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Steel sector heading toward stability: Goncalves

Keywords: Tags  Metals USA, Lourenco Goncalves, construction, steel demand, steel consumption, acquisitions, 3d Annual Dahlman Rose & Co. Global Metals, Mining & Minerals Conference Catherine Ngai

NEW YORK — The outlook for the U.S. steel sector is one of stability, according to Metals USA Holdings Corp.’s top executive, although continued growth will require discipline from domestic mills in order to keep tags up and fix volatility in pricing cycles.

"Steel demand continues to improve," Metals USA chairman, president and chief executive officer Lourenco Goncalves said Tuesday at the Dahlman Rose & Co. third annual Global Metals, Mining and Materials Conference. "Of course, we don’t have ... the exuberance that we expected if the outcome of the (presidential) election was different. But we’re still good because at least the uncertainty of the elections (is) gone, and the certainty that the fiscal cliff will be solved is helpful.

"We’re not seeing anything bad in front of us at this point in time," he added. "And even more importantly, the U.S. industrial production numbers continue to outperform the GDP (gross domestic product)."

In recent weeks, a number of domestic mills have raised flat-rolled tags by some $40 to $50 per ton in response to higher raw material costs (, Nov. 7). Goncalves said that the price increases are a step in the right direction, although he warned that fundamental change needs to happen in order to keep prices higher in the long run.

"The last price movement is giving me a little hope that the steel mills are waking up," he noted. "We’re seeing a serious movement in the direction of higher prices that started with AK Steel (Corp.) increasing $40 (per ton) that was well accepted. Mills can’t afford to go below cash cost."

He said that if mills remove the scrap surcharges that were introduced into the market in 2004, steel prices will become more stable.

Goncalves told AMM on the sidelines of the conference that a number of other sectors are also showing favorable signs of growth.

"The auto industry is consistently good, and residential construction has finally come back. I anticipate that in six to eight months, nonresidential construction will pick up, too," he said, adding that Fort Lauderdale, Fla.-based Metals USA is more focused on specialty products, such as special bar quality (SBQ), over larger markets, such as hot-rolled.

"Our margins are driven by application and not on big products," he said.

Goncalves added that the company will likely focus on acquisitions in the near term.

"It’s a target-rich environment right now," he said. "My appetite hasn’t diminished, and my discipline hasn’t diminished, either. (However,) we’re not a serial acquirer ... The main driver for us to acquire a company is that the company, standing alone, must have an Ebida (earnings before interest, depreciation and amortization) margin higher than the entire Ebida of the entire Metals USA."

Moving forward, Goncalves forecasts stability for the domestic industry, citing increased demand and stable conditions.

"We continue to see steel consumption in the U.S. higher than production," he added. "Despite all the conversations regarding overcapacity, we still buy more steel at the end-user level than we produce in this country. So it’s a good place to be, and it gives us assurance that things will continue to go well."

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