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SBQ Market Report

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SBQ Slips in the Second Half The market for high-quality bar products was one of steel sector’s strongest—until the tide turned in the second half of the year. By Myra Pinkham, Contributing Editor The hot and heavy market for special bar quality products has cooled considerably in the past few months. Given the headwinds SBQ faces on both the supply and demand sides, it may struggle to gain much ground in 2013. “It has been a tale of two halves this year,” says Salvatore Miraglia, president of the steel business at The Timken Co., Canton, Ohio. While the first half was quite strong, marked by some year-long lead times and orders on allocation, the second half was much weaker, with declining prices and no indication that activity will turn around any time soon. Rising imports and increased domestic production capacity, to come on-stream in the next year or two, could boost supply ahead of demand and delay any recovery, experts agree. “Demand has been pretty ugly in the last three to four months, with a 15 to 17 percent drop-off in tons shipped from the first half of the year,” says Jeff Simons, vice president of sales and marketing for O’Neal Steel Inc., Birmingham, Ala. Offering a more positive perspective, Christopher Plummer, managing director of Metal Strategies Inc., West Chester, Pa., says current SBQ demand is not as bad as it may appear. While the market is in a correction, it remains stronger than many other steel segments. Even with the slowdown in the second half and an 18 percent increase in imports, domestic SBQ shipments are up about 20 percent for the year and could increase another 5 to 8 percent next year, he estimates. Other industry observers are less optimistic about next year, citing the political and economic uncertainties posed by the “fiscal cliff” and other tax and regulatory issues in the U.S., the debt crisis in Europe, the slowing of China and other Asian economies, and the escalating unrest in the Middle East. John Anton, director of the steel service at IHS Global Insight, Washington, D.C., does not expect a major downturn next year, but says domestic SBQ demand could decline slightly as the market marks time awaiting better news in 2014. Even 2014 is likely to be a mixed bag as the market anticipates the addition of nearly 2 million tons of new SBQ capacity to come on line by early 2015. The long lead times of 2010 and 2011 were unsustainable, says Simons at O’Neal, and the market needed to make a correction. With lead times so extended, distributors tended to over order, causing an overhang in the supply chain that contributed to the weakness in the second half. At the same time ferrous scrap prices declined steeply, with No. 1 busheling falling 35 percent and No. 1 heavy melt falling 29 percent from January to October. The result was a 25 percent decline in SBQ transactional prices due to the lower raw material surcharges, Plummer says. With prices on the decline, many buyers, including service centers, began holding off purchases. “We believe the underlying demand has softened, as well,” he adds. Sources say these market shifts have shortened SBQ mill lead times to as little as four to six weeks for more commodity grades and larger diameter bars. Even higher quality alloys and narrower diameters reportedly are available within 16 weeks. “Companies are buying to the lead times out there,” says Bill Zielinski, vice president of marketing for Chicago Tube & Iron Company, Romeoville, Ill. In terms of major SBQ end-use markets, automotive demand will continue to be strong, says Daniel McNaughton, vice president of purchasing for Eaton Steel Bar Co., Oak Park, Mich. With the average age of vehicles on the road at about 10.8 years, “many people don’t have a lot of options but to buy a new vehicle.” Demographics, with more young people looking to buy new cars, are also favorable, adds Jim Hoffman, senior vice president of operations for Reliance Steel & Aluminum Co., Los Angeles. North American automotive output was up 22 percent through August. Auto production is approaching pre-recession levels of around 15 million units, despite modest sales decreases in the past few months, some attributed to the effects of Hurricane Sandy. More than 15.2 million vehicles are expected to be built in 2013, with production increases to record levels in 2017 to 2018, analysts say. Meanwhile, Plummer says production of heavy duty trucks has declined by almost 18 percent year on year, compared with a peak monthly growth rate of 72 percent in February. Most of the pent-up demand for trucks from the recession has been met, he says. Anton feels this as a short-term correction as trucking companies re-evaluate their plans, and he expects truck output to accelerate again going forward. Eaton’s McNaughton sees other factors at play in the waning demand for trucks. For one, replacement costs for trucks are prohibitive for some independent operators. “They also have been impacted by certain new regulations. There are demographic reasons, too, including older drivers retiring and fewer young people willing to become truck drivers.” Weak demand for heavy equipment exported to other parts of the world has contributed to the decline in SBQ orders. As much as 50 percent of heavy equipment produced in the United States is sold outside the country, observes Zielinski at CTI. “But it will come back some in the next few years as those countries build up their infrastructures,” he says. Domestic construction equipment shipments were up 5.8 percent through September vs. the first nine months of 2011, though they were down 1.7 percent for the month compared with September 2011, according to Metal Strategies. While demand for agricultural equipment has been strong in the past several years, Metal Strategies reports that it is down 2.6 percent year on year. Kim Leppold, senior steel analyst for Metal Bulletin Research, says that because of this past summer’s drought, farmers don’t have as much cash to invest in new equipment. In the energy sector, the number of drill rigs operating in the United States fell to 1,806 during the first week of November, down 11.6 percent from the 2,016 rigs operating a year earlier, according to Houston-based Baker Hughes Inc. With the new productive drilling technologies, including the controversial hydro fracturing or “fracking” in the nation’s shale plays, U.S. natural gas inventories at the end of October hit an end-of-season record of 3.923 trillion cubic feet. That has contributed to natural gas prices remaining below the pricing level that is profitable for energy companies to drill, and subsequently has reduced demand for metal products, including SBQ. It isn’t that demand for SBQ in the energy sector is bad, says Hoffman at Reliance, offering this analogy. “When you go down the highway at 100 miles per hour and then slow to 75 miles per hour, you are still speeding.” Meanwhile, the SBQ supply situation is in flux, with some mills adding capacity and others cutting back on production to keep it more in line with demand. In response to market conditions, ArcelorMittal Indiana Harbor Long Carbon reportedly has placed approximately 155 hourly employees on a 32-hour work week schedule, while ArcelorMittal Georgetown has transitioned from a three-crew operation to a two-crew operation, affecting 30 employees at the facility. On the flip side, Gerdau Special Steel North America plans to add 400,000 tons of SBQ production capacity, largely in Monroe, Mich. Nucor Corp. plans to add 800,000 tons of capacity at three of its mills. Republic Steel plans to add 150,000 tons in Lorain, Ohio. Steel Dynamics Inc. plans to add 325,000 tons of capacity in Pittsboro, Ind., and Timken plans to add 250,000 tons of capacity at three of its facilities. All total, that amounts to more than 1.9 million tons of new capacity in a 7.3 million ton annual market. The new domestic capacity is likely to reduce import penetration to about 20 percent of the market, from the current 25 percent, so it is not necessarily a net increase of 1.9 million tons, Plummer notes. SBQ supply issues have also been magnified by increased imports. Due to their long lead times, many of those imports were ordered back in the first quarter when the market was much tighter, in quantities that exceed the needs of today’s market, says Miraglia at Timken. Some of that material, especially imports directed at the energy market through the Port of Houston, was not even pre-sold, says Eaton’s McNaughton. Some mills in countries with a waning home market were willing to take the risk of exporting uncommitted product, adding to the excess that has pressured pricing. Despite the current oversupply situation, Mark Millet, SDI’s president and chief executive officer, maintains that his company’s SBQ project is still “incredibly compelling.” It will further diversify the product portfolio at the Pittsboro structural mill and give the company more exposure to the automotive, off-road vehicle and other manufacturing applications. Dan DiMicco, Nucor’s chairman and chief executive officer, says his company’s SBQ expansion plans are not so much based on current market conditions, but on what it expects in the future. “We are very confident that we’re going to see an influx of manufacturing, for a host of reasons, in sectors that are strong consumers of SBQ-type products, and in the energy area, as well.” While there may be a few quarters in which supply outstrips demand, Miraglia is confident that Timken’s investment, which is targeting the oil and gas market, will be needed in the long term, given all the planned development in the shale plays and the country’s goal of energy independence. Despite the recent softness in demand, SBQ base prices have held steady with any transaction price movement tied to raw material price surcharges, suppliers say. After many months of decline, those surcharges increased $53 per ton for Dec. 1 shipments, showing some stability as the New Year approaches. How the SBQ market fares in 2013 depends on the economic recovery in the U.S. and abroad. Many executives expect a year very similar to 2012, though with perhaps more strength in the second half than the first. The big question for 2014 is whether demand will be strong enough to absorb all the new capacity without undermining prices.