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Service centers report ‘more upside than downside potential’

Keywords: Tags  North American metal shipments, service center shipments, service center outlook, Metals Service Center Institute, Lourenco Goncalves, David H. Hannah, John Ambrosia

Overall business activity is improving from last year’s levels, buoyed by strong monthly reports showing increases in service center shipments, some of the largest American metal processing and distribution companies said.

Improvements are expected to be slight, though, because a number of factors beyond shipping levels still worry players in the industry: a depressed construction market, the European sovereign debt crisis and the volatility that typically accompanies a presidential election year.

But because Metals Service Center Institute (MSCI) shipment statistics improved in each month of the fourth quarter, some optimism has crept into the market.

Service center sources confirmed that business was steady, and while volumes weren’t back to pre-recession levels, they said they were still buying and selling steel on a daily basis. “It’s steady. I don’t think it’s crazy, but people are buying,” one distributor source said.

Domestic steel demand appears to be on the upswing, bolstered by strengthening activity in the oil and gas, automotive, heavy equipment and general manufacturing sectors, according to Metals USA Holdings Corp. president and chief executive officer Lourenco Goncalves.

“We see more upside than downside potential,” he told investors during the company’s year-end earnings conference call in late January, predicting that steel demand would outpace any increases in U.S. gross domestic product (GDP) this year. “We saw improvements in 2011, and even more improvements are expected in 2012.”

Those improvements are expected to follow a more traditional seasonal pickup this year after years of volatility, Goncalves said. “The typical seasonality of our business is back. We expect the first quarter to be better than the fourth quarter, and the second quarter will be incrementally more profitable than the first quarter.”

A number of key end-use sectors are behind the service center chain’s more bullish steel forecast. “We are doing a decent amount of business in the oil and gas sector and we have not heard from customers about any slowdown. (And) it’s clear by now that automotive is outpacing GDP,” Goncalves said.

David H. Hannah, chairman and chief executive officer of Los Angeles-based Reliance Steel & Aluminum Co., said he believes that the energy, aerospace and defense, semiconductors and electronics, and heavy equipment end markets will grow fairly strong. “We think aerospace will be quite a bit better. The build rates are improving on commercial lines like the (Boeing Co.) Dreamliner and (Airbus SAS) A380 that were bogged down in certifications and manufacturing processes. Including defense, it’s very positive,” he said.

Whether steel, aluminum or copper, arrows seem to be pointing in the right direction, according to industry players.

Service center shipments of both steel and aluminum grew at slightly higher levels in Canada during December, the latest available data. In the United States, steel shipments grew at about half the rate of the previous month while growth in aluminum shipments remained about the same. Inventory-to-shipment ratios increased to typical December levels, according to the MSCI.

U.S. service centers shipped nearly 3 million tons of steel products in December, a 5-percent increase from the same month a year earlier, pushing full-year shipments to 40.7 million tons, up 14.2 percent from 2010. Steel product inventories totaled 8.3 million tons at the end of last year, up 3.1 percent from the previous month and 8.3 percent higher than December 2010, representing 2.8 months’ supply, a 3.1-percent increase from the end of 2010, according to the MSCI.

Despite some fourth-quarter improvements, U.S. service center aluminum shipments of 109,300 tons in December were down 9.5 percent from 120,800 tons the previous month although up nearly 9 percent from 100,300 tons in December 2010. For the full year, aluminum shipments totaled 1.5 million tons, up 15 percent from 2010. U.S. aluminum product inventories totaled 356,000 tons at the end of December, representing 3.3 months’ supply, down 5.9 percent from a year earlier but up slightly from November, according to the MSCI.

Canadian service centers shipped 419,000 tons of steel in December, up 10.2 percent from the same month a year earlier, putting full-year shipments at 6.2 million tons, an 11-percent increase from 2010.

Aluminum shipments by Canadian service centers totaled 9,700 tons in December, down 26.5 percent from November but up 7.8 percent from a year earlier. Full-year aluminum shipments totaled 146,500 tons, an 8.4-percent increase from 2010

The increased business has been paying off for Metals USA, which reported a sharp rebound in revenue and profits during the fourth quarter and full year as shipping volumes logged a double-digit percentage increase. “Our 2011 results are a clear demonstration that Metals USA is able to consistently generate strong profits even under less-than-ideal business conditions,” Goncalves said.

Metal shipments in the fourth quarter totaled 327,000 tons, a 23.1-percent jump from the same period a year earlier, the Fort Lauderdale, Fla.-based company said, while annual shipments climbed 32 percent to 1.4 million tons.

“Metals USA strengthened business with established customers, developed relationships with new customers and expanded our market reach,” Goncalves added.

Meanwhile, Goncalves said he wasn’t concerned about talk of overcapacity in the domestic steel sector or its impact on the market. Analysts and market observers have been focused on the idea of overcapacity, he said, noting that he believes the issue of capacity in the U.S. steel market has been overanalyzed and, perhaps, overstated.

Except for ThyssenKrupp Steel USA Inc., Calvert, Ala., and Severstal North America Inc., Columbus, Miss., the rest of the so-called new capacity consists of tons coming back at idled plants, he said. “Let’s talk about operating rates. The rate you see is pretty damned exciting at this stage of the economic recovery. Some mills are talking about expanding capacity. We have been hearing about mills putting in 1 million tons.”

If the industry is operating at 75 percent and talking about new capacity, “that’s a sign that 75 percent is not a bad rate,” he said. “You may think they (mills) are not busy, but they are.”

Optimism also reigns at industry giant Reliance Steel & Aluminum. “Energy is probably the brightest spot (and) we think it has legs into the future,” Hannah said, citing developing extraction opportunities such as fracking, horizontal drilling and tar sand sites in Canada. “We hope we will get some new activity on deep-water drilling.” The truck, trailer and shipbuilding markets also have upward momentum, and “prospects for heavy equipment are looking really good,” he said, adding that those markets have large backlogs.

“Out of all the markets, non-residential construction is the only one that is a question mark. It hasn’t recovered much from its low point in 2009,” Hannah said. After a slight glimmer in early summer 2011, “the whole debt-ceiling fiasco—combined with European financial issues, metal prices coming down and talk of a double-dip recession—took the wind out of the sails for non-residential. We have not much more than pure faith that it won’t get any worse.”

Small industrial customers’ demand has grown, Hannah said, “but we need more (economic) improvement before the job shops, machine shops and fabricators really get going.”

Michael Siegal, chairman and chief executive officer of Olympic Steel Inc., Bedford Heights, Ohio, who projects a 5-percent increase in steel demand and larger market-share growth for his company in 2012, echoed Hannah’s sentiments, saying that media headlines don’t accurately reflect the metals market.

“We at Olympic Steel are offended when we hear the media and our government continually talk about how no one is investing capital in growth (or) how no one is hiring employees,” he said. “We are very proud of the fact that we continue to invest in North America and, specifically, the United Sates. We are proud of the fact that we are continuing to add employment in this country with good pay and good benefits. Nobody seems to recognize the fact that this industry in total and the service center sector is a very dynamic and growing universe irrespective of the GDP.”

At Esmark Inc., chairman and chief executive officer James P. Bouchard wasn’t as optimistic as Reliance and Olympic, projecting flatter or lower domestic steel consumption in 2012. However, he expects his Sewickley, Pa.-based company to capture more market share in recovering industries.

Esmark’s heavy steel fabrication subsidiary, Excalibur Machine Co., has doubled its employment while fabricating components for customers in the Marcellus shale natural gas field. The backlog of orders for power generation components is “as big as it has ever been,” Bouchard said, adding that Excalibur’s sales and profits should double in 2012.

On the aluminum front, shipments from U.S. and Canadian service centers are expected to increase this year, sources said, although forward buying will be kept to a minimum as market players remember the lessons of 2008.

“Business conditions are generally improving. I definitely believe we’re headed in the right direction,” one aluminum service center source told AMM.

A second agreed, noting that the first quarter is already off to a stronger start. “The first week of this year was dead in the water. But things started picking up,” he said, noting that he received unexpected calls from customers on Martin Luther King Jr. Day. “I thought (it) was a holiday, but I was getting orders; people were calling for more metal. We’ve been really busy.”

Still, customers are only ordering to fill immediate requirements as an element of fear remains in the market. “Customers are not buying anything they don’t need; they’re just buying exactly what they need,” he said, adding that he expects this trend to continue. “(We’re) not going to get a lot of forward buying. People are still scared. Prices came crashing down, Europe’s a mess and anyone who carries stock carries a huge amount of risk.”

But even though volumes are smaller, at least customers are buying, which is good for business, he added.

Order levels for copper products also have remained strong in early 2012, building on orders placed in the final weeks of last year for January shipment, distributors told AMM. Some sources said they feel optimistic, but others said they’re waiting to see if business remains strong.

Customers have been calling, but it is still too soon to say if demand will be sustained this year, one service center source said. “We’ve been getting orders, but it’s a little early to tell. Last January we saw an increase from the year before, and I see that (again) now.”

Another distributor source said he’d seen “good signs” in the first week of the year. “We are enjoying brisk shipping,” he said. “It’s been fairly strong for the first week. I’m pretty bullish so far on 2012.”

A third service center source confirmed that orders in the first full week of the year were strong. “We’re very busy right now,” he said.

One copper trader said the spot market was strong, noting that he had been getting “more than a few” calls from people needing copper. He said he thought continued business in the spot market could push delivered premiums for copper higher. Late last year, copper traders told AMM that they saw little reason for red metal premiums to increase in 2012 (AMM, Nov. 28).

Still, others have said that demand in the spot market remains minimal. “It’s been quiet,” a second copper trader said.

Corinna Petry, Chicago, and Suzy Waite, New York, contributed to this story.

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