Slowing demand forces change in the supply base
Despite robust demand, the government's Producer Price Index for steel bar products has been sliding annually since the last cyclical peak of 1995. Reason: new hot-rolled bar capacity in the Southwest and Midwest and a steady flow of low-priced imports. Since the start of 1998, prices for hot-rolled merchant bars have slipped 7%, while cold-finished bars are 5% cheaper, reinforcing bar is 9% less expensive, and stainless steel bars are 15% cheaper. Analyst Peter Marcus at World Steel Dynamics already h
By Tom Stundza -- Purchasing, 11/4/1999 2:00:00 AM
Steel bar buyers project that new-order bookings will stay flat for the next six months at least, as they work to reduce in-house inventories they now view as excessive. Buyers surveyed by Purchasing are cautious about new-order bookings since they see no surges ahead for their companies' end-use products or construction-project activity. Also, they doubt strongly that proposed fourth-quarter price hikes for hot-rolled and cold-finished steel bars will permeate the marketplace.
The poll of steel buyers finds that 75% see bar availability as "normal" or "loose" over the next six months, whether the supplier is a mill or a distributor. An equal percentage of buyers suggest flat-to-weaker prices ahead because of excess domestic supply and plentiful foreign metal. Outside automotive, buyers are less than excited about buying plans for next year. Only 40% of those polled say they may buy more tonnage next year, but half of them plan to review buying plans in January.
"Business is a little bit more consistent now, without the high peaks and deep valleys of previous quarters," says a PM at a metalworking company in Southern California. "So I'll be able to reduce in-house inventories and reduce buying if internal needs by manufacturing operations slow down." Another PM at a commercial construction company in Michigan suggests that "work on new projects may stagnate a bit in the near term because interest rates are beginning to rise."
Based on his surveys of OEM buyers, analyst John Anton at Standard & Poor's DRI also projects that "purchases will remain relatively steady" in the months ahead. He also sees little chance for industrywide price hikes until sometime in 2000, and then only if further rationalization reduces supply. "If bar makers maintain current production levels," he says, "the market will stay saturated, and price recovery will be muted."
This fits right in with the market view of Don Caiazza, CEO of CSC Ltd., who notes that "there is an increased customer focus on reducing inventory." He adds a key point: Service center buyers may have to reduce new-order bookings this quarter and in early 2000. Steel bar inventories at the distribution level have risen by 17% this year, after rising 7% in 1998. Current service center stocks alone could supply 6.5% of existing demand, compared with a 5.5% average for the previous eight years of this decade.
It now appears that the overall steel bar market peaked in 1998 at an adjusted 19.77 million tons, and purchasing will slide this year to 19.11 million tons, a 3.3% decline. Looking ahead, even mill executives are cautious. None of the mill execs surveyed see the market perking up. Typical is the comment of Steven Dodge, marketing manager for Macsteel in Jackson, Mich., who "anticipates little change in hot-rolled or cold-finished bar demand trends" next year. "Automotive will remain the strongest market next year," he says, "while agricultural equipment and oil field uses will stay the weakest." Thus, Purchasing's early consensus forecast for 2000 bar demand is 19.13 million tons.
"The domestic steel bar mills will enjoy seeing 1999 end," says analyst Tom Runiewicz at WEFA Inc. He cites weakened sales, reduced production, and depressed prices as the ingredients for "an unattractive bottom line" this year. However, he is more optimistic than most other steel bar market analysts about next year, as he reckons that "the non-residential construction sector should see strong growth and demand for rebar and small shapes." These are the commodity grades.
Conversely, the uncertainty about the economy and an excess of barmaking capacity has deflated the value-added bar industry's optimism for 1999-2000, admits Bill Bowling, president of the steel group at Timken in Canton, Ohio. He tells a recent Steel Service Center Institute-sponsored Steel Outlook Forum that anticipated reduced production of cars, trucks, and agricultural equipment will offset small gains in construction equipment and machine tools. "The dynamics of the bar business for next year will hinge on economic instability, continued high imports, and competitive pricing caused by excess capacity," Bowling says.
Mergers, closings predicted
The Timken Steel chief says that "continued rationalization of older, non-competitive facilities has to occur," but he is sanguine about the future in noting that "even the low-cost survivors won't necessarily prosper for some time to come" without sustained new growth in demand and a reduction in imports." In fact, the surfeit of supply already has caused the structure of the steel bar industry to undergo a number of changes over the past year.
Mergers have created Republic Technologies International from the former Republic Engineered Steels, Bar Technologies, Bliss & Laughlin Steel, and the bar group at USS/Kobe Steel. Roanoke Electric purchased Steel of West Virginia. Inland Steel Bar now is Ispat Inland Bar. Co-Steel now owns New Jersey Steel. Gerdau Group of Brazil now owns 75% of AmeriSteel Corp., adding to its North American holdings of Canada's MRM Steel and Courtice Steel. Qualitech is operating, but under Chapter 11 bankruptcy protection from creditors. Timken has retained J.P. Morgan & Co. "to explore strategic alternatives" for its Latrobe Steel subsidiary. Niagara Cold Drawn and LaSalle Steel now are the five-plant Niagara LaSalle Corp.; and Birmingham Steel is looking for a buyer for its American Steel & Wire operations.
In fact, a dissident shareholder group's battle for control of Birmingham Steel centers around the AS&W bar unit in Cuyahoga Heights, Ohio, along with a newly built melt shop in Memphis, Tenn., where the firm has invested millions on new equipment and still can't make any money. The dissident United Group, headed by former CEO James Todd, is seeking to oust CEO Robert Garvey and install John Correnti, former president of Nucor. Garvey has criticized Todd's decision to embark on a $350-million expansion into the special bar quality (SBQ) market without doing an appropriate market study. The dissident group countered by accusing Garvey of improperly managing the SBQ business since he took over the multigrade bar company in 1996.
Also note that the new management team at Republic Technologies International has started an ambitious four-year consolidation program that will shut 13 obsolete facilities, reducing employment by 29%, revamp steelmaking and upgrade bar-finishing operations, and change its end-product marketing into higher-grade products. The revamped firm will run one blast furnace (instead of two) and basic oxygen furnace, two electric-arc furnaces (instead of four), a bloom caster, a cast rolling mill, and a billet caster (instead of two). These will feed four (instead of seven) hot-rolled bar mills and eight (instead of 13) cold-finishing mills. Despite these cutbacks, the firm expects to be making 53% more finished product--or 3.5 million tons/year--for the market by 2003 after changing the size of bar-processing runs.
"Such capacity and management adjustments are inevitable in the North American market in the near term," suggests Martin Flash, managing director of Mega Associates, a British consulting firm. "The reasons are slowing end-use markets and rising productivity by metalworking industries, both of which will reduce demand, while new capacity and imports keep supply in excess."
Still, not all analysts are so cynical. Cliff Ransom, director of State Street Bank's industrial research group, reckons that the steel bar business will reflect some improved demand next year from basic materials and energy markets. "The consumer spending splurge here will give way to a U.S. economy supported by industrial activity." Frank Korth, director of equity growth funds at National City Investment Management, concurs that U.S. growth in 2000 "will be carried by the 'back end' of the economy--that is, capital goods, basic industry, and energy." And these sectors, he points out, are steel-bar intensive.
Hot-rolled bars
Consumption of hot-rolled bars in round, square, and numerous shaped configurations is slipping to 10.9 million tons this year after slipping to 11.2 million tons last year from 11.5 million tons in 1998. Hot-rolled bars are sold as merchant-quality bars, special bar quality (SBQ) products, and light shapes. Bars are manufactured in a wide range of profiles, including rounds, squares, flats, strips, channels, and angles. Key buyers are fabricators, service centers, and manufacturers of floor joists, gratings, light machinery, tools, farm equipment, and food-processing equipment. SBQ grades entail more sophisticated metallurgy because their key end uses are in automotive parts such as axles, bearings, and other components that require special quality.
Consumption of all these bars is driven by the fortunes of essentially three industries--construction, automotive, and mechanical engineering. "And these key end users entered 1999 with too much inventory," says Mike Lindsey, general sales manager/SBQ, at Chaparral Steel in Midlothian, Texas. "Also, depressed agricultural and oil field equipment markets have hurt sales this year."
The steel bar suppliers have seen shipments drop off precipitously to agricultural equipment, normally a huge market sector, because of slowed end-product manufacture caused by a 37% sales collapse for self-propelled combines, a 5% decline for farm tractors, along with a slight 1% dip in farm-field machinery, and an anemic 5% growth in farmstead equipment. Equipment Manufacturers Institute believes the worst of the ag equipment manufacturers downturn soon will be over. Still, year-2000 sales are forecast to rebound by a paltry 2% for all two- and four-wheel-drive farm tractors, and the forecast for combines in 2000 is another year of declining sales. Atop all that, within the farm field machinery group, negative retail sales for 1999 and 2000 are projected.
All of this will impact SBQ, the largest part of hot-rolled bar sales (about 75%) in the U.S. Slowing key-market demand is a problem because domestic supply now is greater than demand, as reflected by weak prices and industry profits. Recent moves to restructure have been accelerated by the fact that imports still control 22% of supply. Looking at next year, underlying automotive demand is good, says Lindsey, but what worries him and other marketers is that the overall market "may pick up only slightly," because construction may slide off 1999 levels, ag equipment looks to stay depressed, and oil field equipment demand may improve only slightly" Note that the consensus forecast says hot-rolled bar demand will slide to 10.72 million tons next year.
Joe Harrison, VP/sales of Kentucky Electric Steel, disagrees. He sees continued strong automotive demand for lead spring-grade hot-rolled steel flat bars. He also thinks "overall demand from steel service centers will be much stronger" next year. Robert A. Dombrowski, VP/sales and marketing, Ispat Inland Bar Products, says that second-half sales have improved for most markets except agriculture and off-highway, and that should carry into 2000. Automobile demand is still good and most supply contracts have been settled, therefore, there should be no downturn in sales to that sector. So, overall, 2000 should continue to mirror the second half of 1999," he says. "Automotive demand may continue to be strong while oil and gas should improve, and forecasts for agriculture and off-highway continue to remain low." For Dombrowski, a major question will be the level of foreign imports "as some countries begin or continue to export products not covered in current trade case legislation."
Sharing this view is Tom Tyrrell, CEO of Republic Technologies International, which is trying to increase the price of all carbon and alloy steel bar products by $20/ton and leaded bar products by $25/ton. Tyrrell insists that "SBQ steel is a growth industry," and projects that 1998-2003 demand eventually will settle into a 2.5% annual growth sector. Reason: The explosive growth in the production of light trucks, minivans, and sports utility vehicles, which use 400-450 tons of SBQ bars per vehicle, as compared to 15-250 lb/vehicle for small, mid-size, and full-size automobiles. Tyrrell projects that the automotive fleet in the U.S. will rise from 209 million units this year to 229 million units in 2004, and that half of those new vehicles will be trucks.
Cold-finished bars
Vernon Oechsle, CEO of Quanex, notes that "strong demand in transportation markets continues to benefit engineered steel bar operations." The conglomerate's Macsteel Group subsidiary in Jackson, Mich., earned best-ever quarterly operating income in the third quarter, mostly because of record shipments of its MacPlus-brand premium cold-finished steel bar product. Overall, however, the cold-finished bar business has had better years. "Weak agriculture demand, weak energy demand, and high service center inventories have caused overall demand for cold-finished bars to be reduced," says Kevin Van de Ver, VP/sales at LMP Steel & Wire in Maryville, Mo.
In fact, so far this year, mill shipments have fallen by 8% and pricing has slipped by 4%, as apparent supply has dropped by 4.5%. Tom Mulhollan, president of Precision Kidd Steel, says "business overall is weaker, and it's a puzzle." The president of the Aliquippa, Pa., firm says "there's a strong economy and strong automotive sales, yet the cold-finished bar business is weak." His best guess: End users and distributors built up excess inventories over the past three years, "and, now, these stockpile levels are being adjusted." Of course, part of the reason also may be that imports have risen 13% this year.
Cold-finished steel bars are made by processing hot-rolled bars (usually SBQ grades) to make a product that is cold-headed and screw-machined into industrial fasteners, contractors' products, and utensils and are transformed into components for all kinds of industrial, commercial, and consumer products, especially automotive parts. They are found in all types of machinery and equipment used by industry and are especially necessary to the production of crankshafts, steering joints, transmissions, and gears for cars and trucks; parts for motors; and components for machine tools and defense ordnance equipment.
However, it now appears that cold-finished bar use will slide by 4.5% this year to 1.93 million tons after slipping 2% in 1998 from the record 2.06 million tons in 1997. Cold-finished bar use is driven by production of off-road equipment, heavy and light machinery of all types, agricultural machinery, oil and gas drilling equipment, process machinery, machine tools, and various capital equipment. Looking at the 2000 market, the consensus forecast puts demand rebounding by just 3% to 1.99 million tons.
Mulhollan of Precision Kidd Steel and Van de Ver of LMP Steel both disagree, and say business looks to be flat next year. Van de Ver says that "demand from automotive will be strong but off the 1999 pace, and construction will be strong in a presidential election year, but demand from the agriculture and energy equipment industries will remain in the tank." Even optimists such as Lindsey at Chaparral believe that U.S. and Canadian crude oil prices will have to stay in excess of $20/barrel for at least six months into 2000 before energy companies start drilling again in North America and boost demand for oil field equipment. (Note that 770 rigs were exploring for oil and natural gas in the U.S. at the end of the third quarter, as compared with 4,500 at the last cyclical peak in the fourth quarter of 1981.)
Construction-grade bars
Demand for construction-grade bar products--especially concrete-reinforcing bars--looks to be wobbling a little at 7.36 million tons this year from a record 7.37 million tons in 1998. Rebar demand continues to be aided by recent growth in housing and commercial construction, but mostly from expanded highway, bridge, and industrial building. In addition, a large number of public-works projects are "buy America" jobs that prohibit the use of foreign steel.
Phillip Casey, CEO of AmeriSteel says the "favorable environment for construction activity has boosted overall demand from downstream rebar fabrication operations," and he sees little change ahead. However, with imports holding a 30% market share, pricing has been weak. "Under today's demand conditions that have domestic mills operating at capacity, the absurdity of distressed steel pricing by foreign producers and import brokers is difficult to comprehend," says Casey. While sales have been sizzling, domestic spot prices this year slipped 10% to an average of $300/ton.
Demand for rebar used to be seasonal, but recent mild winters have made construction a year-round activity, and boosted demand for residential, commercial, and public-works construction. Atop that, high levels of consumer optimism in the U.S. has retail resales at high levels from lumber yards selling small-length material for use in driveways, pools, sidewalks, and single-family dwelling foundations.
Looking ahead, the analysts and market insiders are split as to whether highway and industrial construction will boost sales. Analyst Runiewicz at wefa sees prices rising by 6% next year as exports slip to satisfy growing offshore demand. However, he projects that supply here will be flat next year, so he's not surprised with a consensus forecast that has supply slipping 1.5% to 7.24 million tons. He believes that business investment in commercial and industrial buildings will slide in the second half of this year, "and maintain a flat trend next year."
These views could be overly pessimistic, however, suggests analyst Scott Morrison at Donaldson, Lufkin & Jenrette, "since construction demand for rebar should be buoyed by incremental government spending associated with the new federal highway bill, which will increase public spending on transportation infrastructure by 40% over the next six years."
Stainless bar
Stainless steel bar demand is sliding, and pricing has crashed by 15% since the start of 1998. List prices are $1.12/lb for Type 304 stainless steel bars, but anecdotal information from buyers suggests that actual sales prices are as low as 95¢. Attempts this summer to get a 6% spot-market price hike flopped. Although inventory drawdowns by service center levels are continuing, stocks still are at high levels, and demand is sliding by 14% this year to around 202,000 tons.
Imports, which controlled 36% of 1998 supply, rose to 38% at midyear--in effect, taking a larger slice of a smaller pie. This appears to be short-circuiting the earlier forecast from Metal Bulletin Research of London that mills might be successful with 7¢-8¢/lb increases in the fourth quarter of this year and the first quarter of 1999. Even stainless market optimists such as Morrison at Donaldson, Lufkin & Jenrette, and Anton at Standard & Poor don't see Type 304 bar prices rising much above $1.02 next year--and only if demand rises the expected 7.5% to 217,000 tons.
Market at a glance
Demand: Solid, but slipping. Demand will average 18.4 million tons/year in the second half of this decade, compared with 14.3 million tons in the first half. However, cyclical peak was in 1998 at 19.77 million tons. Slight slippage in 1999 will continue in 2000.
Supply: Abundant, and then some. Analysis by Resource Strategies Inc. suggests 2 million tons of new hot-rolled bar capacity will be operational by 2000 from the tonnage in place in 1995. Yet, foreign mills ship at least 20% of all bar products sold to U.S. buyers.
Prices: Down, but squirming. Growth in capacity and imports have outpaced growth in demand. U.S. mills are trying to boost tags, but the market isn't very receptive. Not with importers underpricing the domestic mills.
Recent bar industry mergers & acquisitions
Firm Buyer Result
New Jersey Steel Co-Steel Co-Steel Sayreville, a subsidiary
Inland Steel Bar Ispat International Ispat Inland Steel Bar Products, subsidiary of Ispat Inland Inc.
Steel of West Virginia Roanoke Electric Steel of West Virginia, a subsidiary
Lemont Steel Auburn Steel Austeel Lemont, a subsidiary
Owens Electric Structural Metals SMI South Carolina, a subsidiary
AmeriSteel Corp. Gerdau Group 75% ownership
LaSalle Steel Niagara Cold Drawn Niagara LaSalle Corp., a subsidiary
Republic Engineered Steels Bar Technologies Republic Technologies International
USS/Kobe Steel (bar group) Bar Technologies Republic Technologies International
Latrobe Steel (for sale by Timken) ??
American Steel & Wire (for sale by Birmingham Steel) ??
SOURCE: PURCHASING
Cold-finished bar firms plan quality audits
A new continuous improvement program soon will be implemented among the membership of the Cold Finished Steel Bar Institute and will be based on results of a just-completed international benchmarking project. Over the next several months, member companies will be involved in a rigorous "Cold Finish 2000 Audit," a program that will measure their performances against their objectives for the next millennium. The audit will be broad-based, covering both quality and service and procedure and performance, in plant and with regard to customer satisfaction. "A lot of audits that are done look specifically at internal quality processes, but don't focus much on services," says Patrick H. Wannell, steel bar consultant and former industry CEO (at the former LaSalle Steel). "This one is more widespread and will look at results because we want to see what the product is like as we focus on the next millennium." Customer input will be a significant element of the overall program. Customers will be asked to compare performances based on leadtimes, delivery compliance, and marketing support. They also will be asked to assess their needs for 2000 and beyond. "This program has been designed to help member companies provide globally competitive products and services to the users of cold-finished steel bars," Wannell says.
Uncertainty clouds the marketplace
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