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Steel facing headwinds, opportunities: SDI

Keywords: Tags  Steel Dynamics, SDI, Mark Millett, AISTech, AIST, Association for Iron and Steel Technology, steel, steel prices price volatility

INDIANAPOLIS — The steel industry faces stiff challenges but could see strong future growth thanks to a rebounding U.S. economy and increased domestic shale gas production, Steel Dynamics Inc.’s top executive said.

Among these challenges are pressure from imports, global steel production overcapacity and tighter spreads between scrap and blast furnace raw materials, according to Mark D. Millett, president and chief executive officer of the Fort Wayne, Ind.-based steelmaker.

"Domestic steel prices rise, the spreads to global prices expand, imports spike and domestic prices turn over," he said May 6 during a keynote presentation at the Association for Iron and Steel Technology’s annual AISTech conference in Indianapolis. "It’s not a dramatic change from the recent past. But it’s a cycle that has become more frequent."

That volatility comes as steel production capacity has grown exponentially in recent years, driven mostly by China, Millett said. With some major economies slowing, including China’s, there is now more than 400 million tons of open capacity—roughly four times the size of total U.S. steel production—and increased import pressure, he said.

On the raw materials front, prices for iron concentrate and coking coal have recently decreased more quickly than those for scrap, temporarily reducing the cost advantage that electric-arc furnace (EF) producers traditionally have had over integrated steelmakers, Millett said. But he predicted that compressed hot metal cost spreads between EF and blast furnace producers would prove to be short-lived, as scrap prices are expected to fall over the longer term.

While EF producers might regain their margins over integrated mills, a "prolific growth" in U.S. shredding capacity will lead to fierce competition with scrap exporters for "a limited reservoir of unprocessed obsolete scrap," Millett said. The result is that "over time there will be some rationalization in this (shredding) industry because many of the smaller shredders currently lack sustainable cash flow."

Despite those challenges, the steel industry should benefit from an improving U.S. economy and healthy demand for new cars and trucks, a strengthening manufacturing sector and an improving residential and nonresidential construction market, Millett said. Ramped up construction activity is particularly key to driving higher utilization rates and allowing for "much needed" margin expansion, he said.

As economies following the United States enter recovery mode, uncertainty will clear and companies, taking advantage of low interest rates, will put their "considerable" cash reserves to work, Millett predicted. "This will drive fixed-asset investment, which is the fundamental driver of our industry," he said.

Also bolstering U.S. growth is shale gas production that makes the country increasingly energy self-sufficient and encourages companies to relocate there, Millett said. That trend will further bolster steel demand by encouraging additional fixed-asset investment and more infrastructure spending, he added.

And the United States remains the only mature country short on steel production capacity, Millett said. "When this growth occurs, when the steel is needed, we do not have enough domestic capacity to meet it," he said. "It is, therefore, reasonable to expect that production utilization will be higher. ... This will drive increased profit margins, which is obviously great news."

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