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The continuous caster at Gerdau Special Steel North America’s Monroe, Mich., facility was installed in 2012, as part of a major capital improvement project at the plant. (Photo courtesy Gerdau)

Bar Builds On Recovery

After a strong 2017, gains in the SBQ market are expected to carry through 2019

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The market for special bar quality metal rebounded last year after underperforming the previous two years. Strong end markets and favorable market conditions carried those gains into 2018, and producers and distributors of SBQ products don’t see the bar lowering anytime soon.

“Business has been very good,” says Joe Druzak, president and CEO of Kreher Steel Co., a Melrose Park, Ill-based service center specializing in various steel bar products. Druzak, who says volumes have increased year over year, estimates that the overall SBQ market is up between 5 and 10 percent this year. “And, everything leads us to believe that next year should be very, very similar to this year.”

Similarly, all the major producers of SBQ are reporting positive numbers in 2018. Shipments from Steel Dynamics Inc.’s engineered bar division are up 24.7 percent year over year through three quarters. “Our engineer bar is kind of a bellwether to the general steel-consuming industry or market,” Mark Millett, president and CEO at the Fort Wayne, Ind.-based steelmaker told investors in October. “And, it is literally across the board incredibly strong.”

Charlotte, N.C.-based Nucor has also seen double digit increases this year. Through the first nine months of 2018, the company’s bar shipments are up 14 percent.

At leading SBQ steelmaker TimkenSteel, net sales are up 21.9 percent through September, following a strong third quarter. “This year-over-year improvement was driven by stronger demand within our industrial, energy and mobile end markets,” said Kris Westbrooks, executive vice president and CFO, during the Canton, Ohio-based steelmaker’s third-quarter conference call.

Luis Colembergue, vice president of sales and technology at Gerdau Special Steel North America, says 2018 has been a very good year for SBQ, due primarily to strong demand from most of the product’s major end markets. “We are seeing increases across the board,” he says. “Automotive, heavy truck, oil and gas, industrial, all of them presented growth this year from 2017.”

The greatest volume consumers of SBQ products are the automotive, heavy equipment and machinery, general manufacturing, oil and gas, and distribution segments. But among these, automotive, including passenger cars, light trucks and SUVs, is the largest end market.

Gerdau Special Steel North America, Jackson, Mich., primarily serves the automotive industry, which Colembergue says has been performing at a high level for several years.

“Automotive is strong from year to year,” he says, adding that the type of vehicles currently being produced in the United States has only helped SBQ. According to Colembergue, roughly 70 percent of the automotive mix is made up of SUVs, basic utility vehicles and pickup trucks, which have more SBQ content than passenger vehicles.

Auto industry research firm MarkLines reported that new vehicle sales in the U.S. were relatively flat through October, up just 0.2 percent to 14.26 million units. But while sales of passenger cars are down 13.3 percent year over year, light truck sales are up 8.3 percent to 9.65 million units.

“Even though automotive is somewhat flat year over year, I don’t think steel consumption, at least from our perspective, is down, and it’s because of the mix,” says Druzak. “The vehicles that are selling are light truck and SUV, which are more steel-intensive vehicles.”

The oil and gas market has also been a bright spot for SBQ. While 2017 was a relatively good year for many SBQ end markets, oil and gas has improved significantly in 2018, according to Druzak. “Oil and gas has had a very strong year in 2018,” he says, adding that the energy market has been the key driver for SBQ demand this year. “Most of the [SBQ] growth in 2018, versus 2017, was really in oil and gas. Oil and gas has had a significantly better year.”

TimkenSteel’s third-quarter results support the case for oil and gas leading the way. “Shipments to the energy market increased 51 percent, compared to the same quarter a year ago, as the oil and gas industry has recovered well,” Westbrooks told investors. “We expect fourth-quarter energy shipments to be around the same as the third quarter of 2018.”

Colembergue points out that while rig counts are up compared to 2017, they are still nowhere near the level they were in 2013-14. However, he explains that it would be incorrect to conclude, based on rig counts, that the market is not in good shape. “It’s not an apples to apples type of comparison,” he says, noting that the technology in this market has changed in recent years, which has assisted its recovery and made it more attractive to SBQ producers. “We are seeing increases in these markets, and I think we have some actions internally to be awarded more business in this type of market.”

Another important factor in the SBQ market has been the Section 232 tariffs, which have restricted imports and helped to tighten supply domestically. Mill lead times are stable but extended, according to Druzak, whose company adjusted its inventory levels to cope with the post-232 market. “Because of extended mill lead times and uncertainty pertaining to the 232, we increased our inventories,” he says. “What we’ve done this year is we’ve carried a higher inventory than we would normally, but we are looking at taking those inventories back down as we go into 2019.”

Higher overall demand, combined with the effects of Section 232 and higher raw material costs, have pushed up spot market prices. Chuck Short, director of marketing for Gerdau Special Steel North America, says alloy and scrap costs are up this year, adding to the SBQ surcharge. “Aside from supply and demand on the base pricing, the raw material pricing surcharges have increased as well,” he says. “We’ve seen scrap and alloys increase, so that’s kind of been an influence on the overall price.”

For Druzak, the explanation is simply supply and demand. “You restrict supply and prices go up, particularly when demand stays stable or goes up,”

And while Section 232 has tightened supply, it would appear that the tariffs have also spurred investment in SBQ capacity. In March, leading SBQ supplier Republic Steel announced it would restart its Lorain, Ohio, facility in response to anticipated demand spikes brought on by the tariffs.

“Republic is more than prepared to support market demand that has been previously supplied by imports,” said Jaime Vigil, president and CEO at the Youngstown, Ohio-based steelmaker. “We maintained our Lorain facility while it’s been idled waiting for the opportunity to restart, and it appears that time is finally here.”

The 9-inch/10-inch rolling mill at Lorain, which was set to restart in September, has capacity of 35,000 tons per month. Republic Steel said it plans to restart the Lorain electric arc furnace as orders dictate.

Gerdau is also making investments in its SBQ product, though not necessarily because of the tariffs. The company is currently in the middle of a $70.3 million investment project at its special steel mill in Monroe, Mich., which will include a new electric arc furnace transformer, controls and mechanical upgrades in the EAF, and a new twin ladle furnace and material handling system.

“We are sort of at the midway point on this new investment,” says Colembergue “It is going to come to fruition a couple years from now. When this is up and running, we are going to have additional capacity.”

The project, which is projected to be finished in December 2020, will increase Gerdau Monroe’s annual shipping capacity to 720,000 tons, a 180,000-ton increase from current capacity.

“Our further capital investments in the Monroe mill is a result of our confidence in the North American markets,” Gerdau CEO Gustavo Werneck said earlier this year.

Ultimately, these investments in additional capacity underscore steelmakers’ confidence in the SBQ market going forward. Colembergue says Gerdau’s forecast looks at all of the major macroeconomic indicators, which he adds are very strong heading into 2019.

“We are very positive and optimistic about next year’s market,” he says, disregarding concerns about a looming recession. “We really just don’t see that for 2019. We don’t see headwinds for 2019. We just don’t.”

Druzak agrees. His company is forecasting more of the same in the upcoming year. “We think the 2019 market is going to be pretty decent,” he says. “We certainly don’t see any leading indicators at this point that suggest we’re heading towards a market slowdown.”

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