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Nonresidential construction, including the Goodale Street Parking Garage in Columbus, Ohio, represent 45 percent of all galvanized consumption. (Photo courtesy American Galvanizers Association)

Galvanized Outlook 2019

A Growth Dip for Hot-Dipped

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Galvanized steel suppliers and independent galvanizers are generally optimistic that 2019 will be another good year, although the growth rate for demand and pricing is not expected to be quite as strong – at least not for the full year. That is based on assumptions some of the momentum that will likely surface in the first and second quarter could lose some steam later in the year. And the back half of the year is when additional galvanizing capacity begins to come on line.

Domestic hot-dipped galvanized steel sheet and strip prices have already stepped down approximately $100 per short ton from its July 2018 peak, with further, albeit moderate, slippage likely.

“Prices just went too high after the Section 232 tariffs were announced,” says John Anton, associate director of IHS Markit’s pricing and purchasing service. “Now, with buyers realizing that they can get imports cheaper, even with the tariffs, domestic producers had to react.”

The downward pricing and questions about what may occur on the trade front have been making service centers very careful about keeping their galvanized steel inventories lean. It’s possible they’ve gotten too thin, should there be a sudden, unexpected pickup in end-use demand. Christopher Plummer, managing director of Metal Strategies Inc., says even with the continued strength in the U.S. economy, consumption of hot-dip galvanized steel was actually down 0.5 percent in 2018, though from a very high level. He predicts consumption this year will only inch up about 0.7 percent.

Domestic HDG sheet shipments increased year over year each month starting in March, which was when the Section 232 tariffs were initiated, observes Amy Ebben, manager of strategic marketing for ArcelorMittal USA. However, she notes that demand for electro-galvanized steel has been declining since 2013, with automakers increasing their usage of HDG, and in some cases aluminum, for exposed automotive applications. She says it is very likely this trend will continue. Plummer says year-to-date electro-galvanized consumption was down 10.6 percent through September compared with the first nine months of 2017.

Meanwhile, hot-dip galvanizers of structures such as bridges, sign posts, fences and guardrails, as well as certain solar and wind energy components, saw their demand pick up about 3 percent last year, following a 4.5 percent decline in 2017. Demand was helped by greater realization of advantages in lifecycle cost for galvanized structural components vs. painted product, according to Phil Rahrig, executive director of the American Galvanizers Association. He says galvanizers’ demand should be either flat or marginally better in 2019.

Rahrig says some galvanizers’ customers are becoming increasingly aware that galvanized components could last as long as 70 to 100 years without needing costly maintenance. Additionally, certain studies indicate the indirect cost of not using galvanized structures could be as much as 11 times higher than using galvanized products. Thus, there is potential for additional products to be galvanized in the future, he says.

The largest end market for producers of galvanized sheet, as well as the one that accounts for the lion’s share of galvanizers’ demand, is the construction sector. Plummer says the market generally accounts for about 45 percent of total galvanized steel demand. In 2018, not only did put-in-place construction spending move up nearly 5 percent vs. just 0.4 percent growth in 2017, but its year-on-year growth rate accelerated each month. It went from only 0.9 percent last January to 7.3 percent by October, he says.

It is unknown whether this trend will continue. With rising interest rates and uncertainty climbing about the future strength of the economy, the growth could moderate this year, experts believe.

Jeff Simons, president of O’Neal Flat Rolled Metals, says certain recent reports support that view, including the American Institute of Architects’ Architecture Billing Index, which remained slightly over the 50 percent threshold dividing the expansion or contraction of nonresidential construction activity at 50.4 points in October. On the other hand, Dodge Data & Analytics’ November Momentum Index moved up 5.3 percent month on month after easing 4.2 percent in October.

Plummer notes more galvanized steel is used for nonresidential buildings than for other construction applications, particularly for industrial building panels and HVAC systems. Galvanized steel has also slowly made more inroads into steel framing, Gary Dallin, director of the International Zinc Association’s Galv Info Center, points out.

Galvanized steel consumption has also benefited from the public works sector. According to Plummer, infrastructure spending is currently seeing its fastest growth rate since before the recession due to pent-up demand for highway and bridge construction. Even without the much-discussed $1.5 trillion infrastructure spending plan going through, infrastructure construction spending was up 6.9 percent last year, after falling 3.2 percent in 2017, Plummer says.

Whether the upward momentum will continue could be dependent on Congress passing an infrastructure spending plan. There are mixed views about if, and when, that is likely to occur. IHS Markit’s Anton is very pessimistic, stating that given the widening federal deficit he doubts such a bill would pass “until the bridges start falling down.” Others are a bit more optimistic, especially since some politicians have expressed guarded optimism that such legislation could be an area of bipartisan compromise.

“We are hopeful given that no one is saying it is dead,” says Tony Hammes, O’Neal Flat Rolled’s vice president of supply chain management. Plummer agrees. “No one is arguing that there isn’t a massive need for it, but it remains unsure how it will be funded.”

Meanwhile, it appears as if the “torrid pace” of growth for residential construction has begun to ease, Hammes observes. Even with rising interest rates, there is expected to be single-digit growth – about 3 to 5 percent – in housing starts in 2019. This moderation isn’t surprising given that the housing sector has been in recovery for about a decade.

And as they tend to march in step with housing, domestic shipments of home appliances have also flattened out recently, Jim Barnett, chairman and CEO of Grand Steel Products Inc., points out. The most recent data from the Association of Home Appliance Manufacturers showed that shipments of major appliance were down 0.6 percent year to date through October.

The other major end-use market – accounting for approximately 35 percent of domestic galvanized steel consumption – is automotive. While North American light vehicle production was down 2.6 percent year to date through October, Plummer says HDG use by the industry was actually up 0.9 percent over the same time period. That’s due to the fact that 69.5 percent of the vehicles produced were light trucks, which contain 85 percent more HDG than passenger cars.

It is possible the recent announcement by General Motors to change its product mix to concentrate more on light trucks and electric vehicles could be supportive of additional auto-related galvanized demand, says Chris Billman research manager for Majestic Steel USA. That depends on whether they continue to produce the same number of vehicles domestically.

Also, Plummer notes North American auto output has recently started to improve slightly on a year-on-year basis with total light vehicle production up 3.2 percent, including a 5.2 percent year-on-year increase for light trucks. He says this could be the beginning of a positive trend.

Even with demand holding up, there is ample supply of galvanized steel in the marketplace, with expectations the supply could grow further as mills bring on additional production capacity over the next few years.

“One problem is that companies panicked after the Section 232 tariffs were announced last year, concerned that supply would be tight and overbought,” explains Bill Hickey, chairman of Bedford Park, Ill-based Lapham-Hickey Steel Corp. “So now there are a lot of inventories being held by service centers that need to be worked down.” This oversupply situation is at least partially to blame for HDG prices coming down as much as they have, even though domestic mill operating rates are quite high – as much as 90 to 95 percent of their capacity by some estimations.

There is little desire, or need, for service centers to build up stocks, especially in this falling price environment. “Companies remember how they got burned in the last downturn,” explains Lisa Goldenberg, president of Delaware Steel Co., Fort Washington, Pa. “Also, you can get what you want, when you want it, how you want it for everything but certain fringe items.” She says mill lead times for “vanilla” or commodity galvanized grades are quite short – as low as three to four weeks, but in most cases closer to six weeks – and should remain close to this range at least for the next few months.

Also, Hammes observed a little softening in mills’ optimism about future business over the past 60 to 90 days – not just for galvanized steel but for most of the products they produce. “I don’t think that anyone believes the economy will go negative. But it seems as if they are feeling that they are on a little bit softer footing than they had previously been.” Similarly, he says even though his customers are surprisingly optimistic about the first half of 2019, they are just as surprisingly pessimistic about what the second half will bring.

This is in line with a Duke University report that almost half of U.S. chief financial officers believed there could be another recession by as early as the end 2019, with more than 80 percent of the survey respondents saying they think that will be the case by the end of 2020.

Overall, there are more questions than answers about what the future will bring, Anton says, noting there continues to be a lot of uncertainty on the trade front. That includes the United States-Mexico-Canada Agreement, the proposed replacement for the North American Free Trade Agreement, which is not guaranteed to be ratified. Problems could arise with the new politically split U.S. Congress, plus the governments of Canada and Mexico.

With the Section 232 tariffs still in place against Mexican steel and aluminum products, at least for the time being, it will be difficult to get ratification from those two countries. It is possible the tariffs could be dropped entirely or converted to quotas. Anton says Mexican officials have stated they might not sign the USMCA if this isn’t addressed. Meanwhile, President Trump has threatened to pull out of NAFTA within the next six months, regardless whether the USMCA is ratified.

Beyond the tariff question, Ebben says the USMCA could be supportive of galvanized steel demand. Not only would it provide more certainty about North American auto production, but it includes a provision requiring greater domestic steel and aluminum content per vehicle.

Overall import licenses for HDG sheet and coil were down 16.6 percent month on month and 15.6 percent year on year in November, according to Commerce Department data. Nevertheless, even with the recent decline in domestic HDG prices and the tariff added in, domestic material is still about $180 per ton more expensive than European imports, Plummer says. The gap is even wider vs. Asian steel.

The rule of thumb is a gap of $100 per ton or more tends to encourage the buying of imports.

Given these dynamics, Hammes says he is surprised that mills have been so firm in their pricing negotiations for 2019. “I think they believe that their order books will pick up again sometime in the first quarter when service centers, having gotten their inventories too lean, will need to come back pretty heavy.”

While the late-October attempt to raise HDG and other flat-roll prices failed, it is widely expected that another price hike announcement is imminent. This is more likely to create a pricing floor than to immediately lift prices back up. Fastmarkets MB writes in its galvanized steel and tinplate market tracker that base prices could slip slightly more before plateauing and eventually moving back up. That reversal is most likely to happen sometime in the first quarter. But base prices are not likely to return to previous peak levels, rather rise back up somewhere between $40 and $80 per ton after falling $125 to $150 per ton from the peak.

Meanwhile, coating adders are something of a question mark, depending where zinc prices go. As of mid-December, mills hadn’t lowered their first quarter adders, though it remained possible with the recent weakness in zinc. “However, given the volatility of zinc prices, they are more likely to change base prices than lower adders,” Barnett says.

The impact of new production capacity coming on line over the next year or so, largely aimed at serving the automotive market, is another bit of uncertainty. Nucor Corp., for example has several projects on its plate, including 500,000-ton, 72-inch wide galvanizing line at its Gallatin plant in Ghent, Ky.; a 400,000-ton line at its Mexican joint venture with JFE Steel Corp., and a 500,000-ton line at its Hickman, Ark., plant.

Steel Dynamics is adding a 400,000-ton line in Columbus, Miss., and is expected to include a 450,000-ton galvanizing line in the new Southeast mill it recently announced. That mill, however, isn’t expected to come on line until at least 2022. There is also speculation that it could expand the galvanized capacity at the Terre Haute, Ind., facility it recently acquired. Protec Coating, a joint venture of U.S. Steel and Kobe, is also adding a 500,000-ton ultra-high-strength, continuous hot-dipped galvanizing line in Leipsic, Ohio.

These moves could put further downward pressure on prices. Plummer says it depends upon how much of it will replace imports as opposed to taking market share from their domestic competitors.

Over the past year, galvanizers’ production capacity has increased by about 2.5 percent, with the addition of several new plants as well as with some companies upgrading the size of their kettles at existing facilities. Rahrig says a big part of that growth has been OEMs adding internal galvanizing capacity. “We could see more of that happening going forward, as well as the potential for some European companies to open plants in the United States.” Some European companies are already in Mexico, “but it is difficult for galvanizers to serve the Midwest from Mexico.”

“2018 was a year that galvanized steel mills could print money,” Anton says. He adds 2019 could still be very good, though not as profitable. On the other hand, it will likely be less volatile, Hammes says, which is a positive for service centers.