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Steel prices must be at the bottom: Reliance

Keywords: Tags  Reliance Steel and Aluminum, carbon steel pricing, CRU discounts, discipline, ThyssenKrupp, imports, Dave Hannah, Gregg Mollins

CHICAGO — Soft demand and weak carbon steel pricing are likely to persist during the rest of 2013, Reliance Steel & Aluminum Co. executives say, noting that March was, for the first time in recent history, the weakest month in the first quarter and that April average daily shipments are so far showing little improvement.

"Pricing was down across all product groups, with carbon down 10 percent," chairman and chief executive officer David H. Hannah said on an April 25 earnings call when discussing the company’s first quarter vs. the same quarter last year. "Demand was softer than anticipated, particularly in March, which traditionally is the strongest (month)."

Automotive was the only market where volume increased year over year, he said. Nonresidential construction "is showing signs of life, but demand remains below peak level," Hannah added.

At the same time, economic uncertainty, excess steel supply and short lead times are magnifying flat-rolled producers’ inability to hold firm on pricing, Reliance executives said. "We are supportive of price increases, but somebody always breaks ranks," chief operating officer Gregg Mollins said.

Still, the company is optimistic things could firm up ahead. "We are at the bottom in terms of carbon steel pricing. There is nowhere to go but up," Hannah added.

Asked about steelmakers’ recent resolve to move away from discounting off the CRU index for hot-rolled band, Mollins said the practice is "extremely unhealthy for our suppliers. The discounting should and will go away."

While visiting suppliers this year, Mollins heard "a tremendous amount of discontent" about discounting off CRU, he said.

"Could it (the index theoretically) be manipulated? Yes, it could," added Hannah. "That is part of the issue. If discounting goes away, that’s a positive."

Looking at the market, Reliance executives said overcapacity is still a major issue keeping steel under pressure.

"There is too much domestic capacity as it applies to demand today and in the future," Mollins said.

It would be better if imports went away and domestic mills could operate at high utilization rates to meet the demand themselves, but that possibility is limited, said Hannah.

Reliance’s top executives said they are also hopeful a domestic producer, not a foreign entity, will acquire ThyssenKrupp AG’s mill in Calvert, Ala. "That would be our dream come true," said Mollins, noting that slabs to feed the mill would therefore likely be sourced in the United States and the new owner would have incentive to stabilize spot pricing.

"It’s problematic if someone from overseas managed sales and pricing as it is now. But if a company like U.S. Steel (Corp.) got their hands on it, it would have a positive influence," he said.

"The main thing is to get some discipline in there. Right now, that’s lacking," Hannah agreed.

In the three months ended March 31, Reliance reported net income of $83.7 million, down from net income of $116.2 million in the year-ago quarter, on sales of $2.03 billion vs. sales of $2.29 billion in the same comparison.

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