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Structurals Market Report

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HSS Doing OK Despite Weak Construction “I see demand for HSS staying where it is now, flat at a nice level for the rest of the year,” says Jim Hoffman at Reliance Steel & Aluminum Corp. (Photo courtesy Reliance Energy Solutions, Cyprus, Calif.) While nonresidential construction is showing signs of life, it remains years away from its healthy, pre-recession levels. Meanwhile, sales of hollow structural sections are being sustained by strong demand from heavy equipment and transportation markets. By Myra Pinkham, Contributing Editor Even with lackluster nonresidential construction, demand for structural tubing could grow by as much as 10 percent this year on the strength of the heavy equipment and transportation markets. But the outlook for hollow structural sections or HSS is a bit cloudier next year, say the experts, due to concerns about economic uncertainties and rising domestic prices that may attract more low-cost imports. “The HSS market is actually pretty decent given the current level of economic activity,” says Paul Vivian, a partner at Preston Pipe Report, Ballwin, Mo. He estimates that 55 to 60 percent of HSS goes into construction-related applications, mostly nonresidential and infrastructure construction. While showing some modest improvement, construction continues to be quite depressed and is not likely to see a significant pickup for some time. “What has helped HSS up to this time has been manufacturing,” he says, particularly strength in yellow goods, material handling equipment and heavy duty trucks. Although the HSS market continues to struggle with the slow and choppy recovery, it is generally moving in a positive direction, says Christopher Plummer, managing director of Metal Strategies Inc., West Chester, Pa. HSS consumption increased 13.5 percent in the first half of 2012, compared with the first six months of 2011. Nevertheless, the HSS market remains 25 percent below its recent peaks in 2006-07, he adds. Some observers report that HSS orders have flattened out in recent months. Despite this recent moderation, the year as a whole will likely see consumption increase by 10 percent compared with last year, predicts Jack Meyer, president and chief operating officer of Bull Moose Tube Co., St. Louis. Even on the West Coast, where a greater percentage of HSS is used in construction-related applications, there has been “a pleasantly positive” uptick, adds Chris Knox, vice president of Vest Inc., Los Angeles. Nonresidential construction has improved modestly from its recessionary lows, rising 4.1 percent year on year as of June, according to Metal Strategies. The American Institute of Architects billings index, a leading indicator of construction activity, registered 48.7 points in July, still below the 50-point level that indicates growth, but an improvement over June’s 45.9. The AIA has upgraded its forecast for 2012 U.S. nonresidential construction spending, predicting it will rise 4.4 percent rather than its earlier estimate of just 2.1 percent. The architects group expects a further 6.2 percent gain in nonresidential construction in 2013. Ken Simonson, chief economist for the Associated General Contractors of America, says this is consistent with McGraw-Hill Construction’s Dodge Momentum Index, which climbed 8.1 percent in July, pushed up by gains in both commercial and institutional construction. Industrial construction, especially related to activity in the energy and heavy equipment sectors, is responsible for much of the new demand for HSS products, Plummer says. Some re-shoring, plus construction of new facilities by automakers and their suppliers in the South, also has contributed to this type of industrial building. Despite recent small gains, nonresidential construction is still about half of what it was and could take several years to get back to pre-recession levels, says Jim Hoffman, senior vice president of operations for Reliance Steel & Aluminum Co., Los Angeles. Nonresidential construction is doing little more than just bumping along the bottom, agrees Patrick Knutson, director of sales for Maruichi Leavitt Pipe & Tube LLC, Chicago. “It is seeing some successes, but it isn’t climbing out of its hole yet.” Production of agricultural and mining equipment, cranes, conveyors and heavy construction machinery has a bigger impact on HSS demand than the construction sector, Knutson maintains. Such bottoming is especially true of the types of applications that use the most HSS, which tend to be the first few floors of office buildings, retail stores and warehouses, Vivian notes. “Consumer spending drives that activity. From everything we see, it could be 2015 before that is significantly better. Until then, it will be like a water polo event with everyone just trying to keep their head above water.” The new federal surface transportation bill could kickstart the public works construction sector, which is down about 3 percent year to date, following declines of 7.2 percent in 2011 and 2.9 percent in 2010. But how much that will improve HSS demand is questionable. The 27-month spending measure will have more of an immediate impact on consumption of beams, plate and reinforcing bar, which are the steel products most used in infrastructure construction. HSS might eventually get a boost from increased production of construction equipment, if the highway bill proves to have some legs, Vivian notes. Manufacturing sustains the market Heavy manufacturing continues to do very well, despite macroeconomic concerns over the federal deficit, the sovereign debt crisis in Europe, the slowing of China’s economy and the close presidential election in the U.S., observes Bill Jones, vice chairman of O’Neal Industries Inc., Birmingham, Ala. The Federal Reserve Board reports that overall U.S. industrial production was up 4.4 percent in July versus a year earlier, with durable goods production leading the way in primary metals, computer and electronic products, motor vehicles and parts, aerospace, miscellaneous transportation equipment and miscellaneous manufacturing. But even manufacturing activity has shown recent signs of slowing, with the Institute for Supply Management’s purchasing managers’ index falling below the 50 percent level that indicates growth for two months in a row. “The question is whether this is just a typical summer slowdown or something more,” says Tim Spatafore, president of Marmon/Keystone LLC, Butler, Pa. This uncertainty is one reason distributors are playing it close to the vest, keeping HSS inventories low. With mill lead times short, anywhere from stock to four weeks, service centers can get material in a hurry if they need it, he says. Farm equipment sales, which are up 4.9 percent year to date, are expected to see their third consecutive year of increases and are at a cyclical peak, Plummer says. Farm equipment production has fallen back about 4.4 percent, however. Hoffman attributes that “pull in” to the fact that companies are so busy they can’t handle all the orders that come their way. The drought in the United States could also have an impact on equipment purchases at the end of the year, depending on whether farmers have the need and the funds for replacements. “Purchases of farm equipment tend to have a close correlation to farm income,” Plummer notes. Over the long term, demand for farm equipment should continue to rise given the demographics in the developing world, Hoffman adds. “Increased wealth is affecting the way people eat and that affects the need for farm implements.” North American output of heavy construction equipment was up 10.8 percent year to date through June after a 21 percent gain in 2011 and a 10 percent gain in 2010, according to Metal Strategies. Likewise, mining equipment sales remain robust, fueled by strong commodity prices. Plummer attributes much of the increase to exports. Strengthening of the U.S. dollar and weakening of markets outside of the United States could eventually cool export demand, cautions Jones at O’Neal. “We are seeing the rate of growth in HSS demand slowing compared with the beginning of the year, which is clearly a concern.” While imports of structural steel tubing have increased a bit, they have not hurt the market. Domestic producers of HSS are keeping their prices competitive with other regions of the world, Jones says. Recent price hikes by U.S. tube mills just passed along their increased cost for flat-rolled steel. The long lead times make foreign sourcing risky, he adds. “By the time imports come in, it is uncertain whether they would still be attractively priced. There would need to be a double-digit differential for us to even consider buying imports, and even then we probably wouldn’t.” HSS imports are more of a factor on the West Coast, where they are up about 20 percent this year, says Knox at Vest Inc. Any increase in domestic HSS prices could attract more imports, he adds. “The price discrepancy is significant and that is a concern,” he says, noting that the price spread has been a moving target, fluctuating from quarter to quarter. “Prices have been on a roller coaster ride due to movements in flat-rolled steel and ferrous scrap,” Spatafore says. They declined by $40 per ton in June and another $20 per ton in early July, before increasing $40 per ton later in July and another $40 per ton in early August. “We are passing along price increases, but sometimes not as much as was originally announced because of competitive reasons,” Knutson says. Recent flat-roll price increases have been widely accepted by the marketplace, and HSS price hikes have followed suit, he adds. “But with business cycles being so short, [the acceptance] could be short-lived.” Vivian predicts that HSS will likely see much flatter growth for the rest of this year with no big change in store for the construction market, continued flattening of manufacturing and an overall air of caution, at least until after the presidential election. “I think it will be a strong year next year, assuming that there is no further deterioration in Europe and progress on debt and tax reduction in the United States,” Jones says. While he would not term it a good market yet, Plummer feels the trends are generally favorable for structural tubing. But, because nonresidential construction is always a late cycle performer, the business in not likely to get truly good until 2014 or 2015, he says.