SBQ Market Report 2017
Bearish Outlook for Bar Mills expect demand for special bar quality steel to “move sideways” in 2017
By Tim Triplett
on Jan 4, 2017
Except for orders from automotive suppliers, demand for special bar quality steel has been disappointing this year. Leading producers forecast more of the same in 2017.
“Automotive is the only bright spot, basically,” says Shawn Seanor, executive vice president for sales and business development at TimkenSteel, Canton, Ohio.
Energy and the other industrial markets such as rail, machinery, construction, mining and power generation are all down from 2015. TimkenSteel produces SBQ from 1-inch up to 16-inch rounds.
The large bar segment has been particularly hard hit by the downturns in energy production and mining and construction equipment. Automotive is the largest consumer of SBQ. Its seven-year run of record production has been a boon for steelmakers, who wonder how long the good times can last.
“The auto market, which accounts for about 45 percent of all SBQ demand, is clearly now at a cycle peak,” says Christopher Plummer, managing director at Metal Strategies Inc., West Chester, Ohio. U.S. SBQ shipments declined nearly 10 percent in the first three quarters of this year, Plummer reports.
Among the major end-markets for high-quality bar, construction grew by 4.7 percent, automotive grew by 2.1 percent, farm equipment grew by 2.7 percent, and industrial equipment grew by 1.1 percent. Most other sectors saw declines in demand, including heavy truck production, down 18.4 percent; construction vehicles, down 12 percent; and service center shipments, down 6.9 percent.
Service center SBQ inventories were down 16 percent as of September. Metal Strategies placed the price of SBQ at around $690 per ton, down from about $760 a year ago.
In fact, automotive’s growth is beginning to plateau. U.S. vehicle sales for the first 10 months of the year declined by 0.2 percent, though they could still top the 17.4 million mark. General Motors has announced layoffs at car assembly plants in Michigan and Ohio.
“There are ebbs and flows as jobs move here and there. It depends on your participation. But, on the whole, our automotive business remains very strong,” Seanor says.
The energy market is another matter. Oilfield production has slowed dramatically over the past two years in the face of low oil and gas prices. According to Houston oilfield service company Baker Hughes, there were 772 rotary rigs in action in North America as of mid-November, up 28 rigs from the prior week, but down from 923 the same time last year. In the U.S., the rig count jumped by 20 to 588 rigs, but remained down from 757 rigs in 2015.
“Rig counts are up 30 percent off the bottom, but are still at very low levels compared with 2,000 at one point,” Seanor says. “Energy is at low levels, but there is activity. Operators are completing wells now.”
Just because the rig count has improved does not mean SBQ orders have followed suit. There is a lot of inventory in the supply chain—both raw materials and finished parts—which will take some time to work through, Seanor says.
With the oil price dipping back below $50 a barrel late in the year, the outlook for energy remains a big unknown for SBQ suppliers. In response to the low energy prices, energy producers have found ways to extract more oil and gas from fewer wells.
As Halliburton Co. President Jeff Miller told investors during a recent conference call, 900 is the new 2,000 when it comes to the rig count. Today’s rigs can drill farther and faster, and are much more efficient, which means demand for SBQ for drill bits, drilling collars, tooling, connections and couplings may never be the same.
In addition to the weak drilling activity in the energy markets, production of heavy Class 8 trucks also hit the brakes this year, says Ricardo Fioramonte, vice president of sales and marketing at Gerdau Special Steel North America, Jackson, Mich., which offers SBQ in the 1- to 6-inch range. Truck sales had been strong due to pent-up demand following the 2008-09 recession, but it appears they peaked last year.
“We all expected Class 8 sales to go down, but not to the extent that they did,” Fioramonte says. He estimates a 30 percent decline in truck production, more than double Gerdau’s projections. Given the abundant supply, lead times for SBQ currently are just 8-10 weeks for automotive customers and 4-6 weeks for commodity spot buys, according to Fioramonte. “With mill lead times so short right now, service centers are in a comfortable position. They don’t have to carry too much inventory, which is good in uncertain times like these.”
Service centers contributed to the low demand by buying more cautiously toward the end of the year. Some bought ahead of the anticipated increase in the price of scrap in November, which could lead to a flatter-then-expected first quarter, sources say.
The auto-heavy market demand has influenced the product mix. The average diameter that TimkenSteel ships has decreased in size, Seanor notes, because most auto applications use below 4-inch rounds.
“With automotive so strong, that’s just a natural direction," he says. "Inside TimkenSteel, we have done a good job of rolling for the auto space. We are strong on the engine side of applications, which takes a certain kind of product. Our growth in transmission and drive line components is a bit of a different product mix. If you look at the numbers, we are seeing growth in the smaller sizes.”
SBQ imports declined by nearly 27 percent in the first three quarters, but still retain a significant market share, according to Metal Strategies. Historically, SBQ imports are based on bar diameter, with little foreign material in small diameters and more in the intermediate and large sizes.
That trend continues, says Seanor. TimkenSteel and other domestic producers remain vigilant about unfair trade practices and prices. “We continue to track imports and stand at the ready to take any action necessary based on those numbers,” he adds.
With a melt capacity utilization of 44 percent in the third quarter, TimkenSteel production was up from the same quarter last year, but still below desired levels. “We are working very hard to get our utilization up over 50 percent. Fifty percent is pretty typical for the industry right now,” Seanor says.
Dan Keown, operations manager for Steel Dynamics’ Engineered Bar Products Division in Pittsboro, Ind., notes that the market continues to suffer from major overcapacity issues despite curtailment of some production at a few mills in the past couple of years. In the face of the weak demand, the overcapacity for SBQ is putting pressure on pricing.
“Mills are fighting for volume going into 2017, so it’s a buyer’s market as we sit today,” Keown says. SDI’s product line ranges from ¾-inch to 9-inch rounds, as well as round corner squares from 3 to 7 inches.
Keown’s description of the market is about the same as Seanor’s. “Automotive is still strong for us, but pretty much all the other end-uses are slow.”
SDI sees no reason conditions in the SBQ market will change in 2017. “Auto is projected to be strong for several years, so we are working on playing more heavily in the automotive field,” Keown says. SDI is hopeful the Trump administration will follow through with its plans to boost spending on the nation’s aging infrastructure. “We are looking forward to the new policies and the infrastructure build, which should definitely help the heavy equipment market, which in turn could help SBQ.”
Keown echoes the sentiments of many when he looks past first-half 2017. “We are looking for the first half to be similar to what we saw in 2016," he says. "We are hoping something changes with policy or overall demand to pick up the second half of the year.”