relationship of the steel industry and consumables sector that
supplies it has analysts upbeat that there are better times on
the horizon. The question, though, is how far away is the
Equities analysts covering the North
American steel industry believe most costs related to
consumables travel hand-in-hand with steel production levels.
And with steel production levels falling, demand for
consumables is shrinking in lock-step.
"The need for graphite electrodes and
other consumables is for the most part directly proportional to
(steel) production levels," said Mark Parr, a steel industry
analyst at KeyBanc Capital Markets Inc., Cleveland. "If
production goes down, your need for consumables goes down. It's
like if your wife goes away for the weekend and you leave the
dishes in the dishwasher. If you don't run the washer, you
don't use detergent."
But not all things run in parallel,
making the cost of consumables-like fluxing materials, graphite
electrodes and refractory furnace linings-a little more
difficult to track at times.
"With oil prices down, it would stand
to reason that anything related to oil would be down," said
veteran steel industry analyst Charles Bradford, president of
Bradford Research/ Soleil Securities Inc., New York. "But in
the case of needle coke (used to make graphite electrodes), it
isn't working that way. You need oil to make needle coke. But
oil is going down and needle coke prices are going up, even
though they come out of the same barrel."
Commercial Metals Co., Irving, Texas,
told analysts at a luncheon in early November that its
electrode costs for 2009 would be up between 40 and 50 percent
compared with 2008.
"I found that surprising," John
Tumazos, an independent steel analyst in Holmdel, N.J., said.
"There must have been a time lag on a stale contract there or
something to that effect."
Steelmakers cited rapidly rising raw
material and energy costs as key reasons behind skyrocketing
steel prices during the first half of 2008, a phenomenon that
saw hot-rolled sheet soar to a peak of $1,100 per ton by August
from about $560 in January 2008.
The global credit crunch and general
economic slowdown combined with weakening steel demand
beginning in September to send prices back down the ladder. By
late November, hot-rolled sheet had fallen to $650 per ton,
with all indications it could go as low as $500 before the
global financial crisis ends and consumers gain enough
confidence to begin buying again.
Steelmakers responded by reducing steel
production, cutting back both blast furnace and electric
furnace operations. In early November, production was off 24
percent from a year earlier, with some predicting production
would be down by 50 percent by January.
Those cutbacks reduced demand for
consumables, although most believe the downturn is cyclical
rather than structural in nature, leading to optimism that
demand will return in force once the economic woes ease.
"The mills have made an effort to get
production in line with underlying demand," Parr said.
"Contracts for consumables usually are done in the fourth
quarter. I would expect there to be some contract delays on
refractories and electrodes into the first quarter based on the
GrafTech International Ltd., Parma,
Ohio, one of the larger manufacturers of electrodes, reduced
its fourth-quarter earnings expectations as a result of the
financial uncertainty. The company expects 2008 sales to
increase 18 to 20 percent from 2007 levels, down from previous
guidance of a 20- to 22-percent increase, while operating
earnings are expected to range between $315 million and $330
million, down from previous guidance of $320 million to $330
"In a general sense, Commercial Metals
was saying they expected their costs to be about the same in
2009 compared with 2008," Bradford said. "Energy costs are
coming down and transportation costs are coming down. The
second part of that, though, is that volumes also are off. If
you are producing less, you are going to need fewer
refractories and fewer electrodes."
Tumazos offered a similar view. "The
values of things like electrodes are directly proportional to
steel output," he said. "If you are not making any steel,
you're not going to need any electrodes."
For the most part, the cost of
consumables is relatively minor compared to overall steelmaking
costs, Parr said. But in the unlikely "doomsday scenario" in
which steel producers extend production cuts for a lengthy
period due to prolonged weak demand, those who provide
consumables could face long-term pain.
"The dishwasher analogy might not be that
great, but what it comes down to in that scenario is that
people would use even less consumables, like they would
detergent," he said. "When you get to that scenario-even though
I don't think it will happen-maybe you think getting things
sort of clean (using less detergent, or in this case
consumables) is good enough to accomplish what you need to
accomplish." SCOTT ROBERTSON