Steel Products

U.S. Steel: Lake Erie, Utilization Rates, Foreign Imports, PRO-TEC, Tubulars, Pricing

Written by John Packard

Steel Market Update likes to review the transcripts of the earnings conference calls between analysts and the steel mills to see what we can glean from the comments being made by the top executives at the mills. We found a number of items of interest in the U.S. Steel conference call.

USS Running at 90% Utilization Rate in U.S. Plants

Following completion of several major projects earlier in the quarter, our facilities ran extremely well, with steel utilization rates at our U.S. plants well into the 90% range. 2012 was the first year that our Flat Rolled segment reported positive operating results in each quarter since 2007. Our flat rolled shipments in the fourth quarter decreased slightly. Automotive demand remains strong and most other markets we serve were generally stable. In total, North America remains a relatively attractive market in comparison to many other regions. Imports did increase in the fourth quarter and continue to negatively impact both prices and shipment levels for our Flat Rolled segment. (JS)

Rig Counts Higher in 2012 vs. 2011 – Foreign Imports Exceeded 50% Share in OCTG and Line Pipe Markets

While U.S. rig counts trended down throughout the year after peaking in January at more than 2,000 rigs and finishing the year at 1,763 rigs, the average weekly rig count in 2012 was 40 rigs higher than the 2011 average, resulting in record consumption of oil country tubular goods, as well as a strong year for line pipe used in gathering and transmission systems. Despite declining rate activity throughout the year, imports continue to come in at historically high levels exceeding a 50% share for the year in both the Oil Country Tubular Goods and Line Pipe market segments. (JS)

…For tubular we expect first quarter results to improve compared to the fourth quarter due to decreased operating costs and a slight increase in shipments as drilling activity begins to improve. Our average realized prices are expected to be slightly lower as compared to the fourth quarter while operating costs are expected to decrease due to reduced repairs and maintenance costs and improved operating efficiencies. (GH)

Increased Flat Rolled Demand as 1Q Progresses – Contracts with Offset Gains in Spot Pricing:

…For our flat rolled segment steel buyers in North America continue to exhibit caution early in this year but recent increases in our daily order rate suggest increased flat demand as the quarter progresses. We expect higher shipments in the first quarter than the fourth quarter with increases across many of our industry segments. Average spot prices are expected to be higher than the fourth quarter as recently announced price increases take effect. Lower prices for our market-based contracts, which tend to lag the spot market, are expected to offset the higher spot market prices with overall first quarter average realized prices for the flat rolled segment being comparable to the fourth quarter. (GH)

Lake Erie Contract Expiration Date & Hamilton Blast Furnace Status:

John P. Surma: …Well, I think we’ve disclosed that there’s contract expiration at Lake Erie, I want to say, April 15th? Is it April 15th?

A – Gretchen A. Haggerty: Yes.

A – John P. Surma: April 15. And we’ll get about that fairly soon. We’re optimistic we’ll be able to reach a competitive contract without any disruption, as we did back in September with the larger group of plants in the U.S. So that’s on the agenda and we’ll get to it fairly soon, and to get optimistic, we’ll reach a contract. Hamilton, really nothing new to report. We look at it all the time, we measure what the current market situation is, we try to think about the sustainability of the market situation if it looks favorable, and then we take a look at what the costs are and say, is this something we can do based on what the demand is? And those conditions really haven’t occurred recently. When you look at overall steel consumption, if you look at U.S. and Canada combined, we’re still 10% or so below where 2007 or some pre-recession number would be. And it’s taking a while to get back to that. We’re making gradual
progress every year. I think the world steel forecast for this year is an increase of 3.7%, something like that. But we just haven’t had the right combination of factors. We would love to make steel at Hamilton, but we’ve got to find a way to do that and make money the same time.

SMU NOTE: Lake Erie Works – located in Nanticoke, Ontario, Canada and part of what was once Stelco with their sister plant Hamilton. Plant has #1 Blast furnace rated at 2.4 million tons with one BOF rated at 2.9 million tons of molten steel a vacuum degasser and an 80-inch hot strip mill. Hamilton has a 2.0 million ton blast furnace which is not running.

Foreign Imports:

: Okay. My second question’s just on – you mentioned imports having an impact on domestic pricing. We’re looking at the international to China – European prices and they’re not that far off from the U.S. So I was wondering if there’s some other dynamics in the U.S. that’s contributing besides imports? Just whatever color you could provide would be helpful.

A: Sure. Well, I think when you look at – I don’t have in front of me but we take a look at data points across a range of geographies and what freight and insurance and custom duties and all those sort of things and China has moved up quite a bit and they’re not particularly lived different than the U.S. prices, North American prices are. I think it’s more of an issue in the Black Sea, CIS countries strictly on the hot roll side. And then in some of the Asian territories on the fast ream products has become more of a problem from a price standpoint with quantities of cold roll and coated, Galvalume and tinplate – those are products where even a small amount can really have an effect on the market with indiscriminate. So even though the volumes were up somewhat the impact typically in the downstream products has been much more pronounced and it’s something that has our attention. (JS)

Price Increases

Q: So the first question I guess is on the sequential breakout. What do you guys think through the year this year – there’s been a number of price increases last year. Will those start to flow in, in the second quarter or how does that jive with your guidance as well?

A: Well, there were a number of price movements just within the last week or 10 days or so if that’s what you’re referring to and it’s really too hard – it’s hard to tell. It’s too soon and also very hard to tell what that impact might be but for us at least assuming things go reasonably well on that front we would get some benefit from that in the first quarter. We’d get more of it directly on-spot business in the second quarter and then indirectly eventually through some index changes we hope also in the second quarter. So I think we’d get some benefit. Keep in mind that I think our overall spot focus estimate is on the order of 30% or so, so it’s not a huge portion of our business and it’ll take a little longer to get through it. But we get some benefit in this quarter and the only assessments I’ve seen so far from outside parties that one was at 630 Midwest hot roll which is up by 20 some from the last assessment. So that seem to be moving in the right direction but it’ll take some time to see how successful this is. We’re just going to process that… (JS)

A: In conversation with our customers right now and discuss…

A: Yeah, but I think your view – overall we indicated we thought spot pricing was going to be up quarter-over-quarter and so that would really imply that our expectation would be that would flow through our market base contracts into the second quarter…

A: But it also reflects the fact that our fourth quarter book had in it some relatively depressed prices because it was a very competitive market at that time. So…

A: October…

A: So it was very, very difficult. So we would expect that the first quarter should be better as Gretchen said.

SMU Note: Not quite sure what index Mr. Surma was referring when he mentioned $630 HR Midwest… Both the CRU and SMU hot rolled price assessments are a long way from $630 this week. We found the whole conversation about pricing – contract vs. spot and the “expectation” that spot pricing would be up quarter over quarter… quite interesting.

PRO-TEC Project:

A: Yeah, I don’t think we mentioned it, Mark. And just for the record, the discussion is between us – it’s not between us and the material you mentioned. It’s between us and the customer and we’re doing real well with that discussion. I think we should’ve updated you on that, sorry we didn’t. We’re making good progress at the new continuous new line in PRO-TEC in Ohio. We’re doing coal commission now. I think we actually have some furnaces lit to begin factory dry out from getting that ready. I think the entry reels have coils on them and we’re working through the control systems there. I think they’re maybe as far as the welder, if I have it right, the last report that I saw. And get into – we’ll actually have a coil going through the system at some point in the next month or two and actually expect have product coming off sometime in the spring, and so we look forward to getting up to speed as quickly as we can. We’ve had a number of customers that are already involved in discussions about that. We think it’s an excellent answer to automakers who want to maintain the kind of strength and reliability in elongation formability that steel provides with all the manufacturing benefits that goes with that, magnetic handling and all those things that goes with that, weldability, all that, coatability. But also giving them a really good weight advantage. So we think this is a really great product that’s going to allow our auto customers to achieve a lot of the weighted savings they want, but maintaining many of the benefits that steel has, among them a really of value, as well as a way lower carbon footprints, if you look at the total lifecycle than any of the other alternative materials. So we just think it’s a great answer. That’s just a long speech, Mark. I’m sorry, but it’s one I like to give and it – we’re excited have the plant almost done. We look forward have it up and running later in the year. (JS)

Q: Just one follow up, if I could ask on that. I mean is – are the economics compelling enough that you can really get a premium for the incremental value you’re adding upfront?

A: Well, I guess I’d say it this way, Mark, we have a lot of capital invested here. This is going to be a premium product and we expect to have a return on our capital. We think that’s only fair and we think there’s enough value creation here that our customers can get a really, really good value particularly in comparison with other materials and still leave some for us to have a good return on our investment. We think we’re in a good place here and both we and our customer should be able to benefit because this is a really first class product with great strength capability, great elongation capabilities and something that’s going to make their job to maintain a really inconsistent virtues of light weight and high strength and safety – that’s a hard thing to do and we think this lets them do it.(JS)

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