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Steel market growth eyed in 2012—with caveats

Keywords: Tags  OCTG market, steel tube and pipe market, Aldo Mazzaferro, auto market, construction market, Gregory DL Morris

Last year signaled large gains for the steel industry’s recovery, but there’s 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 markets—particularly with oil country tubular goods (OCTG) as well as gathering systems and transportation pipeline—could 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 aircraft—particularly the Boeing 787 Dreamliner and the Airbus A380—the 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, Mazzaferro said.

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 prosperity.’”

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 imports.”

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 isn’t 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 isn’t 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 furnaces.

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 don’t 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.”

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