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Distributors see rise in business through the rest of 2014

Jun 30, 2014 | 08:00 PM |

The first quarter saw some disappointing earnings results and questions about steel demand, but many distributors still believe 2014 will be a solid year for business.

“We’re actually seeing rather than just anticipating demand increases ... in our order books right now,” Reliance Steel & Aluminum Co. chairman and chief executive officer David Hannah said during an earnings conference call with analysts earlier this year.

Steel prices are moving up in the second quarter after swooning midway through the first quarter, according to Reliance executives. The positive pricing trend, along with slowly improving demand in the long-beleaguered nonresidential construction sector—a big consumer of carbon steel—should bolster the Los Angeles-based service center’s bottom line going forward, they said.

But Reliance executives also noted that the increases come as mills struggle to maintain output while working toward more “discipline” on pricing.

In the overall market, prices for some steel products were mixed in May despite overall demand that was said to be robust, which was backed by stronger distributor shipment data for April.

U.S. service centers’ steel shipments totaled nearly 3.81 million tons in April, up 3.6 percent from 3.68 million tons the previous month and 4.9 percent higher than 3.63 million tons a year earlier, according to the latest Metals Service Center Institute data. Steel inventories held by U.S. centers totaled nearly 8.62 million tons (2.3 months’ supply at current shipping rates) at the end of April, up 4.3 percent from 8.26 million tons (2.2 months’ supply) a month earlier despite assertions of lean stocks by market sources.

The energy market was said to be one of the main drivers of recent strong demand for plate products. “Clearly, energy is the workhorse for plate,” a mill source said.

Automotive demand also continues to be strong, and sources said construction is picking up in some areas.

Duisburg, Germany-based Klöckner & Co. SE expects U.S. steel demand to grow 3 to 4 percent in 2014 on a strong automotive market, a recovering construction sector and low energy costs, the company said in its first-quarter financial report.

According to the Institute for Supply Management’s latest Steel Buyers Forum survey, more respondents cut long-term inventory in April, with the proportion of those holding more than 60 days of steel falling some 11 percentage points from March while the proportion of member companies deeming their inventories as “too high” fell about 13 percentage points.

As a result, fewer purchasing managers feel the need to cut inventories further. About 65 percent said they would maintain their inventory levels over the next six months, up from 60 percent in  three months to bring additional orders (64 percent vs. 53 percent in March), while the share of those forecasting stagnant new orders fell by 10 percent month over month. But the number predicting a rise in general economic activity over the next six months fell to 27 percent from 33 percent in March, and those predicting no change in activity rose by about 6 percentage points.

Rebounding prices are a result of better demand as the U.S. economy continues to improve, Reliance executives said, with increased activity in sectors as diverse as automotive toll processing, energy, agriculture, heavy industry and construction. “The price trend on all the products as of today are on the upward swing, and we really believe there is some added discipline on the flat-rolled side,” Hannah said. “We’re hopeful that that will continue going forward.”

Severe winter weather in the Midwest and the East Coast did not significantly impact results in the first quarter, Reliance executives said. Shipments may have been delayed and costs increased in affected areas, but not enough to materially impact earnings.

The recent upward trend bodes well for pricing in the second quarter, according to Olympic Steel Inc. president and chief operating officer David A. Wolfort. “The set-up for the next few months looks promising,” he said, adding that demand seasonality was returning to more typical levels this year, which should mean a better second quarter.

Overall, the Bedford Heights, Ohio-based metals service center chain expects a positive year. “We feel good about the second quarter and the coming year,” chairman and chief executive officer Michael D. Siegal said during a conference call.

Olympic Steel’s first-quarter results were crimped by the severe winter weather, with the company losing some shipping days due to closures at its and customers’ facilities, according to chief financial officer Richard T. Marabito. “The business that you have that is recurring and contractual you make up; some of the things that are more spot, you don’t,” he said of the impact.

Columbus, Ohio-based Worthington Industries Inc. chairman and chief executive officer John P. McConnell said his company anticipates strong growth due to acquisition opportunities in growing markets. “We will continue to pursue our strategy of growth with our existing businesses as well as through acquisition opportunities in growing markets,” he said.

A.M. Castle & Co. president and chief executive officer Scott J. Dolan said the Oak Brook, Ill.-based specialty metals distributor believes metal prices and activity levels could improve later in the year as business rebounds. Price declines came as end markets such as aerospace performed in line with expectations, while others—such as oil and natural gas—lagged late last year, he said, but oil and natural gas drilling activity is expected to pick up in future quarters thanks to higher energy prices.

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