Strong auto and construction markets led to strong shipments of galvanized products in 2016, and supply chain participants anticipate more of the same in 2017.
For most of the past 18 months, the North American steel sector has been mired in a low-growth mode. The galvanized market, however, has managed to avoid getting dragged into the muck. Thanks to a positive performance by two of its primary end markets, automotive and construction, shipments of galvanized products are approaching their highest totals since before the recession. The run-up in prices in 2016, including a late-year spike, has created profitable conditions for North America’s coated products supply chain.
According to analyst Becky Hites, president of Steel Insights, shipments of galvanized products in 2016 were expected to top 16 million tons, a level not seen since the record year of 2006. Late-year momentum saw shipment gains of 3 percent for the rolling three-month period ending in October. Domestic consumption was projected to reach 17.7 million tons in 2016, short of the 2006 record of 19.2 million tons, but a post-recession high for the material.
The market also strengthened for domestic producers as export shipments held firm while imports declined. The decline in import penetration in 2016 was a direct result of trade actions involving galvanized and other metal products.
Last June, the U.S. International Trade Commission ruled that corrosion-resistant steel products from China, India, Italy, Korea and Taiwan were causing unfair injury to the domestic industry and were subject to import duties.
The combination of less competition from imports and improved demand drove prices upward in 2016, particularly toward the end of the year. Steel Market Update reported pricing gains of $25 per ton on a week-over-week basis in early December, with momentum pointing higher through the first two months of the year. The Steel Index reported a price of $854 per short ton for hot-dipped galvanized the week ending Dec. 18, an increase of $79 compared with a month earlier. The story was similar for Galvalume, with prices climbing in early December and signs pointing to even higher tags in early 2017.
Factor in the win by the Republicans in the recent election and steel executives are bullish about the prospects for steel, particularly coated products, going into the new year.
“We’re going to see a very positive year going forward,” says Joel Mazur, the vice chairman of service centers for Esmark Steel Group, Sewickley, Pa. “I don’t think there could be a more exciting time to be in the steel industry.”
Mark Mellon is national sales and marketing manager for Valmont Coatings, Omaha, Neb., which specializes in after-fabrication galvanizing. He agrees the market looks very promising. “I think demand for galvanized products is going to be great in 2017. We’re already seeing higher demand for galvanized going into infrastructure, especially the bridge industry.”
“We’re very bullish on coated for next year,” says Andy Gross, president of Alliance Steel, Bedford Park, Ill. “We supply to the construction market and a little bit into the satellite dish world, and both of those sectors are looking equally as good as last year, if not two or three points better.”
According to Hites at Steel Insights, automotive remains the largest destination for galvanized steel with 40 percent of the product finding its way into the auto supply chain. Auto production may have reached its peak in 2016, but it will remain at high levels for quite some time. The National Automobile Dealers Association forecasts sales of 17.1 million new cars and light trucks for 2017, only a slight decline from the 17.4 million projected for full-year 2016 and just a little off the record year of 2015.
“We are headed toward a stable market for U.S. auto sales, not a growing market,” says Steven Szakaly, NADA’s chief economist. “The industry has achieved record sales, and pent-up demand is effectively spent.” The vehicle mix will continue to favor light-truck sales, which will account for 60 percent of the market in 2017. Production of larger vehicles is good news for suppliers of galvanized steel.
In the competition to make vehicles lighter and more fuel efficient, aluminum and alternative materials have won some applications away from steel. But suppliers believe galvanized will remain a big part of the mix, even if it involves higher-strength steels. “Steel is not going to be standing still,” says Esmark’s Mazur.
Following automotive in terms of market share, service centers purchase about one-quarter of the mills’ galvanized product, while construction accounts for another 15-17 percent, Hites says. On the construction side, most analysts expect continued gains in 2017. The Dodge Data & Analytics 2017 Construction Outlook projects total building starts will increase 5 percent this year, following an 11 percent gain in 2015 and a modest 1 percent improvement in 2016.
“The U.S. construction industry witnessed signs of deceleration in 2016 following several years of steady growth,” says Robert Murray, chief economist for Dodge Data & Analytics. “Total construction starts during the first half of the year lagged behind what was reported in 2015, raising some concern that the current construction expansion may have run its course. Instead, the construction industry has now entered a more mature phase of its expansion, one that is characterized by slower rates of growth than what took place during the 2012-2015 period, but still growth.”
Galvanized steel is finding increased use in construction applications. “We continue to see improved utilization of steel in residential roofing,” for example, says Tommy Scruggs general manager of sales and marketing for Steel Dynamics, Butler, Ind. He sees growth potential for mills supplying galvanized to distributors. “We serve a lot of markets through service centers. Their inventories are fairly low as business in that segment has been off, year over year,” he says. “In general, we’re pretty optimistic about that market heading into this year.”
Analysts expect service centers to be buoyed by a general improvement in the industrial economy, especially if the newly elected president follows through on his campaign promises to reinvigorate manufacturing. Infrastructure spending increases promised by the new administration, with the cooperation of a Republican Congress, are likely to come to fruition. Enthusiasm over potentially large gains in spending for roads and bridges is rippling through the steel industry, and the galvanized supply chain is no exception. A commitment to replace the thousands of structurally deficient bridges would deliver the biggest boost to the galvanized market, but the material is also used in culverts, guard rails and various other public construction applications.
“We really do think the infrastructure market will see the Trump Bump, probably somewhere around late 2017 or early 2018,” says Mike Kruse, director of sales and marketing for Heidtman Steel Products, Toledo, Ohio. “We’re really expecting that across all product lines, but especially galvanized will be up significantly. Everything from guard rails to bridges needs to be replaced in this country.”
One application that has proven particularly strong for coated metal in recent years is solar energy. “We saw a big increase in solar racking systems over the last couple of years. That’s been good business for us,” says Todd Moughler, purchasing manager for Magic Coil Products, Butler, Ind. Industry watchers are concerned about how well the solar market will hold up with the change to a Republican administration, fearful that incentives for the green energy source may be eliminated.
Restrictions on imports of corrosion-resistant steels into the U.S. shifted shipments to other parts of the world. The EU is now weighing its own galvanized trade case against Chinese material, as imports increasingly found a home on European shores. Hot-dipped galvanized imports in the EU increased by nearly 50 percent through the first nine months of 2016.
Such trade blockades, considered protectionist on many fronts, work well for domestic producers, at least for a while, but service centers aren’t always supportive. “We’re all being corralled into a domestic supply chain. The last time we saw this was in the mid-2000s when we were force-fed much higher prices. It’s not like we have freedom of choice,” says J.P. Nelis, an executive with Calstrip Industries, Mira Loma, Calif. He says the dramatic reduction of imports is particularly troublesome for West Coast distributors, who have only two domestic sources of galvanized products west of the Rockies.
“Supply is going to be a lot more interesting. Light gauge, which was invariably supplied offshore, is going to get a lot tighter,” says Gross at Alliance. “The Indians have not been as affected, and they supply a lot of light-gauge, as do the Italians and CSN out of Brazil. But you’re not going to see any substrate from the Chinese.”
The wildcard is Vietnam, which was not cited in the original trade ruling, but is being investigated for allegedly circumventing duties through transshipments. The industry is closely watching the outcome of that trade filing.
Moughler worries that mills are getting too aggressive with price increases. “I understand the mills need to make money. The integrateds have lost money for years. But I’m concerned the pendulum will swing too far the other way, and the price hikes will be too much, too fast.” The high prices hurt American manufacturers and may prompt foreign companies to export more finished goods that might otherwise be made in the U.S.
Mill utilization rates are on the rise in the U.S. and have climbed above 80 percent. Producers are quick to close their order books on galvanized, Nelis says. “The window to make decisions is very short.”
Domestic mills are responding to the tightening conditions by considering the restart of lines that were idled following the recession, Hites says. NLMK, for one, has announced plans to restart the No. 2 galvanizing line at its Sharon, Pa., facility, a line that’s been idle since 2009.