Uncertainty clouds the marketplace
NEW HIGH-QUALITY STAINLESS BARS improve metallurgical consistency and provide easier machining, says product manager Bill Oberbrieser at Castle Metals. These proprietary CMQ (consistent machining quality) bar products make parts in "T" grades 303, 304, 304L, 316, 316L, and 17Cr-4Ni.
By Tom Stundza -- Purchasing, 10/8/1998 6:00:00 AM
Construction and manufacturing sectors probably will set a peacetime record for carbon, alloy, and stainless steel bar use this year at around 21.6 million tons. But not even the market insiders will hazard a guess about consumption in 1999. Demand has been bubbling for the past three years, and there is concern that the growth trend could fizzle out this winter or during the new year.
Throughout the bar supply base, "sales and shipments are reflecting strong business conditions" within North American metalworking industries, says Robert A. Garvey, CEO of Birmingham Steel, which is making a wide range of bar products at 100% of rated capacity. Donald G. Smith, CEO of reinforcing barmaker Roanoke Electric Steel, adds that "very favorable demand" from the construction industry "has resulted in orders still backlogged for delivery." Despite this, bar buyers don't appear to be too concerned. The latest surveys find bar buyers predicting no shortages in supply, and deflationary, rather than inflationary, pricing ahead.
In fact, 88% of steel buyers polled by Purchasing see bar availability as normal or loose over the next six months, whether the supplier is a mill or a distributor. A full 89% of those buyers polled expect to continue strong buying patterns at least through year end. Also, 83% of the buyers suggest weaker prices soon because of the expanded supplies of cheaper foreign metal.
Still, some market analysts wonder just how long hot-rolled and cold-finished bars will remain immune to an expected manufacturing slowdown caused by slowed export orders from recessionary Asian economies. A new Dun & Bradstreet survey of 1,000 manufacturing executives has them predicting a modest slowdown in production this autumn. "The manufacturers do expect that the ripple effects of Asia's trade deficit will weaken order books and mute production," agrees Joseph Duncan, chief economist at Dun & Bradstreet. However, even he admits that given the current robust consumer spending on products and goods, the rate of the anticipated manufacturing slowdown is unclear.
"Durable goods manufacture is the real driver of hot-rolled and cold-finished carbon and alloy and stainless-grade bars, and production of durables to meet firm orders is maintaining its strength for now," notes Bill Hassel, VP/sales of bar producer MacSteel in Jackson, Mich. Bob Dombrowski, VP/sales of Inland Steel Bar in East Chicago, Ind., also sees "continued high OEM demand for hot-rolled bars and downstream cold-finished products." As a group, most bar makers surveyed by Purchasing see a "very small possibility" that Asia's slump will trigger a major manufacturing downturn.
Yet, the economic pessimists also wonder how long construction will stay as hardy as it has been and support construction-grade bar sales. Paul L. Kasriel, chief U.S. economist for Northern Trust Co., predicts an imminent drop in demand for new homes, office buildings, and commercial properties because of layoffs at American factories resulting from the financial crisis dampening the market for U.S. products in Asia.
However, a new Dun & Bradstreet survey of 200 construction executives finds them upbeat, expecting the number of new housing and apartment orders to remain steady through the end of this year. Atop that, "commercial construction continues to expand with a healthy rate of spending on new factories, warehouses, and public projects such as schools, prisons, and sewer systems," adds economist Duncan. Joe Alvarado, executive VP of Birmingham Steel, notes that the benefits from the federal highway bill will become evident in 1999 when states add their share of road, highway, and bridge reconstruction funding. Alvarado says these projects will stimulate demand for rebar and for construction-oriented hot-rolled bar products as well.
Demand has been stellar
Domestic steel bar demand has been rising at an average rate of 6.5% for the past 30 months. In 1997 alone, use exploded by 14%. The apparent consumption of both machining-grade and construction-grade steel bar products has remained strong this year; in fact, midyear demand was running 12% ahead of the first six months of last year. However, this year's early growth rate may have been inflated by stock-building at the distribution level. Still, industry insiders continue to predict full-year consumption growth of 6%, even if demand slides in the second half.
Steel analyst Michelle Applebaum at Salomon Smith Barney notes that "as U.S. equipment manufacturers have become increasingly competitive in global markets over the past decade, manufacturing capacity has migrated back to the U.S. This, she suggests, has increased demand for bars. "Strong income gains and improved consumer balance sheets have fueled household purchases of durables such as cars. In addition, resurgent U.S. competitiveness has reignited domestic investment spending as well as export of capital goods."
However, analyst Jay Agarwal at Charles River Associates points out that the Asian financial crisis has thrown all kinds of assumptions and forecasts into turmoil. "If you believe the Korean economy and the Japanese economy will swing back to full vigor next year, you have the expectation that manufacturing and feedstock demand will rebound," he says. "If you feel the Indonesian economy, the Malaysian economy, and others will take a longer time to recover, you have the expectation that demand for all kinds of goods and services will decline."
And, because of these unknowns, it may be safer to side with the analysts who see demand closer to 20 million tons than those who predict 22 million. Analyst Walter Carter at Standard & Poor's/DRI points out that "it's only a wild card" to suggest that the pressure on metalworking trade and world steel prices caused by Asia's woes will dissipate rapidly. "The best-guess scenario is that the economies of Asia will improve gradually," he says.
Note that delivery leadtimes in the U.S. for steel bars shrunk this summer to an average 3 weeks from the typical 5 weeks. "And that is not so much a reflection of demand as it is of excess supply," contends a bar buyer at a major Midwestern service center. "Bar shipments from mills to service centers to end users continue to reflect steady manufacturing of U.S.-made products," he says, "but the influx of foreign-made steel this spring and summer has really beefed up supply."
In fact, an analysis by Resource Strategies anticipates about two million tons of new hot-rolled capacity--mostly special bar quality product--in the U.S. alone between 1995 and 2000. U.S. producers adding capacity are the Ohio plants of USS/Kobe Steel, CSC Ltd., Republic Engineered Steels, and American Steel & Wire; the Illinois plant of Charter Manufacturing; the Indiana plant of Qualitech; the Pennsylvania plant of Bar Technologies Inc.; the Colorado plant of CF&I Steel; and the new Arizona mill of North Star Steel. Other expansions include Bayou Steel's restart of the former Tennessee Valley Steel plant and a new bar/rod mill at Schnitzer Steel's Cascade Steel operations. Also, specialty-alloy giant Carpenter Technology in Reading, Pa., has expanded its ultra-machining products while Timken is expanding it's high-quality grades in Canton, Ohio.
Rebar capacity has been expanding. Birmingham Steel and New Jersey Steel already have upgraded melt shops, and Birmingham Steel is building a new plant in Tennessee. Auburn Steel has reopened the former Thomas Steel plant, and Owens Electric has become a fully operating subsidiary of Structural Metals.
What about pricing?
Throughout the 1996-1998 demand surge, pricing has remained on the weak side. In fact, since the last peak in 1995, bar pricing has slipped by about 5% through mid-1998. However, market feedback says summertime pricing has been sliding. Market tags for hot-rolled and cold-finished carbon, alloy, and stainless bars for the OEM are influenced by low-cost domestic electric-furnace producers and a substantial supply of inexpensive foreign-made bars. Atop that, analyst Mark Parr at McDonald & Co. says cold-finished steel bar pricing is being impacted both by imports and the ramp-up of new capacity, such as the new Qualitec Steel plant in Indianapolis.
And, as expected, this new capacity has dampened prices. "Some of the additional tonnage may force out some imports, but mostly it will put restraints on domestic market prices," wrote analyst Applebaum a year ago. And that was before the flood of cheap imports. In fact, the increased volume of bar imports from Asia and Europe are pressuring hot-rolled and cold-finished bar prices alike, say buyers.
"There has been some deterioration in spot tags," a buyer reports from Michigan. Adds another, from Ohio: "Tags are down, and it's mostly because of the foreign influence." Indeed, according to Commerce data, midyear imports are running almost 15% ahead of last year, and market sources say these bars are underselling domestic brands by as much as 10%.
Hot-rolled steel bar prices were as low as $316/ton in early 1996, but rose gradually to a peak of $346 in May of this year. However, it appears that domestic mills again are chasing lower prices offered by importers and new-generation electric furnace steelmakers. Latest market reports put midsummer sales of merchant bar rounds at $306/ton. "New special bar quality bar players entering the market have had an impact on prices as well," says Marcus of PaineWebber. That view is supported by Garvey of Birmingham Steel who says that "increased supply pressure is making it very difficult to get equivalent prices from last year."
Cold-finished steel bar (carbon 1018) began 1998 at $510/ton, but recently dropped $20/ton in the spot market. Rebar (#8), which sold for most of 1996 and 1997 at $315/ton, now is at $360. And, it could go higher. Scrap is cheaper than in previous months, but the demand growth foreseen for rebar could raise tags again this autumn. And then there's stainless steel bar, which is under heavy attack by foreign mills. While demand appears to be heading for a near record of 262,000 tons, nearly 25% of the market is supplied by foreigners whom domestic mills allege are underselling by at least 15%.
Hot-rolled bars
Consumption of hot-rolled bars in round, square, and numerous shaped configurations will be around 11.09 million tons this year, a 2% advance over the 10.87 million tons used in 1997. Demand is bearing out the earlier forecast of Vernon E. Oechsle, CEO of Quanex Corp., who had predicted "good, solid performance by the hot-rolled bar market." In fact, "consumption is maintaining its highest levels since the 1970s," says Marcus at PaineWebber.
Merchant 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. Special bar quality 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. Analysts now acknowledge that unexpected demand growth in 1997 and 1998 has come from virtually all end-use sectors.
Some of the metal mavens are suggesting that use of merchant and special quality bar products will slip by as much as 6% to 10.4 million tons next year. There is doubt among the mavens whether the manufacture of automotive parts, appliance, off-road equipment, heavy machinery, and general machining industries will be able to retain their current strength. "Falling exports of machinery and other large metal-worked products from the U.S. to Asia also mean reduced demand for bars in the U.S.," says economist John Anton at Standard & Poor's/DRI.
Cold-finished bars
It appears that cold-finished bar use will rise 5% this year to 2.05 million tons, just as the analysts had predicted. In fact, demand in 1998 will surpass the previous consumption record of 2.01 million tons in 1995. Cold-finished bar use is being 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.
Cold-finished steel bars are specially processed bars, usually special bar quality grades, that quickly become something else. They are 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.
The seven-week strike at General Motors didn't impact cold-finished bar shipments, as most OEM customers continued buying to replenish low inventories. And, despite the strike, there has been only marginal North American slippage in this year's level of production of motor vehicles--as expanded assembly of trucks (light and heavy) has more than compensated for slippage in cars. Also, the recent growth in manufacture of general aviation products, energy exploration equipment, and railroad equipment continues to support high demand for the components machined from cold-finished bars. "Other important buyers have been manufacturers of machine tools, farm machinery, and other capital equipment," adds analyst Michelle Applebaum at Solomon Smith Barney.
However, 1999 is a huge question mark. Few industrial economists will hazard a guess about the outlook for heavy manufacturing. Those who do are the pessimists who think production could fall by 10% in this sector if the Japanese recession drags down the European and North American economies. Most metals mavens suggest less of a 1999 downturn is likely, but do see a slowdown as probable. Upshot: Projected 1999 demand for cold-finished bars of 1.93 million tons, a 6% drop, says steel analyst Walter Carter at Standard & Poor's/DRI.
Construction-grade bars
Demand for construction-grade bar products--especially concrete-reinforcing bars--will rise a totally unexpected 8% this year to 6.71 million tons. This follows a 21% explosion to 6.19 million tons in 1996. Rebar demand growth has been 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. So, "backlogs and current sales contracts for fabricated orders are slightly ahead of last year in volume and average pricing," said Don Haney, VP/rebar fabrication at AmeriSteel in Tampa, Fla.
Excess supply isn't at issue in this product area. Analyst Margaret Cornish Kehoe of Scotia Capital Markets notes that producers have increased capacity incrementally over the past two years to accommodate increasing demand. "Rebar is a low-end product, and so return on capital for a new rebar mill would be generally too low to justify the investment," notes analyst Scott Morrison at Donaldson, Lufkin & Jenrette.
Demand for rebar usually is seasonal in some regions, but that hasn't been at issue of late because of the warming trend caused by El Nino. And don't forget that consumers chew up a lot or rebar; lumber yards sell small-length material for use in driveways, pools, sidewalks and single-family dwelling foundations.
Still, large-volume demand is affected by the availability of public funds for construction. Some years, when money is loose, there is early-year inventory building by highway, commercial, and industrial construction firms. Other years, when money is tight, orders are placed only when construction funding is assured. And, right now, money is very loose; in fact, the new federal Highway Act has erased concerns that public-works construction will turn down anytime soon. Consensus from the mavens is that rebar use will rise by another 5% in 1999 to 7.05 million tons.
Market at a glance
Demand: Dynamic. Without a collapse in the second-half manufacturing economy, steel bar use of 21.6 million tons in 1998 will set a modern peacetime record.
Supply: Abundant. Domestic mills have added more capacity, and the foreign mills are shipping a lot of tonnage across the waters.
Prices: Sluggish. Growth in capacity and imports are outpacing growth in demand.
Bar pricing reflects excess
Despite robust demand, the Producer Price Index for steel bar products remains below the last cyclical peak recorded in 1995. Reason: New hot-rolled bar capacity in the Southwest and Midwest and a steady flow (now turning into a flood) of low-priced imports. And, there's even more U.S. manufacturing-grade bar capacity coming on line in 1998 and 1999. The just-opened Timken bar mill in Ohio "will produce steel with better size and straightness characteristics and better surface quality," says a company executive, but it also is adding more alloy bar tonnage into an already oversupplied market. Looking ahead, metals maven Peter Marcus at PaineWebber says that "downward pressure on prices will continue where overcapacity looms." He adds that "price competition will always be fierce in commodity-grade hot-rolled and rebar products and future periods of tight supply and high prices will be more uncommon."
Big changes for Republic, BarTech bar mills
Look for two distinct hot-rolled and cold-finished steel bar businesses to emerge from a revamped (and probably renamed) parent company that will result from the planned merger of Republic Engineered Steels with Bar Technologies and its Bliss & Laughlin Industries subsidiary. Purchasing has learned that a four-year capital investment program exceeding $400 million is planned to modernize steelmaking, processing, and market delivery of carbon and special-quality rod and bar mill products.
Already, the United Steelworkers of America union leadership has endorsed the acquisition plan for Republic Engineered Steels by Blackstone Capital Partners and Veritas Capital Partners, and their proposed modernization program for Republic, BarTech, and Bliss & Laughlin operations. In return, Blackstone and Veritas plan to forge a five-year labor pact that will include higher wages and pensions. Standard & Poor's, the corporate credit rating house, also has responded positively to the buyout/merger plan mostly because of Blackstone and Veritas' promise to invest substantial capital in new equipment.
Republic (once the bar division of the former Republic Steel) is based in Massillon, Ohio, and owns 10 mills in the Midwest and Northeast which make steel bars and specialty steel used in construction, autos, and machinery. BarTech (once the bar, rod, and wire group of Bethlehem Steel) is based in Johnstown, Pa., makes primarily hot-rolled steel bars at its plants, and owns cold-finished steel bar maker Bliss & Laughlin Industries of suburban Chicago.
The combined companies employ union members at plants in Ohio, Illinois, Indiana, Pennsylvania, New York, Maryland, and Connecticut, as well as Ontario, Canada. A statement from several steel union local presidents suggests that "the combined company will bring together the strengths of the Republic and BarTech facilities and, along with capital investment commitments and a new progressive management team, will allow the Company to meet the quality demands of its customers while improving the standards of living and employment security of the workers."
Republic reported 1997 sales of $753.5 million, but has posted net losses during its past six fiscal years and lost $12.46 million in the nine-month fiscal period ending June 30. The company has been having trouble raising money to fund needed capital expenditures related to a new continuous caster and several other planned upgrades. The new owners plan to upgrade virtually every major steel facility and to consolidate production, processing, and marketing of products by hot-rolled and cold-finished categories.
Still, while Standard & Poor's believes the merger will result in "potential synergies derived from plant rationalization, shuttered capacity, and improved operating efficiencies," the credit rating group cautions against too much optimism. "Although the merged company is expected to realize significant cost savings, it is subject to a highly leveraged balance sheet, significant capital expenditure requirements, and difficult industry fundamentals," Standard & Poor's adds.
However, David Stockman, senior managing director at Blackstone, counters that "the new homogenized company will be able to use the best of the upgraded plants to a world-class hot-rolled and cold-finished bar steel with the widest range of products available to buyers."
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