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Third Quarter Report and Outlook

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‘Challenging Conditions’ In their recent third-quarter conference calls with analysts and investors, most mill executives reported disappointing results compared to last year. AK Steel Mill Suffers Losses for Three Quarters AK Steel, West Chester, Ohio, reported a net loss of $60.9 million for the third quarter of 2012, compared to a net loss of $3.5 million for the third quarter of 2011. Net sales for the third quarter of 2012 totaled $1.46 billion on shipments of 1,363,500 tons, compared to net sales of $1.59 billion on shipments of 1,368,800 tons for the year-ago third quarter, and net sales of $1.54 billion on shipments of 1,335,800 tons for the second quarter of 2012. The company said its average selling price for the third quarter was $1,073 per ton, a 7 percent decrease from both the second quarter of 2012 and the third quarter of 2011. The lower average selling price for the third quarter 2012 compared to the second quarter of 2012 was primarily due to lower spot market prices for carbon steel products, reduced raw material surcharges and a lower value-added product mix. “Challenging domestic and global economic conditions continue to weigh on shipping volumes and prices,” said James L. Wainscott, chairman, president and CEO of AK Steel during his recent conference call with analysts and investors. “Additionally, while we expect to enjoy lower raw material costs in the future, we are still working through some higher cost raw material inventories.” For the first nine months of 2012, the company reported a net loss of $796.9 million, versus net income of $38.3 million for the corresponding 2011 period. Net sales for the first nine months of 2012 totaled $4.51 billion, compared to $4.96 billion for the first nine months of 2011. Shipments for the first nine months of 2012 were 4,025,200 tons, compared to 4,288,900 tons for the first nine months of 2011. Alcoa Price Declines Impact 3Q Revenue Aluminum maker Alcoa, New York, reported a loss from continuing operations of $143 million during its third quarter, a downturn from the $172 million in net income earned in the same quarter last year. This followed a loss of $2 million during the second quarter. Alcoa cited environmental remediation of the Grasse River in New York State and the settlement of a civil lawsuit filed by Aluminium Bahrain for the quarterly loss. Without those charges, the company would have reported net income of $2 million during the quarter. Third-quarter 2012 revenue totaled $5.8 billion, down 9 percent compared with third quarter 2011, primarily due to a 17 percent decline in the realized metal price and a 20 percent decline in the realized alumina price, company officials said. “Markets seem to be driven more by headlines than fundamentals right now, but Alcoa remains focused on the things within our control,” said Klaus Kleinfeld, chairman and CEO, during the company's quarterly conference call with investors and analysts. “We're capitalizing on pockets of strong growth and achieving record profitability in our mid and downstream businesses. We're improving performance in the upstream while optimizing our assets, and across the board we're driving productivity gains.” Amid challenging market conditions, Alcoa's upstream businesses achieved significant performance improvement in the third quarter, delivering $98 million of combined sequential operational improvements across the Alumina and Primary Metals segments as higher volume, improved price and mix, and productivity gains more than offset cost headwinds, company officials claimed. In what is traditionally a weaker quarter, Alcoa's midstream and downstream businesses turned in strong performances. Despite weakness in Europe, its Global Rolled Products business achieved record third-quarter after tax operating income of $98 million, up 63 percent compared to the 2011 period. The year-on-year improvement was driven by better price and mix, higher volume and strong productivity gains. In Alcoa's global end markets, positive growth continues, particularly in the aerospace market, where the company sees 13-14 percent year-on-year growth, and in the automotive market, where the company has raised its North American 2012 forecast by 1 percent. Alcoa has moderated its 2012 global aluminum demand forecast to 6 percent, down from 7 percent, due to slowing in China. The aluminum market grew 13 percent in 2010, and 10 percent in 2011, and is well ahead of the 6.5 percent compound annual growth rate needed to meet Alcoa's projection of a doubling of aluminum demand 2010 to 2020. Allegheny Technologies ATI Sales Suffer from Global Uncertainties Allegheny Technologies Inc., Pittsburgh, reported net income for the third quarter of $35.3 million on sales of $1.22 billion, down from income of $62.3 million on sales of $1.35 billion in last year’s third quarter. For the first nine months, ATI reported net income of $147.9 million on sales of $3.93 billion, down from income of $182.6 million on sales of $3.93 billion in the first three quarters last year. “Continuing uncertainty regarding global economic conditions impacted our third-quarter 2012 results,” said Rich Harshman, chairman, president and CEO during his quarterly conference call. “We are seeing conservative inventory management throughout the supply chains of most of our major end markets. These actions appear to be driven by concerns about the U.S. election and resolution of the U.S. ‘fiscal cliff’, and uncertain economic trends in China, Europe, and Japan. We believe that as these uncertainties begin to be resolved, demand will improve for our GDP-sensitive products and strong secular growth trends will resume in our key global markets.” ATI’s sales to the aerospace and defense market in the first nine months totaled $1.25 billion or about one-third of its business. “The current economic conditions have resulted in softening of demand from the jet engine aftermarket and a cautious approach to managing inventory in the supply chains of both airframe and jet engine OEMs,” Harshman said. “In spite of these short-term headwinds, we see strong growth in demand for our products from the commercial aerospace market over the next three to five years.” Company officials also continue to see long-term growth opportunities from the oil and gas/chemical process industries. “Our downhole oil and gas products remain in high demand because directional and horizontal drilling rates are holding up, even as the total rig count is declining,” Harshman said. ATI expects demand for standard stainless steel sheet and plate to continue at low levels in the fourth quarter as a result of weak GDP growth in the U.S. and aggressive inventory management actions throughout the supply chain. In addition, base prices for most grades of standard stainless products are at historically low levels due to weak demand and high levels of Asian imports. “We believe inventory levels of these products throughout the supply chains are lean and base prices are at unsustainable levels. Therefore, our view is that as global economic conditions begin to improve, both demand and base prices will begin to improve,” Harshman said. He added: “We expect business conditions in the fourth quarter to remain challenging. Except for the U.S. election, meaningful progress on the primary reasons for the current global economic uncertainty—the possible U.S. ‘fiscal cliff’, the Eurozone debt crisis, and slower growth in China—is not expected until the first half of 2013. Therefore, we expect continued soft demand and aggressive inventory management by most of our customers to persist through the fourth quarter 2012.” Carpenter Technology Strong Quarter for Specialty Metals Specialty steel maker Carpenter Technology Corp., Wyomissing, Pa., reported net income of $39.2 million for its first fiscal quarter ended Sept. 30, up from $23.8 million earned in the comparable quarter last year. Net sales for the quarter totaled $544.9 million, up 32 percent from the prior year. “Our strong first-quarter results demonstrate that we are continuing to execute well against our strategic plan,” said William A. Wulfsohn, president and CEO. “While there are some areas, particularly in lower value products, where customer demand has softened recently, our overall business continues to be well positioned in attractive end markets with strong demand for our ultra-premium and premium products. This is evident in our strong top line growth, and continuing positive spread between our revenue and volume growth rates. Results for Latrobe Specialty Steel, which Carpenter acquired seven months ago, remain strong. “The teams are doing an outstanding job delivering operational synergies from the combined operation that will lead to higher volumes, improved costs and a richer mix. The first new VAR furnace recently began operation with two more to come online in the near future. We are accelerating use of the Latrobe assets for additional premium products, which will enable us to continue improving mix and our average mill profit per pound, Wulfsohn said. The company expects the next quarter to be equally strong, keeping it on track to achieve its full-year goals. “Strong customer demand for the ultra-premium and premium parts of our product line, combined with our large backlog, is consuming our full available premium capacity,” he added. Kaiser Aluminum Aerospace, Auto Drive Aluminum Gains Kaiser Aluminum Corp., Foothill Ranch, Calif., reported net income of $29 million for the third quarter, up from $4 million in third-quarter 2011. For the first nine months, Kaiser’s net income totaled $77 million, up from $19 million in the prior-year period. “We are very pleased with our third-quarter results as we continued to benefit from strong aerospace and automotive demand, improved pricing and increased overall operating leverage,” Jack A. Hockema, president, CEO and chairman, told investors and analysts. “In addition, we have begun to realize steady improvements in underlying manufacturing cost performance across our platform, especially in the rod and bar value stream at our Los Angeles and Kalamazoo, Mich., facilities. Solid execution at our Trentwood facility during the Phase 4 heat-treat plate expansion also has contributed to our strong results.” Despite these strong results, the company began to experience a seasonal slowdown in the third quarter and expects the effect to be more pronounced in the fourth quarter as a result of weakness in service center orders and year-end destocking. “Given the seasonal nature of this activity, however, our overall outlook for the second half of 2012 is largely unchanged, with value-added revenue down 5-10 percent from the first-half pace but up 10 percent from the second half of 2011. “Looking ahead to 2013, we anticipate continued growth in our overall value-added revenue and margin, driven by strong demand for aerospace and automotive applications,” Hockema added. “While our outlook for the automotive end market also remains strong, driven by higher build rates and increasing aluminum extrusion content, the outlook for our general engineering applications remains tempered as a sustainable recovery in the general industrial economy continues to be challenged by U.S. and global economic uncertainty.” Nucor Steel DiMicco: Earnings Impacted by Imports Nucor Corp., Charlotte, N.C., reported net earnings of $110.3 million for the third quarter of 2012— comparable to the $112.3 million earned in the previous quarter, but down from the $181.5 million earned in third-quarter 2011. In the first nine months, Nucor reported consolidated net earnings of $367.7 million, down from $641.1 million earned in the first three quarters last year. Nucor's sales decreased 6 percent to $4.80 billion in the third quarter, down from $5.10 billion in the previous quarter. Sales were down 9 percent compared with $5.25 billion in last year’s third quarter. Tons shipped to outside customers totaled 5,768,000 in the third quarter, a 3 percent decrease from the previous quarter and a slight decrease from third-quarter 2011. The average sales price per ton was down 3 percent from the previous quarter and 8 percent from the previous year. Nucor mills operated at 71 percent of capacity in the third quarter, down from 76 percent in the second quarter. For the first nine months, Nucor's net sales decreased 1 percent to $14.98 billion, compared with $15.19 billion in the comparable period last year. Total tons shipped to outside customers were up 1 percent, while the average price per ton was down 3 percent. Company officials said the third-quarter results reflect a continuing trend of reduced operating profits, most significantly in sheet and plate, primarily the result of very high import levels. Pointing to U.S. Census Bureau data, Nucor Chairman and CEO Dan DiMicco noted that 2012 steel imports are on pace to reach 27.7 million short tons in 2012. This represents an increase of 21 percent from 2011, and is 43 percent higher than 2010 import levels. In addition, U.S. sheet steel markets have been negatively impacted by new domestic supply that began ramping up production in 2011. “Such increases are totally inconsistent with a domestic economy that is barely growing, as well as a U.S. steel industry capacity rate mired in the range of 70 percent,” he said. Construction is going well on Nucor’s 2,500,000-ton direct-reduced-iron facility in Louisiana. The majority of the equipment will arrive in 2012, with startup on track for mid-2013. Looking ahead, the Nucor management team pointed to some challenges. In addition to high import levels and excess domestic sheet supply, slowing economic growth both domestically and globally is expected to be a negative factor through the end of the year. Volatility in scrap prices, together with a combination of political and economic uncertainty in global markets, is affecting steel buyer confidence and therefore supply-chain stocking levels. Steel Dynamics SDI Reports Sales, Earnings Declines Steel Dynamics Inc., Fort Wayne, Ind., reported net income of $12.8 million on net sales of $1.7 billion in the third quarter, down from income of $43.3 million on net sales of $2.0 billion in the same period last year. The third quarter was also down from the previous quarter, when the company earned $44.5 million on net sales of $1.9 billion. For the nine months ended Sept. 30, SDI’s income totaled $103.0 million on net sales of $5.6 billion. In comparison, the company earned $247.9 million on net sales of $ 6.1 billion in the first three quarters last year. “Relative to overall market demand, our operating performance was commendable for the third quarter,” said SDI CEO Mark Millett. “The U.S. market in general remains tepid, as uncertainty surrounding the strength of Europe, growth in China, and the near-term U.S. economic and political environment continues to weigh heavily on customers’ purchasing decisions. Aside from our fabrication operations, this reluctance in customer buying resulted in reduced selling volumes across our major operating platforms.” Compared to the second quarter, operating income from the company’s steel platform was down $30 million, primarily caused by reduced volumes, most notably within the special-bar-quality arena. “Earlier customer estimates of robust growth have not been fully realized during the year, resulting in excess SBQ inventory build throughout the customer supply chain,” Millett said. “Inventory realignment seems to have begun later in the second quarter, and could continue through the remainder of 2012. However, we believe there is steady underlying demand that will support volumes as the destocking subsides.” Despite a challenging environment and decreased volumes, the company’s metal recycling platform saw ferrous operating margins improve as metal spreads expanded 23 percent. But the ferrous scrap market continues to be oversupplied, as the export market and U.S. steel mill utilization rates have moderated. “However, we believe an inflection point has been reached and ferrous scrap pricing is likely near a bottom,” Millett said. Looking ahead at end-use markets, he reported softening in agriculture, transportation and certain areas within energy related to natural gas exploration. Automotive and manufacturing appear strong and residential construction has shown incremental improvement. “But we believe volumes could continue to be challenged in the fourth quarter, as fluctuations in immediate customer needs and hesitancy for customers to carry inventory persists,” Millett said. Service Center Third-Quarter Results Metals USA Shipments Increase 12 Percent Metals USA Holdings Corp.. Fort Lauderdale, Fla., reported net sales for the third quarter of $483.7 million, down slightly from sales of $492.3 million in third-quarter 2011. Net income for the third quarter totaled $13.7 million, down from net income of $16.7 million in last year’s third quarter. Third-quarter 2012 shipments of 381,000 tons were 11.7 percent higher than shipments in the prior-year period. Metals USA’s net sales for the first nine months of 2012 totaled $1.54 billion, up 8.1 percent from sales in the first three quarters last year. Net income for the first three quarters totaled $49.0 million, down slightly from $50.6 million in the same period in 2011. Shipments for the first nine months totaled 1,197,000 tons, 12.0 percent higher than the comparable period last year. “Despite a third quarter characterized by a weak global business environment and no meaningful improvement in the domestic economy, Metals USA performed well and yet again delivered strong results,” said Lourenço Gonçalves, Metals USA chairman, president and CEO. “Our achievement of a 12 percent increase in year-over-year shipments, which partially offset price weakness and related margin compression, was further evidence of our growth momentum.” Metals USA claims to continue gaining market share with its emphasis on value-added processing and maintaining healthy inventories. “We have adjusted our inventory mix for a fourth quarter that we do not expect to be worse than the third quarter, other than the normal impact of slower seasonal activity around Thanksgiving and year-end holidays,” Gonçalves said. Reflecting the company’s progress, its board of directors recently authorized the initiation of a regular quarterly cash dividend payable on its common stock. Reliance Steel & Aluminum Sales Dip ‘In Line with Expectations’ Reliance Steel & Aluminum Co., Los Angeles, reported sales of $2.06 billion in the third quarter, down 3.9 percent from third-quarter 2011, and down 7.0 percent from the previous quarter. Net income for the quarter totaled $98.1 million, up 15.5 percent from last year’s third quarter, but down 9.8 percent from second-quarter 2012. Tons sold in the quarter were up 2.0 percent from last year, but down 3.5 percent from last quarter. “Overall demand in the third quarter was in line with expectations after taking into account normal seasonal fluctuations and one less shipping day compared to the prior quarter and same period last year,” said David H. Hannah, chairman and CEO of Reliance. Driven mostly by increased sales of stainless steel and aluminum products, as well as contributions from its 2011 and 2012 acquisitions, Reliance’s total tons sold increased 2.0 percent, compared to last year’s third quarter. Additionally, its sales related to the auto industry through its toll processing operations were up significantly compared to last year. “However, our net sales reflect downward pressure on pricing, as our average price per ton sold fell 3.8 percent sequentially and 6.3 percent year-over-year. While we expected economic uncertainty to continue as we entered the third quarter, price decreases in the quarter were greater than expected for all of our products,” Hannah said. For the nine months ended Sept. 30, Reliance reported net sales of $6.55 billion, up from $6.1 billion in the first three quarters of 2011. Its net income for the period was $323.1 million, up from $275.9 million last year. On a year-to-date basis, Reliance’s tons sold were up 8.5 percent, operating income was up 13.7 percent and net income was up 17.1 percent. Commenting on various markets, the Reliance management team noted that relative strength in aerospace, energy, farm and heavy equipment, and auto continue to offset weakness in non-residential construction. Commercial aerospace, consistent with the first half of 2012, continues to perform well, led by strength in both demand and pricing. Heavy industry performed well in the third quarter, albeit at a slower pace than the first half of 2012, due partly to increasingly conservative inventory management among industry OEM’s, as well as a general slowing in the industrial economy. Automotive, supported by the company’s toll processing businesses in the U.S. and Mexico, exhibited robust demand in the third quarter. Nonresidential construction continued to show signs of a recovery, although at significantly reduced demand levels from its peak in 2006. Consistent with the first half of 2012, North American industrial construction related to manufacturing and energy continued to exhibit the most improvement. The company expects that global economic uncertainty will continue to impact the industry in the fourth quarter. Carbon steel prices are still fragile, while stainless and aluminum prices are anticipated to increase slightly. Reliance completed the acquisitions of GH Metal Solutions Inc. and Sunbelt Steel Texas, LLC, during the third quarter.