduced footprint.

Regardless of what spot in the supply chain each company occupies, growth is the goal in the short and long terms. On that front, there is relatively even spread of what is the primary step they’ll take to get there. 

The greatest number of respondents (33 percent) said mergers and acquisitions will be the avenue, which is undoubtedly the preferred choice for Headwall Partners. Since launching the survey eight years ago, M&A has topped the list of growth drivers every year. But this was the first time since pre-pandemic when a plurality of respondents expected to be more active in the next three years. 

Another 23 percent see geographic expansion as the biggest driver. Rounding out the options were market penetration/increased share supported by 21 percent of respondents, market development/new use for products by 10 percent and product development by 8 percent. Another 6 percent answered “Other.”

Consistent with those answers, 43 percent believe their companies will be more active on the acquisition front in the next three years, while another 6 percent said they will be significantly more active. Only 6 percent believed they will be less active in the next three years. 

The past year was a busy one for deals in the space, with 17 reported, the most since the wild days of 2008. It was also a record year in terms of value, with the U.S. Steel-Nippon sale leading the way to $20.5 billion total, more than double every year since 2008.

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