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Third-Quarter Report & Outlook: Mills

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Quarter Sees Winner, Losers In their latest conference calls with analysts and investors, executives from the leading publicly traded steel and aluminum mills reported mixed results. AK Steel AK Steel Continues to Cut Quarterly Losses AK Steel, West Chester, Ohio, reported a net loss of $31.7 million for the third quarter. The loss was an improvement on the $60.9 million loss in the 2012 third quarter and the $40.9 million loss posted in the prior quarter. For the first nine months of 2013, the company reported a net loss of $82.0 million, a significant improvement from the net loss of $796.9 million for the first nine months of 2012. Year-to-date sales of $4.11 billion were off 8.8 percent compared to the first three quarters of the prior year. Net sales for the third quarter totaled $1.33 billion, down 8.9 percent compared to the same quarter of 2012 and off 5.0 percent from the prior quarter. Shipments of 1.35 million tons were down 8.9 percent from the third quarter of 2012 and 6.1 percent from the second quarter. The reduction in shipments for the third quarter was primarily due to the effects of the unplanned outage at the company’s Middletown Works blast furnace and to a seasonal reduction in shipments to the automotive market. As a result of the unplanned outage, AK experienced increased costs per ton, lowered shipments and was unable to fully benefit from recently announced price increases for carbon steel. The furnace was repaired during the quarter, but it did not return to full productivity, requiring a three-day outage in October for further maintenance work. “We believe we’re now back to full production capacity at the Middletown furnace and, accordingly, we expect to enjoy the associated higher production, higher shipments, lower unit costs and higher selling prices going forward,” Chairman, President and CEO James L. Wainscott told investors and analysts during the company’s quarterly conference call. AK Steel’s average selling price during the quarter was $1,071 per ton, down slightly from the same quarter last year but up 1 percent from the second quarter. The average selling price for the third quarter improved over the prior quarter due to a more favorable mix of value-added products, the benefit of which was largely offset by lower raw material surcharges and the effect of delayed shipments to customers. The company says it continued to fulfill its commitments to customers for lower-priced carbon steel spot-market orders placed prior to the unplanned outage. Further, it continued to experience a decline in electrical steel spot market pricing during the quarter, particularly with regard to international sales as a result of weak global economic conditions. Wainscott said most markets AK Steel serves are trending in the right direction. “Automotive is up, and so is housing and industrial production. Construction is trending positively and, except for a down month in September, consumer confidence also has been rising.” Inventories at the service center level also bode well for the demand picture, he said. Carbon steel service center inventories remain down 25 percent from peak of cycle in August 2008, and stood at just 2.4 months of supply at the end of September, below the historical average for the month. The same was true with stainless steel stocks, which stood at 2.9 months of supply at September’s end, well below the historical average of 3.8 months. AK Steel is concerned about the outlook for its electrical steel business. Wainscott said the growth in housing has been focused on the multifamily side, which uses less high-quality electrical steel. But the bigger issue is the amount of foreign product coming into the U.S. “America has been the dumping ground for electrical steel,” he said. AK Steel has filed two trade actions in response. The company followed up an existing trade case covering grain-oriented electrical steel with a September filing against six countries covering non-oriented electrical steel. The most recent case was filed against China, Germany, Japan, Korea, Sweden and Taiwan. “We urge the Department of Commerce and the ITC to bring a halt to unfair trade practices,” said Wainscott, who added that a decline in the international market has led to excess capacity and declining prices for the material. Nonetheless, AK Steel is confident about the long-term global prospects for its electrical steel products. Alcoa Alcoa Returns to Profitability in 3Q New York-based Alcoa reported net income of $24 million during the third quarter, a reversal from its second-quarter loss of $119 million. Net income was also a turnaround from the $143 million loss reported in third-quarter 2012. For the year to date, Alcoa’s income totaled $54 million, compared to a loss of $51 million during the first nine months last year. Net sales in the quarter totaled $5.8 billion, flat with both the previous quarter and third-quarter 2012. Through nine months, net sales declined 1.9 percent to $17.5 billion. “Our performance this quarter shows our repositioning of the company is on the right path,” said Klaus Kleinfeld, Alcoa chairman and CEO during the company’s quarterly conference call with investors and analysts. “We continued to build our value-add businesses, capturing demand for innovative material solutions across multiple markets. Our commodity business delivered better performance in a tougher market environment, and we continued to reshape the portfolio to lower the cost base.” Results were led by continued strength in Alcoa’s value-add businesses—Engineered Products and Solutions and Global Rolled Products—despite traditional third-quarter weakness. In the first three quarters, the two divisions accounted for 57 percent of total revenues and 79 percent of segment after-tax operating income. Global Primary Products overcame falling metal prices and lower premiums to deliver significant performance improvement through productivity gains, the company claimed. After-tax operating income in the third quarter hit $71 million, down from $79 million in second-quarter 2013 and $89 million in third-quarter 2012. Sequentially, lower metal prices continued to impact the segment, albeit less significantly than the prior quarter. Strong automotive results and seasonal demand in packaging were offset by lower volume in aerospace and industrial markets. During the quarter, Alcoa completed the previously announced closure of the two Soderberg potlines at the Baie-Comeau smelter in Québec, representing 105,000 metric tons per year of smelting capacity. Alcoa also closed one Soderberg potline, representing 41,000 metric tons of capacity, at the Massena East plant in New York. Alcoa now has 16 percent, or 651,000 metric tons, of smelting capacity offline. The company also broke ground on a $275 million expansion of its Tennessee operations to meet the growing need for aluminum sheet for the automotive market. It follows a $300 million project in Davenport, Iowa, for the same purpose. Kleinfeld said the investments demonstrate Alcoa’s confidence in the long-term prospects for automotive aluminum. “We cannot speak for our customers, but I think you can get a good feel for what we are doing in terms of investment. We would not have started our Phase 2 investment in Tennessee if the Phase 1 in Davenport would not have sold out. And if you look at Phase 2, we just broke ground a few weeks ago and most of the capacity there is already committed.” The company believes use of aluminum sheet in automotive will quadruple by 2015, and sees a tenfold increase by 2020. “It’s become pretty clear that aluminum-intensive vehicles have a clear competitive edge,” said Kleinfeld, citing safety, durability, CO2 emissions and fuel efficiency as the chief attributes. “Aluminum is moving rapidly into high-volume vehicles.” For 2013, Alcoa sees a 1-4 percent growth in aluminum demand compared to 2012, part of an overall 7 percent global aluminum demand growth forecast. Alcoa also projects global growth this year across the aerospace (9-10 percent), packaging (1-2 percent), commercial building and construction (4-5 percent), and industrial gas turbine (3-5 percent) end markets. In the heavy truck and trailer market, Alcoa is raising its 2013 growth expectation to 5-9 percent due to improvements in Europe and a stronger Chinese market. Allegheny Technologies ATI Strives to Restructure in Challenging Conditions Allegheny Technologies Inc., Pittsburgh, reported a loss of $28.4 million during its third quarter, a reversal from the $31.3 million in earnings reported during the same quarter of 2012. Net sales declined 14.1 percent to $972 million. For the first nine months of 2013, ATI reported a loss of $19.4 million, well off of the $147.9 million of earnings through the first three quarters of 2012. Net sales declined 14.2 percent to $3.1 billion. The Flat-Rolled Products segment operating loss for the third quarter 2013 totaled $20.4 million, reflecting the challenging market conditions for standard stainless and grain-oriented electrical steel products, pricing pressures on high-value products, including industrial grade titanium products, and lower overall demand for many high-value flat-rolled products due to global economic conditions, the company claimed. “Challenging conditions continued in the third quarter of 2013, and we expect business conditions to remain challenging through the remainder of 2013,” said Rich Harshman, chairman, president and CEO. “We are focused on taking the necessary actions to navigate the current challenging global economic conditions, while we continue to strengthen ATI’s position for future profitable growth. The restructuring actions announced last week represent an important part of this strategy.” ATI is restructuring its Engineered Products segment as a result of the sale of its tungsten materials business, plus the integration of the previously standalone specialty steel forgings business into its ATI Ladish forgings operation. Additionally, ATI will integrate its precision titanium and specialty alloy flat-rolled finishing business into ATI Allegheny Ludlum’s specialty plate business. ATI also announced plans to close its fabricated components business and divest its iron casting business. Altogether, ATI expects gross cost reductions in the first nine months to total $123.4 million, well ahead of the target of $100 million in full-year cost reductions. Looking at its markets, while the long-term trends in commercial aerospace, oil and gas, medical and automotive look strong, there are short-term challenges. “During third-quarter 2013, jet engine destocking at OEMs, while beginning to show signs of stabilizing, continued to impact shipments of both mill products and forged and machined components in our High Performance Metals segment. Lackluster economic growth in the U.S. and Europe, resulting in excess supply of natural gas, has temporarily softened demand from the oil and gas market. Also, global economic uncertainties and slowing global GDP growth has reduced project-related demand for our Flat-Rolled Products segment industrial titanium and nickel-based and specialty alloy sheet and plate products,” Harshman said. Additionally, he said, while stainless steel sheet price increases announced for August and October appear to be holding, the price increase effective Aug. 1 did not have a significant impact on improving the profitability of those products in the third quarter. Orders for most shipments were placed before the price increase took effect. “As we look ahead to the fourth quarter, we are not seeing any significant signs of improvement in market conditions. Also, the debate about the U.S. debt ceiling and other fiscal policy issues continues to create uncertainties that negatively impact short-term consumer and business confidence. These issues may negatively impact demand from many of our shorter-cycle end markets at least through the end of the 2013, and possibly into 2014,” he added. Kaiser Aluminum Kaiser’s 2013 Earnings Consistent with Last Year Kaiser Aluminum Corp., Foothill Ranch, Calif., reported net income of $25 million during its third quarter, a decline of 13.7 percent from the same period in 2012. The aluminum maker’s income was 31.5 percent better than the previous quarter. For the year to date, Kaiser’s income of $78 million is almost flat compared to the first nine months of 2012. Kaiser’s net sales during the quarter totaled $320 million, down 4.7 percent from third-quarter 2012 and 2.7 percent below the second quarter. For the year to date, net sales totaled $986 million, 5.7 percent behind the first nine months of last year. “Our third-quarter results were affected by throughput and manufacturing inefficiencies at our Trentwood and Newark facilities that negatively impacted our sales and costs. In addition, the aerospace inventory overhang for products other than plate continued to dampen demand,” said Jack A. Hockema, Kaiser president, CEO and chairman. The manufacturing inefficiencies were the result of a disruption of construction activities related to the expansion project and installation of the new casting complex at Kaiser’s Trentwood facility. The company also experienced an extended downtime with the casting equipment at its Newark facility during a planned major maintenance outage. “In contrast to these temporary setbacks, we were very pleased to see the ramp-up of our new automotive extrusion programs that created a step change improvement in our value-added revenue for automotive applications. We believe this represents the beginning of a new phase of growth for our company,” Hockema said. Value-added revenue of $182 million for the third quarter was slightly lower than value-added revenue for the prior-year quarter. For the first nine months of 2013, value-added revenue of $553 million was down 2 percent compared to 2012, reflecting a continuing inventory overhang in the aerospace supply chain, offset in part by higher value-added revenue for automotive extrusion applications. “Although the capital investment programs at the Trentwood facility negatively impact our results in the short-term, the longer-term benefits provide additional capacity to meet heat-treat plate demand growth and address critical production bottlenecks that currently impede our ability to maximize operational efficiency and flexibility,” Hockema said. “Despite some adversity in the third quarter, we continue to be very optimistic regarding the longer term outlook for our business. We expect improved performance in the fourth quarter; however, seasonal demand weakness and higher major maintenance expenses will likely offset the performance improvement. Overall, we anticipate value-added revenue to be comparable to the third quarter, although there is always some uncertainty when looking at the fourth quarter due to seasonal market dynamics as we approach year-end,” Hockema added. Nucor Sales, Earnings Up Over 2012, Second Quarter Nucor Corp., Charlotte, N.C., reported third-quarter net earnings of $147.6 million, a 33.8 percent gain over the same quarter in 2012. The minimill’s earnings were also up 73.3 percent versus the previous quarter. Through three quarters, Nucor saw net earnings of $317.5 million, down 13.7 percent compared to the first nine months of 2012. Nucor's net sales decreased 5 percent to $14.16 billion for the nine-month period. “Our third-quarter operating performance in the steel mills segment improved significantly compared with second-quarter performance mainly due to better pricing for sheet steel. Sheet steel profitability improved as a result of competitor supply disruptions, customer inventory restocking and some market demand improvement. Structural steel profitability also improved due to Nucor-Yamato Steel's higher production following its 17-day planned outage in the second quarter and customer inventory restocking,” said John Ferriola, president and CEO of Nucor. Third-quarter earnings were negatively affected by a net $14.0 million partial write-down due to the collapse of a storage dome at Nucor Steel Louisiana in St. James Parish. No one was injured, and there was no environmental impact from the mishap, the company said. Nucor Steel Louisiana was finishing construction of its new direct reduced iron plant on the site and preparing to begin production at the time of the accident. “We are certainly disappointed by this event. However, this was not an issue whatsoever with the process technology we are using to produce DRI. We are addressing the problem and expect to start production by the end of the current quarter,” Ferriola said. Nucor's consolidated net sales increased 6 percent to $4.94 billion in the quarter, compared to $4.67 billion in the second quarter, and increased 3 percent compared with $4.80 billion in third-quarter 2012. Average sales price per ton increased slightly from the previous quarter, but decreased 4 percent from third-quarter 2012. Nucor’s shipments to outside customers totaled 6.2 million tons in the third quarter, a 6 percent increase over the second quarter and a 7 percent increase over the same period last year. Total tons shipped to outside customers increased 1 percent over the first nine months, while average sales price per ton decreased 6 percent. Nucor’s mills operated at a 78 percent rate in the third quarter, up from 73 percent in the previous quarter and 71 percent at the same time last year. “Although we expect stability in metal margins, we typically experience lower shipping volumes in the fourth quarter due to seasonal factors. Additionally, we expect extended planned outages during the fourth quarter at our SBQ mill in Norfolk, Neb., our sheet mill in Berkeley County, S.C., and our structural mill in Blytheville, Ark., in preparation for our previously announced capital expansion projects at those facilities. As a result, we currently expect to see moderately lower earnings for the fourth quarter of 2013,” Ferriola said. Commenting on the recent indefinite idling of Evraz’s Claymont operations, Ferriola said his company expects some benefit from the removal of a competitor from the plate market. “They tend to provide a thicker product for the market. That being said, there are some overlaps on the grades we produce, and we have seen an incremental pickup in inquiries and order entries as a result of them closing. Obviously we serve a similar geographical territory.” Steel Dynamics SDI’s Income, Sales, Climb in Third Quarter Steel Dynamics Inc., Fort Wayne, Ind., reported net income of $57.5 million during its third quarter, a 338.4 percent increase versus the same period last year. SDI’s quarterly income was almost double the $29.0 million reported in the previous quarter. For the year to date, SDI saw net income of $135 million, up 31.1 percent from the first nine months of 2012. SDI’s net sales for the quarter totaled $1.9 billion, up 11.7 percent from the same period last year. Net sales were also up from the $1.8 billion reported during the previous quarter. For the full year, SDI’s net sales totaled $5.5 billion, down slightly from the $5.6 billion reported through three quarters of 2012. "Stronger steel sheet pricing, combined with increased overall steel shipments, provided significant improvement to our third-quarter financial results, as operating income from our steel operations sequentially increased $61 million. We continued to see meaningful improvement in galvanized and painted sheet product demand,” said Mark Millett, CEO of SDI. Third-quarter 2013 shipments across the company's operating platforms increased as compared to the sequential quarter. Operating income from the company's steel operations increased 69 percent to $149 million compared to the second quarter, primarily due higher average steel selling prices and a nominal decrease in the average scrap cost per ton. The company's steel mill production utilization rate was 89 percent in the third quarter, compared to 83 percent the previous quarter. The Structural and Rail Division continued to improve production utilization as structural steel shipments increased 17 percent over the sequential quarter. The average selling price per ton for the company's steel operations increased $13 to $794 in the third quarter, while the average ferrous scrap cost per ton melted decreased $5 per ton. Operating income attributable to the company's steel sheet operations increased 92 percent compared to the sequential quarter and earnings from long product operations increased 46 percent. “The automotive market remained strong and the steel-consuming manufacturing markets, such as HVAC and appliance, rose in concert with the improved residential construction market,” Millett said. “Although volumes have increased, customer buying patterns continue to reflect a preference to manage relatively low inventory levels. Additionally, the modest growth in the overall construction market benefited our structural steel and fabrication businesses, as evidenced by sequentially higher shipments and profitability,” Among its distribution customers, Millett said lean stocks continue to be the rule. “We see inventories still being incredibly tight through the supply chain. As I’ve said in the past, perhaps we’re closer to an inflection point than some people think, but it’s not going to happen in the next few weeks. We’re projecting a slow incremental improvement in the demand picture.” On the downside, third-quarter operating income from the company’s metals recycling operations decreased 29 percent to $11 million, compared to the prior quarter. SDI cited a decrease in ferrous metal spreads, with increased volumes failing to offset the decline in market prices. “Profitability from our Midwest operations was actually slightly improved. However, the continued industry overcapacity of shredding locations in the Southeast resulted in deterioration in earnings for those locations,” Millett said. SDI remains on schedule to complete two growth projects by year’s end: a 325,000-ton capacity expansion at its Engineered Bar Products Division and a product capability expansion into premium rail at its Structural and Rail Division. “We are optimistic, as the demand for high-quality steel products continues to improve,” Millett said. “We remain cautiously optimistic about the nonresidential construction market, as evidence of increased demand is shown by improved shipments of our structural and fabricated steel products.” However, he added, “the economy remains weaker than it needs to be to support a robust, sustainable recovery, and it continues to be subject to political headwinds.” Timken Profits Down in 3Q for Separating Timken Co. The Timken Company, Canton, Ohio, reported third-quarter net income of $2.2 million, down 35.5 percent from the same quarter last year. Timken’s net sales totaled $1.1 billion, a drop of 11.0 percent from 2012. "On a macro basis, economic growth across the world has been much slower than we and our customers envisioned, and our third-quarter results were below our expectations," said James W. Griffith, Timken president and CEO. "As a result, we are continuing to take additional actions to enhance margins despite the lower demand levels. These include leveraging our strategic investments, as well as implementing tactics to rationalize capacity levels and reduce costs.” Earlier in the quarter, Timken’s board of directors approved a plan to pursue a separation of the company's steel business from its bearings and power transmission business through a tax-free spinoff, creating a new, independent, publicly traded steel company in 2014. Timken posted sales of $3.3 billion in the first nine months, down 16 percent from the same period in 2012. The change reflects lower demand across most of the company's broad end markets. In addition, a $124 million decline in raw material surcharges from the prior-year period negatively impacted revenues. The decrease was partially offset by the benefit of acquisitions. In the first nine months of 2013, the company generated net income of $210.1 million, less than half the $420.2 million in the same period last year. Lower volume and manufacturing utilization, as well as sales mix, drove earnings during the first nine months. Sales for the company’s Steel Segment, including inter-segment sales, totaled $350.5 million in the third quarter, a decrease of 7 percent from the same period last year. The results reflect reduced shipments to industrial sectors, partially offset by improved sales to the mobile on-highway sector. Raw-material surcharges decreased $4 million from the third quarter last year. For the first nine months of 2013, Timken’s Steel segment sales totaled $1.1 billion, a 26 percent decrease compared with the same period a year ago. The company anticipates sales will be down 20-22 percent over the full year, driven by lower industrial and oil and gas end-market demand and lower surcharges.