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Speakers at the Steel Business Briefing’s Steel Markets North America 2012 conference last week were nearly unanimous that service centers will continue to consolidate while mills won’t participate.
We have observed and been extensively involved in the service center industry’s slow march towards consolidation for over 30 years now. The steel cycle has slowed the pace of consolidation in this sector. Capital has to be available to acquire, and capital isn’t available in the down-cycle. Sellers also simply won’t sell when business is bad – they are typically mis-advised (usually by their lawyer who they trust but does not understand market dynamics) that selling in a weak market hurts values – most buyers look past that.
Dan Sullivan, from Houlihan Lokey, said that we are in year two or three in the most recent M&A up-cycle which typically last 5-7 years. Sullivan does not believe that mills will partake in consolidating the service center sector however, saying there would have to be large-scale consolidation in the sector before that would be attractive.
In our view, Sullivan’s comment reflects concern that some mills may have, that should mill XYZ acquire distributor A, distributors B-Z would run from that mill, so that the only way mill XYZ would be able to buy distributor A is if A is big enough to offset the lost business.
We disagree with that analysis – if mill XYZ has “trust” relationships with end-users, and distributor A has “trust” relationships with suppliers, the ownership could be arm’s length – and there is historical precedence in the old Ryerson/Inland model, from decades ago.
Mark Breckheimer, President of the Heavy Carbon Group at Kloeckner Metals, said he expects consolidation of the service center industry to continue in the Americas. He sees private equity as supportive of the effort by creating regional players via M&A.
Lourenco Goncalves, Chairman, President & CEO at Metals USA, says there are “plenty” of M&A opportunities out there as more owners are willing to talk following stronger financial results in 2010 and 2011. Although he said he was once a proponent of mills consolidating the service center sector, today he no longer believes that steel mills will “go after service centers.”
Vicente Wright, President & CEO of California Steel Industries, believes there is room for consolidation in the service center and distributor sector, a view shared by Charles Schmitt, Head of SSAB Americas.
We attended Steel Business Briefing’s Steel Markets North America 2012 conference last week, and one of the most interesting parts of the conference was the live interactive pricing and demand survey which showed that most participants anticipate further increases in steel prices, scrap prices and steel demand.
One observation we found fascinating was that respondents were far more optimistic on HRC pricing than rebar, with most participants forecasting an uptick as high as 18% for HRC and just 10% for rebar, despite entering peak construction season and people continuing to talk about new sheet capacity impacting the domestic market.
Some 67% of respondents expect hot-rolled sheet prices to peak at $800/ton or below, while 15% expect prices to peak at $850/ton, 11% believe prices have already peaked, and 7% think prices will peak at over $900/ton. At the time of the conference, domestic HRC ranged from $680-690/ton.
For rebar, some 47% of respondents expect prices to peak at $800/ton or below, while 31% believe rebar prices have already peaked at the $730-750/ton range. Some 19% of participants are forecasting rebar prices to peak at $840/ton, with 3% expecting rebar to peak at over $880/ton.
Some 40% of respondents expect overall steel prices to peak in 2Q, while 27% of participants are forecasting prices to peak in 1Q as well as 3Q, with the remaining 6% expecting prices to peak in 4Q.
On the scrap front, some 47% of respondents believe that shredded scrap prices will peak at $500/ton or below, while 38% expect prices to reach $525/ton. At the time of the conference, domestic shredded scrap ranged from $440-445/ton.
Some 60% of respondents expect steel demand to strengthen over the next six months, while 20% expect stable demand and just 9% believe demand is set to fall. Some 11% believe demand will rise and fall, but did not know which trend would play out.
Steel Market Production Cuts – The Nucor Yamato beam mill has a scheduled shutdown on March 25th.
Steel Market Production Cuts – According to the Japan Iron and Steel Federation, Japan will see decreased production this year from weak demand in the shipbuilding sector and destocking, causing production to potentially shrink by 2 percent to around 104 million tons, assuming flat exports.
Steel Market Production Cuts – Max Aicher North America Inc. (MANA) has moved back a restart of its bar mill in Hamilton, Ontario to late in the second quarter.
Steel Market Production Increases – U.S .Steel plans to restart its No.3 galvanizing line at Hamilton Works in early May.
Steel Market Production Increases – RG Steel has completed the restart of its No. 2 galvanizing line a month earlier than expected, with operations anticipated to resume very soon.
Steel Market Production Increases – SSAB Americas is conducting hot trials on its new 200,000 tpy quenching line at its Mobile, AL works and expects commercial production to start very soon.
Steel Market Production Increases – Syria’s Saifi Group plans to complete commissioning of its 300,000 tpy bar and section rolling mill, Steelco, next month, with plans to start production in June.
Steel Market Production Increases – UAE rebar mill Hamriyah Steel could restart production in April following a 5-month stoppage caused by unfavorable pricing in the UAE and the surrounding region.
Steel Market Production Increases – Turkish billet producer Cansan Metallurgy plans to start rebar production within three months at its Southern Payas EAF billet plant. The plant has a capacity of 1 million tpy.
Sources: Steel Business Briefing, Reuters, SteelOrbis, American Metal Market
We attended The Steel Index’s Scrap Seminar in Chicago last week and heard a variety of views on the current scrap market and the overwhelming changes in the market for this once-quiet commodity.
One over-riding theme was scrap’s strategic importance to the U.S. steel industry and increasingly to the world’s steel industry.
A question as to whether or not the United States is doing enough to protect scrap supply was raised by Rich Brady, Executive VP of Omnisource. According to Mr. Brady, “There is a global tug of war for scrap materials.” He went on to outline how 20 countries have ferrous scrap export restrictions, and despite scrap being one of the top 5 commodities exported from the United States, our nation has no similar restrictions on exports.
This issue of increasing exports of U.S. scrap was pointed to as a driver of scrap price increases and volatility by the Institute of Scrap Recycling Industries’ Chief Economist and Director of Commodities, Joe Pickard, who pointed out that the increase in scrap volatility coincides with increasing exports to foreign markets.
The general consensus at the seminar was for scrap demand to continue to grow moving forward, particularly as China adds more EAF-based production to improve the regions’ air quality.
At The Steel Index’s Scrap Seminar in Chicago last week the theme of steelmakers backwards integrating into the once sleepy and primarily family-owned business of scrapyards was a frequent topic.
According to Rich Brady, Executive VP of the Ferrous Commercial Group at Omnisource, in the past there was a worry among EAF steel producers that foreign companies were going to enter the U.S. scrap market and begin exporting.
This perception drove many of them to protect their supply through acquisitions.
With roughly 30% of domestic scrap being exported, according to Joe Pickard, Chief Economist and Director of Commodities at ISRI, we can see why domestic steelmakers were concerned about scrap availability during times of strong domestic steel demand and production levels.
Exacerbating this is that there are 20 nations around the world that restrict scrap export.
Mr. Brady went on to say that producers are likely to continue to make acquisitions, though not at the same rate given the lofty valuations that many scrapyards are commanding today.
At the same time, the problems that many steelmakers face in finding stable prices for scrap were laid out by Republic Steel’s Director of Supply Chain Management, Michael B. Humphrey II, who outlined Republic’s difficulties in obtaining the high quality scrap they need to produce SBQ.
According to Mr. Humphrey, Republic is looking to acquire a scrapyard to help ensure a stable supply of scrap for its operations.
The number of active oil and natural gas rigs in the United States fell 0.8% to 1,968 for the week ending March 23, 2012. The rig count is still up 13.2% from the year-ago level and is just 2.9% off the 2011 high of 2,026 for the week ending November 4, 2011.
The highest weekly rig count in the United States since 1940 was recorded on December 28, 1981, at 4,530; the lowest was recorded on April 23, 1999, at 488.
The number of rigs in Canada fell 31.9% to 352 this week from 517 the week before, marking the seventh straight decline. The drop puts the rig count 17.9% below the year ago period.
The highest rig count for Canada was 727 on February 3, 2006; the lowest was 29, recorded on April 24, 1992.
Source: Baker Hughes Inc.
The spot reference price for 62% Fe iron ore cfr North China rose to $145.20 on Friday, March 23, 2012, up 0.3% from last Friday’s 16-week high of $144.70. The price for iron ore rose steadily all week and is now at the highest level since November 22, 2011, when the price was at $146.60.
The post-recession low was $59.10 on March 27, 2009, while the high was $190.19 on February 17, 2011.
Source: The Steel Index
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OAO TMK (TMK) reported 4Q adjusted EBITDA of $223m, a 10% improvement sequentially, on flat revenue of $1.60B. The company reported an improved product mix, marked by a 28% rise in seamless OCTG and premium connection sales, and lower raw material prices.
Guidance for 1Q was for these trends to continue leading to higher EBITDA and EBITDA margins in the quarter compared with 4Q and similar to year-ago results. The company also had a constructive outlook for full year 2012 due to expectations for improved volumes and a richer product mix.
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