CHICAGO Domestic producers of engineered bar products are not as vulnerable as they were in the past to a serious supply-demand imbalance due to a lowered cost structure, a steel industry analyst says.
Although U.S. engineered bar capacity is on track to increase some 15 percent by 2015, robust physical demand is expected to help keep the market largely in balance, Christopher Plummer, managing director of West Chester, Pa.-based Metal Strategies Inc., told attendees at AMMs 5th Automotive Metals Conference in Dearborn, Mich., this past week.
Demand for engineered bar, also known as special bar quality (SBQ), is coming primarily from the North American light vehicle and heavy truck sectors.
"The automotive market is absolutely booming from the perspective of the buyers and the mills and still has a long way to go," Plummer said.
Another bright spot for SBQ is in the mobile equipment manufacturing market, which is exporting to strong emerging economies that are increasingly entering the mining sector, building cities and modernizing their agricultural industries, he said.
As a result of the steady demand, most domestic SBQ mills are running near capacity, he said.
The engineered bar market "has been the tightest and with the highest effective operating rate in North America. There are lead times for certain subsectors of the product range out to 24 months, and 30 months in some cases," Plummer said. "That is driving the capacity change here."
Though a series of separate expansion projects, Nucor Corp., Gerdau Special Steel North America, Steel Dynamics Inc., Republic Steel and Timken Co. plan to add about 1.5 million tonsor 15 percent more capacityto the U.S. market between 2011 and 2015, he said.
But with many mills now operating at a lower cost structure than in years past, the increased output is not expected to weigh down the sector. Compared to less than 10 years ago, most SBQ mills today make the product in electric-arc furnaces (EFs), which require scrap rather than converted iron units, so "generally, the cost structure has come down," Plummer said, noting that he doesnt expect to see much of an upheaval as a result of the new capacity.
"When you get too much capacity coming in, (producers may) have to buy their way in (with aggressive pricing) during a 24- to 36-month cycle. If worse comes to worst, the high-cost producer is the most vulnerable, but we dont expect a shakeout," he said.
Meanwhile, hot-rolled bar imports have not yet put much pressure on the sector, he said.
Although import share for SBQ has increased so far this year, with first-quarter imports of hot-rolled bar up 14.2 percent year over year to 313,000 tonnes, the product is typically proprietary and pre-sold to specific end-users, making an influx unlikely, Plummer said.