A year ago, the special bar quality bar market was so tight that much of the product was on allocation. But this year, the market demand is quite soft, prices have been falling and mill lead times have shrunk significantly. Most producers are operating at roughly 50 percent of their rated capacity and many have been offering sizable price discounts to fill up their order books.
The transformation of the SBQ market has been called “striking.” John Anton, director of steel analytics for IHS Markit’s pricing and purchasing service, says SBQ was a hyper-seller’s market in 2017 and 2018, with demand not only exceeding supply but exceeding the production. Now, it’s a buyer’s market, with mill lead times reportedly falling to between 4 to 12 weeks, depending upon the mill and grade, down from as much as 30 to 50 weeks for much of last year.
In its most recent quarterly conference call, TimkenSteel reported its SBQ shipments were down 27 percent year on year and will likely be down another 15 percent in the fourth quarter. Tyler Kenyon, a metals and mining analyst for Cowen & Co., says TimkenSteel’s shipment levels tend to be a good bellwether for the SBQ market, given they are a “pure play” SBQ/seamless mechanical tubing producer.
Different producers, however, have seen different degrees of falling demand, partly due to the end-use markets they serve. Gerdau Special Steel’s North American SBQ business is primarily sold into the automotive market, which has declined only modestly, says Luis Colembergue, the company’s vice president of sales and technology.
Though down not quite as much as shipments, apparent consumption is expected to decline 9.2 percent in 2019 and another 3.4 percent in 2020, says Christopher Plummer, managing director of Metal Strategies Inc. This followed a 5.1 percent increase in 2018.
This year’s weakness is not all that surprising, Kenyon says, given SBQ is “smack dab in the middle” of three softening steel end-use markets – energy, the industrial sector and automotive. Additionally, there has been broad destocking of SBQ by distributors, which he estimates to account for somewhere between 50 and 60 percent of SBQ sales, as well as downstream by OEMs, fabricators and forgers.
That comes after a massive buildup of SBQ inventories last year. Joe Druzak, president and CEO of Kreher Steel Co. LLC, says one reason for the accumulation was due to uncertainty created by the Section 232 tariffs, resulting in interruptions to the supply chains and panicked steel buyers purchasing more SBQ than they needed. This condition was exacerbated once certain end-use market demand softened.
Based on data from the Metals Service Center Institute on SBQ and seamless mechanical tube, which is made from SBQ, shipments are off 30 percent year over year, estimates Tom Moline, TimkenSteel’s executive vice president of commercial operations. That’s steeper than most other products they stock, which is one reason there’s been such a large buildup in service centers’ SBQ inventories.
“While SBQ inventories are currently in better shape than they were four or five months ago, they are still a bit high,” Druzak says.
It wasn’t just the fear of a shortage that prompted all the buying late last year, Kenyon says. Many companies sought to stock up SBQ ahead of the sizable upward annual contract resets that took place at the beginning of 2019.
This came as scrap prices were moving up, resulting in rising SBQ surcharges, therefore higher selling prices. Plummer observes that late last year hot-rolled carbon SBQ peaked at $927 per ton, hot-rolled alloy SBQ at $1,070 per ton, cold-finished carbon SBQ at $1,307 per ton and cold-finished alloy SBQ at $1,677 per ton.
Anton maintains there is no such thing as a true metals shortage, but rather instances where companies hadn’t raised prices high enough. He says that was what happened with SBQ last year, when SBQ supply was as tight as it had been.
“While SBQ prices were high last year, given how long lead times had been, they should have been higher. In a real sense the mills were leaving money on the table to encourage more long-term business,” Anton says, noting at the same time there was a supply response to the tight market conditions. “All of the mills that were able to produce SBQ were making as much as they could, not only running flat out but also converting some of their other capacity to SBQ and making their production equipment more efficient.”
As result, Plummer says there has been a dramatic increase in new North American SBQ production capacity, almost exclusively through brownfield expansions. Nearly 3 million tons of annual production capacity, representing a 40.3 percent increase, has been brought online between 2015 and 2019 by Nucor Corp., Gerdau, TimkenSteel, Charter Steel and Grupo Simec at its Republic Steel operation. Some of it is still ramping up.
Moreover, even further production capacity is in the works. For example, Gerdau is planning a further upgrade at its Special Steel North America SBQ mill in Monroe, Mich. Colembergue says the project, which is expected to be completed in mid-2020 and ramped up through 2021, will increase the facility’s capacity by about 180,000 tons per year. But the capacity increase is just a positive side effect, as the primary purpose for the investment is to increase the efficiency of the mill and to reduce its production costs.
Also, TimkenSteel is in the middle of expanding its St. Clair facility in Eaton, Ohio, a project that is expected to be completed next year. Moline says this move is tied to an award of powertrain components for several automotive OEMs it will be launching in 2020 and 2021. The investment will not only help the company increase its penetration in fuel-efficient power transmission components, but also supports TimkenSteel’s strategy to expand its product offerings, including some products for battery electric vehicles.
Finally, Nucor is adding vacuum degassing capabilities at its Darlington, S.C., bar mill.
However, Druzak says the additional SBQ capacity that has come online and is continuing to come onstream is no longer necessary. “Last year there wasn’t enough capacity, but today there is too much.” Still, no one is idling any capacity – at least not yet. “That could happen if the market goes further south. But I don’t see that happening, as I believe that the market is pretty close to bottoming out. Bear markets don’t last forever.”
Moline says a host of factors need to be in place for service centers to start buying again, including confidence the scrap prices have bottomed out and faith the underlying SBQ demand will improve. Until lead times start moving out, distributors and other SBQ buyers are likely to remain cautious, he says.
“Many believe we are already in a manufacturing recession,” he says, a position supported by the Institute for Supply Management’s Manufacturing PMI dipping into negative territory for three successive months, most recently registering 48.3 percent in October.
“If there is a recession, all bets are off,” Druzak says. “But right now, it appears that the underlying economy will remain OK.”
As far as the softening of U.S. SBQ demand this year, Colembergue maintains it has been largely coming from the energy sector. That isn’t very surprising given that Baker Hughes reports the number of active U.S. drilling rigs were down 24.4 percent year on year as of Nov. 8 to 817 rigs, which TimkenSteel’s Dunlap says is the lowest they been since early 2018. Plummer estimates energy accounts for about 10 percent of domestic SBQ consumption.
Crude oil prices continue to fluctuate between $50 and $60 per barrel and drilled but uncompleted (DUC) wells remain at historic high levels, greater than 8,000 wells. Dunbar says the market is weak, with operators constraining spending and tool and component manufacturers are focused on reducing inventory. “Most service centers that service the oil and gas industry still have far too much inventory to support demand.”
While there is currently intense competition for orders and that any talk of offshore drilling continues to be pushed out into the distant future, Dunlap believes the tool and component manufacturers will start coming back into the market as more DUC wells get completed.
Automotive remains the largest end use for SBQ, consuming about 45 percent of the market. The sector has been surprisingly resilient in 2019, with production down just 2.3 percent compared with the first nine months of 2019, Plummer notes.
According to Gerdau’s Colembergue, North American light vehicle production is expected to hit 16.8 million tons, a historically high level, with the decline attributed to the recently concluded General Motors strike. The work stoppage took almost 300,000 units off the assembly lines during part of the third and fourth quarters.
While he admits it will take some time for the automotive supply chains to recover from the strike, he downplayed the impact upon SBQ. “We are expecting that some of the tons that aren’t shipped in the fourth quarter to be shipped in addition to what was originally planned for the first quarter of 2020.”
Moreover, the current vehicle mix, with more than 70 percent of automobiles produced in North America being light trucks, is a plus for SBQ. Plummer observes that production of light trucks, which tends to contain 85 percent more SBQ than passenger cars, was actually up 1.1 percent year to date through September, while sedan output was down 10.2 percent.
That trend isn’t abating, says Chuck Short, Gerdau Special Steel North America’s marketing director. The light truck share could climb to 78 percent over the next three years,
Increased demand for electric vehicles could eventually have a negative impact, Druzak points out. Plummer agrees, observing that given EVs do not have spindles, gears and certain other engine and transmission parts, they contain about a third less SBQ than internal combustion engine vehicles.
But with EV production still very low – currently accounting for only about 2 percent of the vehicle mix – Colembergue says it hasn’t had much, if any, immediate impact upon SBQ demand. That could start to happen by 2030 and beyond as EV production steps up. There have already been some moves in that direction. For example, the shuttered GM assembly plant in Lordstown, Ohio, has been acquired by newly formed Lordstown Motors Corp., which plans to start producing the Endurance all-electric, four-wheel drive pickup truck there starting late next year.
Moline says that while fully electric vehicles use less of the material, many of the hybrid platforms that are currently being developed have significant demand for SBQ. He says TimkenSteel is adjusting its value-add model to accommodate the type of products required for those platforms. In fact, it has already been awarded business for future battery electric and hybrid powertrain platforms that are slated to ramp up in 2021 and beyond.
SBQ demand has also weakened this year for such industrial applications as heavy equipment, which Kenyon attributes to the destocking activity that has been going on at equipment dealers over the past 3 to 6 months, which in turn has affected OEM production schedules. Heavy equipment production, especially farm equipment, has also been dampened this year by the U.S.-China trade war and adverse weather conditions. Demand next year will very much depend upon how much of the farmers’ losses this year is covered by insurance. Despite the headwinds, the latest forecast from the U.S. Department of Agriculture is for farmers’ income to increase 2.9 percent this year, which could be a plus for domestic demand, but exports will depend upon whether a U.S.-China trade deal is reached or if the tariff war between the two nations escalates.
While demand for heavy duty trucks and truck trailers were at record levels earlier this year, those markets have lost some steam in the second half and are likely to fall further in 2020. Colembergue says it will just be a correction to a more historical level, explaining, “A year like 2019 doesn’t happen very often.”
Anton says demand for 4100-series SBQ, which is used in aircraft landing gear, is starting to be negatively affected by the grounding the Boeing’s 737 MAX as SBQ inventories get worked down. “But if there is a semi-permanent problem with the 737 MAX, there will be a semi-permanent loss of SBQ demand.”
Given all of the destocking of SBQ that has already occurred, Druzak predicts that 2020 will be at least a little bit better than this year. Plummer agrees, although he expects that any pickup in pricing and demand will be relatively modest given recent end-use demand erosion. “Even sectors that remain positive are likely to see lower growth rates next year.”