Steel Market Production Increases – UAE producer Al Ghurair Iron & Steel plans to commission its new 200,000-400,000 tonnes per year hot-dip galvanizing line by the end of 2013.

Steel Market Production Cuts – South Korean producer Dongkuk plans to shut down its 1 million tonne per year No. 1 plate mill at Pohang on June 10^th due to overcapacity in the domestic market.

Steel Market Production Cuts – ArcelorMittal plans to stop production at 2.2 million tonne per year blast furnace B at its Gijon plant in Spain for 40-45 days in July for relining.

Sources: Steel Business Briefing, SteelOrbis

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The American Institute of Architects’ (AIA) ABI Index – a leading economic indicator of non-residential construction activity 9-12 months into the future – dropped to below 50 in April, meaning that the number of architects reporting “declining billings” outpaced the number reporting “rising billings” for the first time in six months. The dramatic deterioration in the index is disappointing.

While ABI economists pointed to the impact of warmer weather in the 1Q, we’d disagree because architects’ billings lead construction by 9-12 months – as the AIA says itself every month – so that the likelihood is that a real deterioration in business conditions drove the change.

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Our Advance/Decliner Index stopped a four week slide, but remained weak, rising from 27% to 31% (any reading below 50 meansmore price cuts were reported than increases).

The nominal increase was driven by our Ex-China Index rising from 35% to 38% as AK Steel and JFE Steel announced price hikes in the US and Japan, partially offset by weaker steel pricing in the MENA region and East Asia.

Our China Index remained at zero for the second straight week, the first time this has happened since last October, as record Chinese steel production combined with declining spot iron ore prices are hurting pricing sentiment and keeping buyers on the sidelines.  Chinese steelmakers have continued to reduce steel prices this week, despite Beijing’s reduction of the reserve requirement ratio for banks over the weekend.

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Vallourec (VK) reported 1Q EBITDA of €152m, some 13.1% below the Street’s €175m as well as a 40% decrease sequentially and a 25% decline compared with the year-ago quarter. The EBITDA margin fell to 12.7% in 1Q from 16.4% in 4Q 2011 and 17.7% in 1Q 2011, driven by increased start-up costs for projects in the US and Brazil and lower profitability from its Brazilian mine due to lower iron ore prices, management said.  The company had expected a weak quarter, but European orders didn’t pick up sequentially as much as forecast, with pricing pressure exacerbating results.

Guidance for 2012 was reduced due in part to a weaker-than-expected 1Q, with management now expecting sales growth of 5% for 2012, compared with 10% previously. The EBITDA margin will improve through the year, Vallourec said, with the full-year margin at 15%, while average selling prices should be higher than in 2011.

The oil & gas market is strong, VK said, but commented that its 500,000 tpy OCTG mill in Ohio is three months behind schedule, with the first pipe now expected to be produced this fall.  The company said that CapEx for the mill is now expected to be $1.05B, up sharply from the original $650m budget.

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April MSCI shipments declined a seasonally normal 2.1% from March, but a 4.3% increase in flat-rolled inventories drove total inventories 3.3% higher than March levels to a post-recession high, resulting in adjusted months’ supply rising from 2.32 to 2.45, the highest months’ supply in over a year.

The jump in flat-rolled inventories puts still further pressure on the weak sheet market, which has been feeling the effects of a surge in imports recently.  We suspect some buyers may have come off the sidelines when sheet prices were starting to rise in March as well.  Inventories of all other products rose during the month, with plate up 2.9%, beams up 1.1%, pipe up 1.0% and bar up 0.3%.

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Klöckner and Co. (KCO) reported 1Q EBITDA of €45m, short of the Street’s €48.8m, but in line with company guidance of €40-50m. Results were down sharply from the €104m of EBITDA from a year ago, which management said was aided by windfall profits, but were up from the adjusted €24m in 4Q.

Guidance was for 2Q EBITDA to increase sequentially to €50m-€60m on slightly higher shipments with the company expecting the current oversupply to press margins. Volume for the full year should rise about 5% from 2011, but gains in EBITDA depend on a recovery in Europe in 2H.  KCO is more optimistic about the US market, where shipments could be up 10% in 2012, while European tonnage could fall by “up to 5%.”

KCO said that inventory levels in the US and Europe are probably “a bit” too high and will reduce inventories going forward.  The company said it will be cautious on purchasing because there’s no need to pre-buy material.

In the US, the company said that imports may dry up by late May, with tonnage coming in at much lower levels in 3Q.

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TMS International (TMS) reported 1Q EBITDA of $36.8m, ahead of the Street’s $34.6m and the adjusted $32.8m recorded in the year-ago period.

The yoy improvement was driven by new service contracts signed in 2011 at the Mill Services group, although the large start-ups in South Africa hurt EBITDA margins by 90 basis points.

Prior guidance for 2012 was reaffirmed, with EBITDA expected to total $142-148m, in line with the Street’s $145.39m.  In 1Q, TMS’ EBITDA margin (as a percentage of revenue after raw materials cost) was 23.6% and management expects to see normalized margins of 24-26% going forward on an annual basis.

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Our Advance/Decliner Index fell again, dropping from 30% to 27%, the lowest reading since early December (meaning more price cuts were reported than increases).

Our China Index drove the weakness with no price increases in the week as CISA’s late April production flash showed a 1.5% increase from mid-April to a new 10-day record, with full-month output estimated at 2.026 million tonnes per day (mtpd), which would annualize to 741 million tonnes, some 8.5% higher than previous high.

Our Ex-China Index was mostly stable, rising from 33% to 35%, as an uptick in pricing in the MENA region was offset by weakness in all other regions, including East Asia, where until now pricing had been resilient.

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Metalico (MEA) reported 1Q earnings of $0.05/share, in line with the Street’s $0.04/share, but above 4Q’s loss of $(0.06)/share as ferrous scrap shipments jumped 28% and non-ferrous scrap soared 56% versus 4Q.

Guidance was qualitative with MEA expecting 1H 2012 results to underperform record 1H 2011 levels, but 2H 2012 results to outperform 2H 2011.  The company said that some 7,400 tons of ferrous scrap were in-transit as of 3/31, which will be recognized in 2Q.

The company expects steel industry capacity utilization and ferrous scrap prices to remain “relatively” stable, although “some pockets of weakening mill demand may occur” and the challenge for MEA will continue to be sourcing material at acceptable margins.

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