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Steel profits to grow despite low capacity rates: Timken

Keywords: Tags  Timken, steel capacity utilization, steel demand, steel supply, steel profit margins, product quality, James Griffith, Richard Kyle Corinna Petry

CHICAGO — Timken Co. will be able to operate profitably in a weak demand environment and with relatively low capacity utilization by investing in new equipment that both increases efficiency and raises the quality of its steel bar products, the company says.

Canton, Ohio-based Timken maintained a double-digit steel operating margin during the first quarter despite a 55-percent capacity utilization rate and lead times of less than 12 weeks, president and chief executive officer James W. Griffith said during an April 24 earnings call.

Steel sales this year will decline 7 to 12 percent compared with 2012 levels, executive vice president of finance Glenn A. Eisenberg projected. Raw material surcharges will also decline.

"From a volume standpoint, we have limited visibility to the order book," Richard G. Kyle, group president for the aerospace and steel divisions, said. However, he expects second- and third-quarter order activity will improve modestly from the first quarter.

Aside from decent automotive sector demand, no end markets "really stand out," although they are generally expected to improve going forward, Kyle and Griffith said.

Another headwind for steel is inventory adjustments at major customers, such as Caterpillar Inc. "Doug (Oberhelman, Caterpillar Inc.’s chairman and chief executive officer) was really clear about what they’re doing," Griffith said, adding that the same adjustments are occurring throughout the oil and gas market.

Steel’s profit performance, however, "reflects the new flexible cost structure we’ve put in place. Add to that the impact of capital programs coming on, and we’re pretty comfortable with our ability to operate at those kinds of levels," he said.

This is the result "of a years-long effort to shift focus away from a high utilization model and selling capacity (and instead focus on) attractive markets and product and application differentiation," Kyle said. "We can sustain good margins running at a relatively low utilization rate. And as demand for (steel) products picks up, that would further improve (profitability)."

Although customers are "paying significantly less for a ton of steel today" than during 2012, based on the surcharge mechanism, "with the focus on applications and differentiation, the base price has essentially held through this year," he added.

As the company’s new caster, new forge and other capital projects ramp up, benefits should start multiplying next year in terms of reducing costs and being able to demand a premium for Timken’s steel quality, Kyle said.

Once Timken’s steel assets get up to 70 percent of capacity, "it allows us to have industry-leading availability and on-time delivery, which then supports the premium pricing that we have in the marketplace," Griffith said.

Having a 70-percent capacity utilization rate as a goal is "a real shift for us. It’s a shift for the industry and it is fundamental to (our) earnings model," he added.

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