Last year signaled large gains for the steel industrys
recovery, but theres still work to be done before it
reaches pre-recession levels, according to Aldo Mazzaferro,
managing director and senior analyst for steel, metals and
mining at Macquarie Capital USA Inc.
Tube and pipe, especially, could be among the
strongest end-use markets for the steel industry this year,
along with aerospace, oil and gas. The overlap in the oil and
gas markets with the tube and pipe marketsparticularly
with oil country tubular goods (OCTG) as well as gathering
systems and transportation pipelinecould be the key to
renewed strength for steel in 2012, Mazzaferro said. He also
sees strong demand for high-strength steel for pressure
vessels, including reactors and storage tanks for processing
plants and railroad tank cars.
Overall there continues to be a backlog in
aerospace and in oilfield equipment, especially pressure
tubing, OCTG and process plant equipment such as reactor
vessels and heat exchangers, Mazzaferro said. There
is also a huge backlog in aerospace.
Even with the continuing advances in composite
materials for large components in aircraftparticularly
the Boeing 787 Dreamliner and the Airbus A380the
aerospace industry continues to be a source of growth for the
steel market, he said.
The construction and automotive sectors, however, are
expected to remain soft. Carmakers had a good run for a
while, but that is slowing and starting to turn sideways,
Regardless of the end-use market, steelmakers of every
size and configuration continue to battle for market share as
opposed to profitability. Look at the spreads of
something like rebar to hot-rolled coil. Rebar is about the
simplest, easiest thing to make, and margins are half again
better than for flat-rolled hot coil, which is more
sophisticated, he said. Generally, the less a mill
does the more profitable the result. Those I-beams for big
buildings are much more profitable than more sophisticated
manufactured components. I call those battles for market share
in aerospace or automotive profitless
In a similar vein, domestic mills recently
announced price increases could be just as impractical for the
market, Mazzaferro said. The recent increases are really
on shaky ground. The mills are so bullish these days you would
think there is a shortage of steel. But that is all smoke.
Their heads are just in the clouds. We are seeing the same
thing we saw in 2009; there was a flurry of price increases in
the first quarter of that year, which brought in a surge of
He believes the market is set for the same
rollercoaster ride in 2012. With prices going higher,
either we are going to attract imports or someone domestically
is going to break ranks and bring on additional capacity,
Mazzaferro said. This kind of gap is destined to attract
supply one way or the other.
Much also has been made of the blurring lines between
integrated steelmakers and mini-mills. While there isnt
much distinction in the size of the companies or in their
upstream or downstream integration, Mazzaferro said that one
key discriminating factor remains unchanged: There are no
mini-mills that run a blast furnace.
Having a blast furnace as the primary means of
production isnt just a processing choice but a completely
different way of running a company, he said. There is a
huge difference in staff, Mazzaferro said, noting that
mini-mills use about half a man-hour to make a ton of steel vs.
two-and-a-half to three man-hours per ton for blast
Those figures are more than just a measure of
efficiency, he said. At a mini-mill, labor accounts for
about 10 percent of the cost of the finished product. At the
blast furnace, labor is 30 percent directly, with another 20
percent in fixed costs. Those fundamentals affect everything
else: how the company reacts to changes in price and volumes in
the market, the raw material supply chain, everything.
Self-contained users of scrap are fundamentally different from
users of coke, limestone and iron ore.
There is more than just a semantical distinction, he
said. Investors dont really care how a company
makes steel. What we want to know is how sensitive the company
is to price fluctuations of the commodity and its raw
materials, to changes in labor and capital costs. When you make
steel in a blast furnace, you are more susceptible to those
factors than when you make steel in an electric furnace. You
have a totally different cost structure.