Steel Mills

Steel Mill Exec's Optimistic about Industry

Written by Sandy Williams

Earnings reports are accompanied by conference calls which allow us to get some insight on what the steel leaders are thinking about in the industry. SMU decided to look at the comments by AK Steel, Nucor, Steel Dynamics, and US Steel for ideas on where the steel industry is headed for 2014.

All four of the companies are optimistic about industry and economic growth for 2014.

Non-residential Construction
The increase in housing starts is a “positive for our clients and HVAC demand” said AK Steel CEO James Wainscott. On non-residential construction he said privately funded construction projects, in particular, are expected to be more favorable in 2014. “Our lead times are extended into May for all carbon steel products except for hot rolled,” said Wainscott adding, “As a result, we’re in a much stronger position at this point in the first quarter of 2014 compared to year ago or really about as far back as we can remember.”

CEO John Ferriola at Nucor agrees, “We stand ready and poised to take advantage of the up cycle that’s inevitably going to arrive.” Ferriola said Nucor’s back logs have increased but noted that just as construction began improving, winter weather hit. “We we believe that there’ll be an incremental improvement in the non-residential construction market during 2014. How quickly it ramps up is unclear,” said Ferriola. “Some of the projections are 5% to 10% improvement in 2014 over 2013,” he said. “So we think that that’s probably a reasonable amount.”

CEO Mark Millet at Steel Dynamics said they are encouraged by increased orders from fabricators. Chris Graham, President of Fabrication and Vice President Steel Dynamics, added that the big distribution center activity seen in the first half of 2013 has been filled by regular type work “which we see as a sign of an improving—a truly improving landscape.” Regarding public construction, Millet was less optimistic, “One of these days, our legislators will understand that the place is falling apart….”

David Burritt, Executive Vice President and CFO at US Steel expect average realized prices to increase as a result of higher contract and spot market prices. Wainscott said AK Steel is seeking higher prices for 2014 contracts. US Steel CEO Mario Longhi commented, “I think imports are probably the biggest driver that can impact prices going forward. Millet agreed, “The one headwind for our industry, for us and our industry, is the import specter, so to speak.” Millet added, “I think generally, it’s just going to set a ceiling or just compress our ability to increase and expand margins dramatically.”

Millet also commented on the increase in sheet pricing in the second half said, “I think the underlying appreciation was driven by demand. It’s a little difficult to determine the current market direction, I would suggest. Some would say that it’s turned slightly.”

The steel market is strong right now due to low service center inventories, said Wainscott, with the average month supply on hand at 2.1 months compared to the historical average of 2.4 months. “These lower inventory levels have created a tighter market, since production must not only support demand, but also help replenish the supply chain.”

Ferriola said that although there was a small amount of demand improvement in the fourth quarter, competitor production issues presented huge opportunities for Nucor to grow market share. “We were able to move in quickly, supply high-quality products on time, great service, phenomenal performance all at a very reasonable price, and we believe that as a result of that and as a result of the new products that we’ve been introducing to the market, we did pick up market share and we will be able to hold a portion of that market share going forward.”

When asked to comment on market term dynamics, Longhi said the following, “I see a very gradual move on this one with mini cycles in between. So I don’t see us getting back to peaks like we’ve seen back in the past and with the exception of the extremely high level of overcapacity in the world and still pending situation with imports, those things can fluctuate quite dramatically, creating the mini cycles I referred to.”

Auto Industry
All of the companies agree that the auto industry is strong and will continue to be so. The development of advanced high strength steels for use in auto production is a high priority for all of the mills. “We are developing several new grades, working very closely with the customers,” said Longhi. Commenting on inroads aluminum has made in the industry, Longhi said, “It doesn’t surprise me as aluminum has been working hard at it for quite a bit of time.” He added, “We’re continuing to lightweight and we’re broadening the capability for development quite significantly. So this is just a point in time in this battle.”

“So let’s take a look at aluminum, said Ferriola. “We’ve recognized Ford’s moved into the aluminum arena with the F-150, but we still believe that steel, long-term, will be the material of choice for automotive production, and when we compare it to aluminum, aluminum’s 2x or 3x the initial cost of the steel. There’s significant cost to retool the automotive production facilities, and the repair and insurance costs for car owners with aluminum we believe will be significantly higher. So, we still see a major role for steel in automotive.”

James Wainscott, highlighted similar concerns about aluminum use in vehicles, saying AK Steel will “protect our product in this space vigorously” and added, “We just want to emphasize that our product remains a wonderful product for making automobiles, particularly if you want to put your family in that vehicle and keep them safe.”

Scrap prices were a hot topic for discussion during the conference calls. When asked where scrap prices are moving Millet replied, “The scrap market is likely to be sideways to down, more likely down even though we’ve got some frigid weather that is probably hampering the flow of scrap. If you look at the export market, the Turkish currency valuation weakening, there’s very, very little export interest right now, and that has seemingly pushed pricing up or down over the last year or two. So, with a decreasing scrap environment, we would anticipate the potential for margin expansion.”

Nucor’s Keith Grass, President and CEO of the David J. Joseph Company, agreed there will be a softening in scrap prices. “Well, certainly, their currency [Turkey] dropping off, we’ve seen less activity on the coast. So in terms of how it will impact the scrap market moving forward, the scrap market will continue to be regional and based on grades, but we’re starting to see certainly cold weather in one part of the country and less demand from an export standpoint on the East Coast and that scrap’s starting to become a little bit more available to consumers here in the United States.”

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