Steel Market Update once again hosts supply chain leaders in Atlanta for three days of robust discussion.Three of North America’s largest service center operators gathered for a panel discussion at August’s Steel Market Update Steel Summit, and the first question posed was about a North American mill.
The potential sale of U.S. Steel, whether to notable suitor Cleveland-Cliffs or some other entity, was one of the prime topics over the course of the three-day event, and SMU’s Michael Cowden asked what everyone was wondering, “what does the service center space think of the possibility?”
Worthington Industries Executive Vice President and COO Geoff Gilmore was prepared, noting he’d given the question considerable time. “You hope it adds value to our industry. It doesn’t mean a whole lot to us. There will continue to be ample supply of hot-rolled,” he said, then added how he hoped he never had to discuss the topic again.
To Rick Marabito, CEO of Olympic Steel, one noteworthy element of the possible sale was what it did to U.S. Steel’s stock price. “You look at what’s happened to its valuation in the last two weeks. It just points to the American steel industry and the unlocked value that’s in it.”
And Ryerson President and CEO Eddie Lehrman noted how the interest speaks to the favorable country where companies such as U.S. Steel are located, given trends toward nearshoring, supply chain resiliency and sustainability. “It’s a belief that looking over the next 20 to 30 years, there are a lot of choices we’re going to make in order to create the best quality of life, and you’re going to have to make significant investment in recyclable metals.”
While U.S. Steel wrestles with its future, Worthington Industries’ is already set. In 2024, the Columbus, Ohio-based company will split its business units, separating the company’s service center business from its other holdings.
Gilmore is excited about the prospect. “We’ll have a more laser-like focus, a lot more attention to strategy,” he said. “And the other benefit is it allows us to grow quickly by having our own capital structure. When you’re part of a conglomerate, you’re consistently competing for capital.”
One thing the panel was not worried about was the possibility of mills encroaching their space. While companies such as Nucor have gone downstream, they’ve typically bypassed the distribution side of the business and moved directly into manufactured products.
“I don’t think that’s a move that they would make aggressively,” Gilmore said. “We’ve seen some of that over the years. When that occurred, those acquisitions stayed kind of a standalone. There wasn’t a roll-up strategy tied to that.”
Lehner agreed. “Some of the mills that have done downstream acquisitions have been in really clean verticals, with very tight product categories,” he said. “When you think about larger service centers, you can have up to 100,000 customers. Given the history of acquisitions and mill ownership, It’s been a better business model to be decoupled from the mills and be able to service the entire manufacturing industry.”
Part of the reason for their confidence is just how fragmented the industry is. One day earlier, Reliance President and CEO Karla Lewis was part of a fireside chat and explained how little consolidation has gone on, even by North America’s preeminent acquirer.
“We’ve worked very hard. I’ve been involved in 72 acquisitions, and we still have only 14 percent of the market,” Lewis said, noting there were plenty of opportunities in the distribution space for the small company.
Regarding demand, the service center executives were generally optimistic despite some areas of concern.
“Given some of the dynamics on pricing and inventory, the spot market has been a little weaker. But as a whole, I think our customer demand is good. The near-term outlook is good, and for the mid-term and long-term I’m pretty bullish,” Marabito said.
“The consumer in certain areas of the economy has shifted more toward experiences and services vs. goods consumption. Things that are interest-rate sensitive, leisure items like boats and trailers, have started to trail off,” Lehner said. “On the commodity side, carbon has been relatively stronger. When we look at shapes, long, plate and tube have held up better than sheet, and I think the pricing curves support that.”
As with many discussions, the conversation eventually turned to technology. Among those are the introduction of marketplaces. Cowden asked how the companies present have handled that change.
“The platforms are here. You can debate whether the companies that are here now are going to be around,” Lehner said. “But when technology comes into a marketplace, whether the company stays, the disruption remains.”
“You layer on top of where we are in the industry, automation, digitalization and you throw in AI on top of it, I don’t think anyone understands the total impact this might have on all different businesses,” Marabito said.
That doesn’t mean service centers aren’t embracing the opportunity. “We love innovation and technology. If it’s something that’s going to make our industry more efficient, you want to be involved in it,” said Gilmore.
Yet for all of the possibilities offered by new advancements, one hard fact remains. “The one thing we come back to is you still have to move the steel.
You physically have to break it down,” Marabito noted. “It can enhance our model, but the good news is it’s not like technology is going to take away our core competencies.”
Analysts See Challenging Year AheadWhile the service center panel exhibited an upbeat attitude about their business and conditions, the previous day’s remarks from a trio of steel analysts painted a much darker picture about the year to come. Or, as CRU’s Josh Spoores said, “2024 might be a year to forget. Plan now for 2025. It might be a better use of your time.”
Optimism was in short supply from Spoores, John Anton of S&P Global Market Intelligence and Wolfe Research’s Timna Tanners.
Spoores said the supply chain is “probably entering a six- to 10-month period of slowing industrial production.
The upside to his outlook is a strong rebound projected in 2025, with both demand and pricing strengthening.
Though his forecast was far from bubbly, Anton doesn’t believe there will be much movement in sheet prices. The global price can’t dip much lower or producers will be making steel at a loss. And there won’t be enough activity from customers to drive the price higher. “Demand can’t drive prices up, but prices can’t fall much lower in the rest of the world or people will be selling at an actual loss. It leads to one of the flattest forecasts I’ve ever had,” he said.
The same isn’t true for other steel products, most of which have stayed well above sheet despite similar input costs. Anton doesn’t believe that will last, and the prices for those other products will come down to meet sheet, rather than sheet coming up to them.
He set the price for sheet products in the low $700 range.
Tanners believes long products may maintain some of their edge over sheet due to the expected demand gains from government spending. “What we’re seeing in the private sector is going to be bad. But government spending will save the day.”
On top of that, the supply situation is tilted toward HRC, with most of the investments in capacity coming for sheet products. “We do believe there will be too much sheet supply over the next several years. Long products haven’t seen the same growth in supply,” she said. Tanners pegged the 2024 price of HRC a little higher, in the $750 to $800 range.
One product that won’t be running in lockstep with HRC is electrical steel, Anton added. The lack of capacity in the U.S. in the face of an expected unprecedented uptick in demand will shape the market for the next decade.
“If you need an electric motor, buy it now for 2026 delivery. If you need a transformer, but it now for 2028 delivery. The lead times are that bad,” he said.
The analysts also discussed the possible sale of U.S. Steel. On the one hand, Anton said, “Once a company is in play, generally something happens.”
However, none of the panelists were convinced that Cliffs would be the owner, despite the very public push made by company President, Chair and CEO Lourenco Goncalves, a late scratch at the summit due to the U.S. Steel announcement.
One of the biggest hurdles is antitrust concerns, as such a move would make a combined Cliffs/U.S. Steel the sole domestic producer of up to four major products.