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232 fallout hazy; downstream nervous: Ryerson

Mar 06, 2018 | 05:41 PM | New York | Millicent Dent

Tags  Section 232, steel, steel imports, earnings, hot-rolled coil, Ryerson, Eddie Lehner, Millicent Dent

It is difficult to ascertain the fallout from the United States’ recently announced tariff on imported steel since nothing has actually happened, Ryerson Holding's top executive said during the company's quarterly earnings call on Tuesday March 6.

“There’s a lot of action around the headline but nothing enacted. It’s hard to extrapolate what will happen since nothing has been enacted,” president and chief executive officer Edward J. Lehner said during the call.

President Donald Trump announced on March 1 that he would enact a 25% tariff on steel imports following the US Section 232 investigation on national security grounds.

A lot of Ryerson’s downstream customers are concerned about availability and continuity of supply, Lehner said.

“First and foremost, people want availability and continuity, and then they want to know how that will be priced later on in the year,” he said, adding that customers are wondering if prices in the US will rise enough for it to make financial sense to import material from abroad despite the tariff.

But Ryerson is well positioned to deal with the tariff, if and when it is enacted, since it imports less material than the industry average and stands to benefit from higher metals prices.

The company imported 10% of its material in 2017 versus an industry average of 34%, Lehner said. “We’re further strengthening our domestic supplier relationships, which should support supply continuity in 2018 as the market works through” a number of factors, including the tariffs.

Ryerson anticipated the announced tariff would “have an upward bias on pricing conditions for metal products in the US for at least the first half of 2018,” which should be beneficial to the company’s bottom line, he said.

Indeed, hot-rolled coil prices have soared in recent weeks in anticipation of the results of the Section 232 investigation. American Metal Market’s hot-rolled coil index reached $40.03 per hundredweight ($800.60 per ton) on March 1, passing $40 per cwt for the first time since May 2011.

The company is not experiencing any material shortages ahead of the potential tariff enactment, although Lehner said that he has heard reports of people buying ahead. “But that has to materialize in the form of longer lead times and greater price pressure. We’re waiting for more evidence before we can make any conclusions.”

Meanwhile, Ryerson expects to see an improvement in margins in 2018 due to a number of factors that are lending support to the company’s bottom line, including a weaker US dollar, lower domestic import levels and supply-side reforms in China.

The company's gross margin fell to 17.3% in 2017 from 20% the previous year, with procured metals costs outpacing pricing power in the industry. Lehner highlighted the volatility in the nickel and chrome markets as having a large impact due to Ryerson’s larger exposure to the stainless market versus other service centers.

But chrome and nickel prices and expected to trend higher in 2018, particularly with stainless surcharges moving higher, he said.  

In addition, demand ticked up in nearly all of Ryerson’s end markets in 2017 compared with the previous year, and this trend is expected to continue into 2018. The construction, heating, ventilation and air conditioning along with the oil and gas markets all showed “encouraging signs,” although demand for consumer goods did not fare as well, Lehner said.

Ryerson's sales volumes fell by 8.7% to 470,000 tons in the fourth quarter from 515,000 tons in the third quarter, but rose 6.8% from 440,000 tons in the same year-ago period. Sales volumes totaled 2 million tons last year, up 5.1% from 1.9 million tons in 2016.

Lehner has spoken to a number of customers who are considering making capital investments in their businesses due to Trump's tax reforms, he said.

One area where companies have expressed interest in investment is automation due to the tight labor market. “There’s a theme developing in capital investments to automate... We’re having more and more conversations about employment constraints,” Lehner said.


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