Global steel production rates
and prices should remain stable through the remainder of this
year and beyond, analysts and key market players say, but other
forces, including demand, could be less reliable, potentially
creating some volatility.
In general, supply/demand
is actually in balance, Aldo Mazzaferro, senior steel
analyst at Macquarie Capital USA Inc., said. Ore is
weaker and scrap is weaker, but so far there has been fairly
good production discipline from mills. He suggested there
is likely to be little change in that situation worldwide
through the balance of the year, and that will act as a natural
hedge in North America against imports.
Demand is missing in
action, but supply is well-behaved, Mazzaferro and his
team concluded in a recent MacSteel report. There is
little confidence and little motivation to hold inventory of
anything, so mills have been slowing production, service
centers have been living hand to mouth, and consumers are in a
just-in-time mode. Foreign trade is getting modestly better,
with lower imports expected as U.S. price levels in many cases
are not high enough to justify the additional freight and
delivery costs of imports. This could change quickly, however,
with the evolvement of global price trends and currency levels.
Domestic steel pricing is likely to go sideways.
Mazzaferro said that U.S. steel
prices are volatile within a narrow range of plus or minus $20
to $30 per ton, and he expects them to stay between $570 and
$600 per ton as long as scrap and iron ore are soft. He also
expects production rates to remain stable in the mid- to
Either demand must
increase or supply must decrease for market forces to begin to
move steel prices up again, Mazzaferro said.
Company earnings are likely to diverge, with a split
between losses from high-cost, mostly integrated steelmakers
compared to modest profits for lower-cost players, largely
mini-mills. Service centers should do well in a more stable
pricing environment, as profit margins should no longer be
whipsawed by volatile pricing. Rising prices would be better,
but service centers can do well in stable pricing, especially
those investing free cash flow advantageously.
Looking worldwide, Macquarie
said that scrap and raw material prices are likely to rise and
fall with the level of global scrap and steel demand, including
that from China, Turkey, and elsewhere in the eastern
Mediterranean and Asia.
We expect stability in
scrap and iron ore. Ore prices are probably the most important
underlying factor up and down the steel spectrum,
Mazzaferro said. Some concerns include the high levels of
Chinese steel inventories because a destocking as pricing there
declines could cause a cutback in steel production, which would
then create some downside volatility in ore that might bring
down the scrap and steel price spectrum globally.
With U.S. steel mill capacity
utilization rates hovering in a range of 75 to 79 percent
during the first half of this year, steelmakers are looking at
a mixed but generally positive picture for the rest of the year
and into 2014.
The automotive market has
improved markedly over 2012, and energy is still looking
relatively strong, even though that segment has seen a lot of
import penetration, Thomas J. Gibson, president and chief
executive officer of the American Iron and Steel Institute,
said. Overall, imports are running at 24 percent, which
is higher than the recent average. Construction markets remain
depressed from pre-recession highs, with some better
subsegments, such as warehousing and hotels.
Energy is a bright spot, and not
just as a source of demand for line pipe and oil country
tubular goods, said Lawrence W. Kavanagh, Steel Market
Development Institute president and AISI treasurer. He said the
boom in shale oil and gas has pushed up demand for sheet steel
for storage tanks and rail cars.
We are an energy-intensive
industry, and the lower cost of power from gas-fired generation
is a benefit, Kavanagh said, noting that natural gas also
is being used in blast furnaces, not just as an accelerant but
also as an economical replacement for some of the carbon and
fuel components provided by coke and coal.
As for primary steel inputs,
prices for iron ore and scrap are coming off recent peaks, said
Jessica Fung, global commodities analyst at BMO Capital Markets
Ltd. in Toronto. Chinese and Indian mills were running
very high, which was supporting high ore prices. In mid-May,
traders were not buying, she said. Upstream of
steel, we are expecting an onslaught of raw material supply.
That is not so great for the mines, but good for the
Overall, sellers, buyers and
traders are disappointed with the way the market has behaved
lately, Fung said. We have seen some real shocks in ore
prices, which is something of a surprise. When the industry
moved off annual contracts in 2010, many people thought that
would be great for capturing better prices. In (any) event, no
one is happy with the volatility, and there has even been some
talk of going back to some form of contract, perhaps quarterly,
like coal. I doubt that will happen, but the sentiment is
The downstream demand recovery
varies greatly by sector, Steel Manufacturers Association (SMA)
president Thomas Danjczek said. The bright spots are
automotive and energy. Long products are also bright for both
residential and nonresidential. That includes rebar, wire rod
and structural shapes, but not (special-bar-quality products).
Long products are up 24 percent this year, but bear in mind
that is off a utilization rate of about 60 percent last
There are still uncertainties
surrounding low capital investment around the country, low
hiring rates and government gridlock, including over debt and
regulation, said Adam Parr, SMAs vice president of policy
and communications. The largest drag on our industry is
Europe. They produced 200 million tons in 2007 and now just 150
million tons. What is going to happen to all that excess
capacity? That is really acting like a wet blanket on the
global steel business.
Overall, we are seeing a
pickup in all areas, but no one is happy just growing at 3
percent a year, Danjczek said. At least we can say
that the likelihood of a second dip into recession seems to be
behind us. People may be disappointed with the rate of growth
currently, but at least it is growth and not recession. My
members are not necessarily confident, but they are more
optimistic. We try not to get caught up in the averages of this
quarter better than that quarter but worse than the other
quarter. There are variables in all sectors, but this is still
a good time to be in the primary steel business.
One way steelmakers have
attempted to control their input costs has been to integrate
vertically upstream, but those initiatives seem not to have
played out as hoped. We have seen several mills acquire
mines, but that was mostly done when ore prices were
higher, Fung said. But now, when ore prices are
coming down and mine valuations are lower, is the time when the
mills should be making deals with mines. It never seems to work
out that way, though.
If back-integration from the
mill to the mine has delivered mixed results, combinations in
other segments of the supply chain have shown positive returns.
One of them is Nucor Corp.s $750-million, 2.5-million-ton
direct-reduced iron (DRI) project in St. James Parish, La. The
DRI process is a heavy user of natural gas, and late last year
the Charlotte, N.C.-based steelmaker struck a 20-year supply
deal with Canadian energy firm Encana Oil & Gas (USA) Inc.
for an onshore natural gas drilling program. Chesapeake Energy
Corp. and methanol producer Methanex Corp. recently reached a
similar deal, demonstrating how high-demand industrial users
and energy suppliers are moving beyond simple spot
Nucor previously said its DRI
plant was on schedule for a mid-2013 startup, with plans to
construct a second DRI plant of the same size at the same
location once the first is up and running. A knowledgeable
industry source said the first train is likely to be in
service later in the year, perhaps even toward the end of the
year. Nucor did not respond to requests for comment.
Meanwhile, Interpipe Group has
been effusive about its upstream integration to primary steel
production at its pipe mill in Ukraine. One of the
companys most important projects has been its
$780-million, 1.3-million-tonne Dneprostal steel mill,
according to Interpipe North America president Daniel Valk.
The companys new
electric-arc furnace was commissioned in October 2012 and
supplies the billet needs of all of Interpipes pipe
mills, Valk said. We ship semifinished green pipe to the
U.S. and upgrade here, primarily threading and heat-treating.
The huge advantage to having our own steel production is that
we can control quality and reduce lead times to very
The pipe business in North
America is slower so far this year than it was in 2012, Valk
said. We have seen volumes and margins decrease because
oil and gas companies are concerned about overproduction and
lower prices, so they have reduced drilling. We do anticipate
increases in oil and gas prices, and when that happens drilling
will resume, but for the moment they, and we, are just
He also noted that there are
still many players in the pipe business throughout Europe,
India and Asia competing for markets in the Americas.
People think about the North American market in
particular as a bottomless pit, but it is not, he said.
And we are finding the bottom. In recent years, there
would typically be a two- to three-month supply of pipe on the
ground in the U.S. Now that has increased to a four- to
With no major macroeconomic
developments in global supply and demand shifts, industry
observers are watching for more subtle signals.
We are seeing lots of
small things, said Josh Cole, a principal with accounting
and consulting firm Crowe Horwath LLP. We are seeing
companies of all sizes making investments to move closer to
their customers by investing in additional value-add(ed
products) for their end customers. They could be responding to
a need from a customer to outsource some operation, or it could
even be replacing a customer operation.
Up and down the steel supply
chain, companies are evaluating where their profits are, where
their costs are and where their expertise lies, Cole said.
Where businesses have been commoditized, they are raising
the barriers to competition in the places that they best
Cole said that trends toward
value over volume stop at the mill gate. Generally, the
primary steel world is still about running at a capacity to
achieve efficiencies, he said. Their margins are
dictated by the price of their metal and their cost structure
back to raw materials.
David Hannah, chairman and chief
executive officer of service center chain Reliance Steel &
Aluminum Co., said his company is not focused on tons. We
rarely even talk about tons. Our focus is on maximizing gross
profit by turning inventory. Reliance recently completed
its acquisition of Metals USA Holdings Corp., Reliances
largest ever in terms of value but just the second public
company it has purchased of a total of 55 acquisitions.
Metals (USA) did a very
good job. Their returns were only second to ours in the sector,
with gross profit of about 22 percent. The new target is 25
percent, Hannah said. That might not sound like a
big deal, but with a $2-billion operation even a few percentage
points makes a big difference on the bottom line.
The same principle applies to
operational efficiency. Metals (USA) were turning their
inventory 3.5 or four times. We have set a new target of five
times, he said. If that can be accomplished, it
would free $100 million in capital.
Analysts lauded the
companies complementary product lines and geographical
advantages, noting that the deal would be immediately accretive
to earnings for Reliance.
Hannah agreed, adding that
integration is being led from the field, not the head office in
Los Angeles. We dont draw lines around products or
geography, he said. As we said when we closed the
deal, this is accretive straight out of the box, so there is
not a lot of integration in the traditional sense. We are
letting the people in the field drive this combination. We are
not planning any redundancies in people or locations. This
business is based on relationships, and we dont want to
harm those. We dont have a lot of geographic overlap, and
there is not a lot of duplication in lines of business even
when we are in the same geography. But even if Metals (USA) has
a location near a Reliance location, we are not going to close
one or the other. We leave all the names in place, and we have
seen a great deal of cooperation already.