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Construction Slump Cuts into Galvanized

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Gains in automotive continue to be offset by weak residential and commercial construction, leaving executives to wonder whether recent price hikes are sustainable in the galvanized sheet market. By Myra Pinkham, Contributing Editor While much improved, demand for galvanized steel continues to suffer from a weak construction sector. Despite price hikes announced for January and February, suppliers are concerned that new and restarted production capacity will put downward pressure on pricing in 2012. Galvanized prices have been volatile ever since the recession, which has made service centers cautious about building inventories, says Steve Almond, president of Phoenix Metals Co., Norcross, Ga. The lingering economic and political uncertainty around the globe has made companies hesitant to buy more than they absolutely need, especially since mill lead times are relatively short and mill depot stocks are readily available. Demand for galvanized steel—while marginally better in automotive, agriculture and other heavy equipment sectors—definitely has not recovered to prerecession highs, says Jerry Nelson, chief commercial officer for RG Steel LLC, Sparrows Point, Md. Weakness in building and construction, which account for about 40 percent of galvanized steel consumption, could persist for years, says Christopher Plummer, managing director of Metal Strategies Inc., West Chester, Pa. But even the construction market has been shown some recent signs of life, says Bill Sternard, executive vice president of Viking Materials Inc., Minneapolis. “I’m not saying it is picking up significantly, but the numbers are improving.” Single-family housing starts edged up in October to an annualized 3.9 percent. “While we still have a long way to go toward a recovery, some signs of hope are emerging in certain markets where economic and job growth is occurring and where foreclosures have not been an overwhelming obstacle,” says Greg Goad, general manager, commercial, for Severstal Columbus, Columbus, Miss. Ken Simonson, chief economist for the Associated General Contractors of America, reports improvement in the nonresidential construction categories. Commercial starts increased 15 percent, industrial building starts increased 24 percent, institutional building starts increased 10 percent and heavy engineering starts increased 5 percent year to date through November. The Architecture Billings Index of the American Institute of Architects, an indicator of future construction activity, hit 49.4 in October, up from September’s reading of 46.9, but still below the 50-point level that indicates increasing construction activity. “While construction has bottomed out, it is recovering a lot slower than anyone had expected,” says Kasandra Lutzko, product manager of metallic coated products for Fort Wayne, Ind.-based Steel Dynamics Inc. “I think we will see a slight seasonal uptick in the second quarter, much as we usually do, but we won’t see any sustained growth until the end of 2012,” predicts Nelson at RG Steel. How big an auto rebound? The automotive market’s growing need for galvanized steel is a whole different story. “We are seeing demand strengthen as automotive builds recover,” says Jim Mortensen, general manager of automotive sales for Dearborn, Mich.-based Severstal North America. North American automotive production is expected to reach 13.8 million to 14.0 million light vehicles in 2012, up from just under 13 million in 2011, says John Anton, director of the steel service at IHS Global Insight, Washington, D.C. That’s a major improvement from the 8.6-million-vehicle pace at the depth of the economic downturn. Anton expects annual auto industry output to return to 15 million vehicles by 2013. Richard McLaughlin, steel practice director for Hatch Beddows, Pittsburgh, is not as confident about the growing auto builds. Much of the recent growth could be the result of pent-up demand after slow summer production rates and supply chain disruptions tied to the earthquakes and tsunamis in Japan. “It is unclear if these rates of growth will continue past January or February,” he says. Price hikes to prompt buying? Lead times for galvanized steel have extended a bit in the first quarter because of a moderate increase in ordering activity prompted by mill price hikes. Major steel suppliers announced plans to raise galvanized prices by $80 to $110 a ton in three separate rounds, two effective with January shipments and the other with February shipments. Lead times for galvanizing lines vary depending on the markets they serve, notes Severstal’s Goad. Delivery now takes about six to seven weeks for general industrial orders vs. eight to nine weeks for automotive. Even with prices on the way up, few service centers and OEMs are hedge buying ahead of the increases. Most continue to order only what they need to fill holes in their inventories, he says. Chris Billman, market research analyst for Majestic Steel USA, Cleveland, says the second round of price hikes may have pushed some service centers off the fence and caused them to make some purchases. Almond predicts a good percentage of the announced price hike, $60 to $80 a ton, is likely to stick, especially with ferrous scrap prices on the rise. American Metal Market placed the average monthly Midwest hot-dipped galvanized sheet price at $910 a ton in December vs. $864 in November. “It wouldn’t surprise me to see another round of price increases early in the first quarter,” Nelson says. “I’m concerned that as domestic prices go up, however, the spread between domestic and import prices could be wide enough to increase imported galvanized steels late in the first quarter.” Up to this point, imports of galvanized sheet have not been much of a factor, except for certain specialized grades and sizes that aren’t readily available domestically, says Sternard at Viking, but that could change if the price spread widens. Does the market need more capacity? Another question for buyers is whether the stronger domestic prices are sustainable with all the additional galvanized capacity coming online. “I don’t believe there is enough demand to absorb all of the new capacity, not unless the economy picks up significantly,” says Almond at Phoenix Metals. Since much of the new capacity is more technologically advanced and cost effective, the older mills will find themselves at a competitive disadvantage, he notes. ThyssenKrupp Steel USA LLC has already brought its three hot-dipped galvanizing lines into production, as well as a cold-roll line at its new Calvert, Ala., mill. The facility adds 2.2 million tons of annual coated steelmaking capacity to the domestic market. Likewise, Severstal has commissioned the Phase II expansion of its Severstal Columbus facility, which gives the plant the ability to produce an additional 400,000 tons of coated steel each year. Severstal’s expansion of its Dearborn, Mich., facility raises its annual coated steel production capacity by up to 500,000 tons. Pittsburgh-based U.S. Steel Corp. recently restarted the 500,000-ton galvanizing and galvannealing Z-Line at its steelmaking complex in Hamilton, Ont. The Z-Line has one of the world’s largest zinc pots, which will take time to get up and running, so the company won’t be producing large volumes of steel there until sometime this quarter. U.S. Steel also has begun construction on a 500,000-ton continuous annealing line at its Pro-Tec Coating Co. joint venture with Kobe Steel in Leipsic, Ohio. The new line, which will be used to coat cold-rolled advanced high-strength grades, is slated to come online in first-quarter 2013. While RG Steel restarted the L blast furnace at its Sparrows Point facility last spring, it hasn’t restarted any of its idled coating lines nor has it announced any immediate plans to do so. However, as a “new old player,” Nelson admits that RG is looking to regain share in the galvanized market. With galvanized exports on the rise—up 27 percent from last year—there has been enough increase in demand to absorb the increased capacity so far. But much of the new production is just ramping up. “It depends on what happens with the world economies,” says SDI’s Lutzko, “but I don’t think that all of the capacity can be absorbed with current demand levels.” All capacity is not created equal, notes Mortenson, who warns against simply considering net supply vs. net demand. Severstal is gaining new capabilities with its expansions at Columbus and Dearborn that will enable it to enter new markets, he explains. The expansion at Dearborn will allow it to produce exposed galvanized and galvannealed steels for a wide range of high-strength steels, as well as a wide range of high-strength and advanced high-strength steels. At Columbus, it will be able to produce 0.130-inch thick by 72-inch wide cold-rolled and hot-rolled galvanized product. Much of the new capacity is aimed toward the growing automotive market in the South. These facilities are also well located to export steel to Mexico, Plummer notes, and won’t necessarily worsen the overcapacity targeting construction and other capital equipment markets. Most experts agree that 2012 should be a decent year for the galvanized steel market, better than 2011, but still well below prerecession levels. “I don’t expect to see anything significant until after the presidential elections and until banks become more confident about lending money,” McLaughlin says.