Demand softened and margins were compressed for merchant bar producers and distributors in 2017, though signs point to a slightly better year to come.
Demand for merchant bar has been stable to slightly down this year, though the real weakness in the market has been on profit margins. Some executives are claiming margins have hit a multiyear low, which has effects throughout the supply chain.
There is hope, however, that 2018 will be a better year. That will depend on a number of factors, including the state of imported product.
Because of its various end-use applications, and the diverse products that fall into the classification, “The merchant bar market tends to be a tough one to figure out,” says Vince Pappas, president of Baltimore-based Stone Steel Corp.
Christopher Plummer, managing director of Metal Strategies Inc., West Chester, Pa., supports that contention. Plummer says merchant bar can be divided into two distinct markets – merchant bar quality shapes and MBQ bar – with very distinct dynamics. MBQ shapes, including angles and channels, are used primarily in nonresidential construction. MBQ bar, which covers flat and round bars, is used in various types of industrial, transportation and off-road equipment, plus some miscellaneous end-use markets.
Plummer estimates that MBQ consumption will be down about 2.8 percent in 2017, following a 4.4 percent decline in 2016. Most of the hit was in MBQ bar, which is down 8.5 percent in 2017 after falling off 12.6 percent last year. MBQ shapes were down just 1.6 percent this year, but were up 3.1 percent in 2016.
Most of the sales of the product continue to move through service centers. “The vast majority” of merchant bar is sold through distribution, says Robert Simon, CEO of LaPlace, La.-based Bayou Steel Group. How much varies by steelmaker, often depending on the number of downstream operations a mill maintains. Additionally, larger OEMs are more likely to buy mill-direct.
On top of that, some service centers have lost their appetite for the merchant bar business compared with other steel products, including rebar and SBQ. “The margins are just too short and the payments too long,” says Don Ascione, founder and secretary of Continental Steel & Tube Co., Fort Lauderdale, Fla.
Plummer says about two-thirds of MBQ shapes and about half of MBQ bar are sold through distribution. The biggest driver for MBQ demand, especially from service centers, is nonresidential construction. This is especially the case for fabricated MBQ product, claims Mike Morse, CEO for Morse Steel Service, Bellingham, Wash.
Lynn Lupori, head of North American metals consulting for CRU International Ltd., says nonresidential construction activity continues to grow, with expectations that it will be up 3.0 to 3.2 percent this year, a slight decline from original expectations. Gains of 3.3 percent are forecast for 2018
This is in sync with Dodge Data & Analytics’ recent 2018 construction outlook. Dodge calls for total U.S. construction starts to climb 4 percent this year and another 3 percent in 2018 as the U.S. construction industry moves into a mature stage of expansion, says Chief Economist Robert Murray
Dodge further predicts that commercial building will increase 3 percent in 2017 and another 2 percent in 2018.
Reconstruction efforts related to Hurricanes Harvey and Irma, combined with the FAST Act highway bill passed at the end of 2015, will boost public works construction about 3 percent next year after inching up 1 percent in 2017. Additional benefits are possible from President Trump’s proposed infrastructure build, “should it achieve passage in some form.”
An infrastructure program isn’t expected to filter down to additional merchant bar and other steel demand until 2019 or even 2020, according to John Anton, director of steel analytics for the pricing and purchasing service of IHS Markit. On the other hand, some gains could be triggered by the Infrastructure for Rebuilding America discretionary grant program announced by the Department of Transportation in June.
MBQ shapes are largely used in low-rise commercial and warehouse construction, plus institutional building. These nonresidential construction sectors tend to move hand in hand with the housing market, which continues to be on an upswing, Simon says.
According to the National Association of Home Builders, single-family housing starts were up 9.1 percent year to date through September. Dodge predicts they will move up another 7 percent next year. Anton says the rate of residential construction growth could be even greater, but it is being held back by an inability of builders to find workers.
On the MBQ bar side, the story has been more negative in the recent past. There are, however, some signs of improvement. One possible source of growth is heavy duty trucks, one of the larger MBQ bar end markets. While Class 8 truck demand was down 10 percent through the first nine months of 2017, the trend was reversed in September when demand grew 13.5 percent year on year. Plummer attributed the early sluggishness to the buying that occurred last year prior to new environmental regulations taking effect.
Plummer says tractors and other farm equipment have enjoyed a recent turnaround, with production up 5 percent year to date through September after several down years. The U.S. Department of Agriculture forecasts domestic farm income, which has declined for the past three years, will be up 3.1 percent in 2017, boosted by higher farm commodity prices.
Some other end markets, such as ship and barge building and the energy sector, still have a way to go. For merchant bar, energy end uses include both oil and gas and natural gas exploration. It also covers alternative energy applications, such as brackets for solar panels, Simon says. Use of MBQ in solar panels has seen an uptick, though typically on solar farms rather than residential panels, Pappas adds.
Even with expectations of about 2.4 percent annual GDP growth this year, MBQ demand is not likely to expand more than 1-1.5 percent, Anton says. While that’s a reversal of the previous years of decline, “It isn’t anything to jump up and down about.”
Despite the fairly stable MBQ demand and fairly low mill operating rates – about 65 percent of their production capacity, according to Charles Bradford at Bradford Research – additional domestic capacity is coming online. In November, Charlotte, N.C.-based Nucor Corp. announced it had selected its Bourbonnais, Ill., facility to locate a 500,000-ton merchant bar mill. The $180 million project will use existing melt-shop capacity at Nucor Steel Kankakee to produce a full range of merchant bar products.
Nucor is also in the middle of an $85 million upgrade program at its Marion, Ohio, operation. During its recent quarterly earnings conference call, Nucor Chairman, President and CEO John Ferriola said the investments were “a function of more fully utilizing our melt in each of our areas and better matching the product offerings in each region to the markets in those regions.”
Moreover, other mills’ plans to add long product capacity could be accompanied by the production of additional merchant bar. Plummer estimates that as much as 20 percent of the output at rebar, SBQ and wire rod mills could be MBQ.
How well the market can absorb any capacity increases will be affected by import penetration. A pickup in imports over the last two years has made it difficult for mills to raise MBQ prices, even as scrap prices moved up this summer. MBQ prices remained largely unchanged through mid-September, when the mills moved their list base prices down $60 per ton.
The stagnant prices weren’t by design. The mills attempted to lift their prices, “but none of those attempts got any traction,” Morse says.
Complicating matters was a wave of high-volume, aggressively priced bar imports, particularly from Mexico. MBQ bar imports were up 16.3 percent year to date through September, Plummer says.
Market observers say the resultant margin squeeze led mills to offer very high discounts to their customers to help them fill their order books. By September, the discounts had reached as high as $100 per ton, an unsustainable situation, Pappas says. That was when the mills sliced base prices, essentially bringing them down to levels that reflected what was actually being paid by most of their customers.
“Companies that were sitting on a lot of inventory weren’t very happy about the price cut,” Continental Steel’s Ascione says, explaining that doing so brought down the value of their stocks. “But if you buy bar to match orders, it could be a good thing.”
Pappas applauded the move, claiming that not only was it justified, but it created a more even playing field between smaller and bigger market players. According to Bayou Steel’s Simon, the biggest winners were smaller companies that didn’t receive large, or any, discounts before they were ultimately eliminated.
The next question is whether the recent decline in scrap prices will produce another dip for merchant bar and structural steel, Anton says. Or will the mills, following their stated quest to keep steel prices decoupled from scrap prices, use the savings to improve their profits margins? Anton is forecasting MBQ and other long products to remain sideways for the next few months.
Even with scrap prices falling, margins have been squeezed by other costs, Simon says. “Both alloy and electrode prices have been coming up significantly,” he says. While there has already been a meaningful increase in electrode prices, it will only get worse as long-term contracts are negotiated, he adds.
In addition to the price impact, there have been some concerns voiced about electrode availability and how that could affect EAF producers’ ability to make steel. However, Simon doesn’t believe the situation has reached a critical stage yet.
On a positive note, with merchant bar prices down, the price gap between domestic and import offerings has closed. “We aren’t seeing many imports coming from Asia to the West Coast,” Morse says. “The price gap is too narrow. Those imports are just not worth the risk.” Pappas says there is a similar situation with Turkish imports to the East Coast.
Simon adds that the gap between domestic and Mexican merchant bar prices have also narrowed somewhat, but Mexican imports continue to come in. “It would seem that at this pricing differential that they wouldn’t be worth the risk, but people are still buying them,” he says.
Overall, there is general optimism that 2018 will be a better year for both MBQ bar and shapes, Plummer says. He believes demand for MBQ shapes will see a 1-2 percent improvement, while MBQ bar consumption will increase by 3 percent.