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Quarterly Financial Report
Wednesday | 05 October, 2011 | 12:55 pm

Second quarter 2011

By Houlihan Lokey

October 2011 - The domestic steel market continued its recent growth into the second quarter, as improving macroeconomic trends bolstered demand for metals across many end markets. During the quarter, analysts witnessed further M&A market improvement over the same period last year, as deal volume increased substantially and values increased as well. Domestically, the number of U.S. transactions improved during the period, increasing 29 percent over the same period last year.

For the eighth quarter in a row, the United States economy showed continued economic growth, rising consumer sentiment and stabilizing unemployment help to accelerate GDP growth, as the economy grew real GDP at 1.0 percent versus 0.4 percent in the first quarter. China's economic growth continued to lose speed in the second quarter, with annualized GDP growth of 9.7 percent, but inflation continued to raise concerns about a possible interest rate tightening in Beijing.

During the quarter, steel producers’ utilization rate increased to an average of 74.6 percent in the second quarter of 2011, compared to 73.2 percent during the second quarter of 2010. Domestic crude steel production decreased to 16.8 million tons during the second quarter, a decrease of 27.0 percent from 23.0 million tons during the same period last year.

HRC pricing decreased by $165 per ton or 18.3 percent from the previous quarter’s levels. Prices decreased from $900 per ton at the end of the first quarter to $735 per ton at the end of the second quarter. CRC prices fell to $850 per ton from $1,000 per ton. Hot-dipped galvanized prices decreased to $970 per ton, a decrease of 12.2 percent from the prior quarter. OCTG prices increased 2.0 percent to $1,763 per ton from $1,729 at the end of the first quarter. Scrap prices remained constant quarter-over-quarter, as #1 HMS scrap stayed at $335 per ton from the first to second quarter. Analysts expect scrap prices to increase due to increases in demand during the next calendar year.

Nonferrous metal prices decreased during the second quarter, led by aluminum and titanium. As supply recovered, aluminum pricing decreased 3.4 percent from $1.18 per pound at the end of the first quarter to $1.14 per pound ($2,276 per metric ton) at the end of the second quarter. The price decrease in aluminum was driven by expectations of unwinding financing deals. Copper prices decreased 1.1 percent from $4.26 per pound at the end of the first quarter to $4.22 per pound at the end of the second quarter.

Slower than forecasted
Chinese manufacturing is believed to be the cause of the price decline. Nickel prices decreased 11.4 percent to $10.48 per pound at the end of the second quarter from $11.83 per pound at the end of the first quarter. Nickel prices fell throughout the second quarter as the market responded to supply surpluses. Zinc prices decreased 0.2 percent from the first quarter, remaining at similar $1.05 per pound to $1.05 per pound at the end of the second quarter. Zinc surpluses increased during the first two quarters of the year, which maintained price levels. Titanium prices remained constant during the period, closing at $12.00 per pound at the end of the second quarter. Prices were maintained due to steady demand.

Merger and acquisition activity improved during the second quarter, as compared to the same period last year, with several notable transactions occurring in the metals and mining sectors. The second quarter witnessed 22 domestic transactions, an increase compared to 17 transactions announced during the same period last year.

In May, Cliffs Natural Resources Inc. (Cliff) and Consolidated Thompson Iron Mines Limited (Consolidated Thompson) jointly announced that Cliff had closed on its acquisition of Consolidated Thompson. The C$4.9 billion transaction was financed through a $1.25 billion term loan and $750 million bridge financing and available cash on hand. Cliffs plans to replace the $750 million in bridge financing by accessing the capital markets.

In May, Metals USA Holdings Corps. (Metals USA) acquired nonferrous metals distributor Richardson Trident Co. The acquisition increased Metals USA’s geographic coverage in the Southeast, South central, Northeast and West Coast markets within the United States.

In June, Arch Coal Inc. (Arch Coal) completed the acquisition of International Coal Group for $3.4 billion. International Coal Group became a wholly owned subsidiary of Arch Coal. The acquisition adds nearly 13 million tons coal to Arch Coal’s portfolio, solidifying the company’s No. 2 position among U.S.-based coal miners.

In June, Schnitzer Steel Industries (Schnitzer Steel) acquired American Metal Group Inc. This acquisition is expected to enhance Schnitzer Steel’s supply network in Northern California, and will add a strong nonferrous franchise and a container recycling facility to Schnitzer Steel’s operations in the region.

In recent months the metals industry has seen a moderate comeback in M&A activity, largely driven by renewed growth in markets such as the automotive and aerospace sectors. As the 2011 outlook for the metals industry remains healthy, analysts expect raw material volatility and continued macroeconomic concerns to be the key drivers in the domestic and international M&A markets.

Steel Pricing and Demand
- HRC prices decreased 18.3 percent, or $165 per ton, to $735 per ton during the second quarter. Steel bar decreased 3.2 percent during the quarter, from $785 per ton to $760 per ton, in response to increases in production. OCTG increased 2.0 percent from the end of the first quarter. In addition, cold-rolled sheet and hot-dipped galvanized prices decreased 15.0 percent and 12.2 percent, respectively, during the quarter, with cold-rolled sheet falling from $1,000 ton to $850 per ton and hot-dipped galvanized falling from $1,105 to $970.

- Scrap prices remained constant quarter-over-quarter, as #1 HMS scrap generally stayed at $335 per ton from the first to the second quarter. Analysts expect scrap prices to increase due to increases in demand next year.

Nonferrous Metals Pricing and Demand
- Nonferrous metal prices decreased during the second quarter, led by aluminum and titanium, which decreased by 3.4 percent and 1.1 percent, respectively. Aluminum prices also decreased markedly throughout the quarter, while titanium remained steady due to end market demand.

- Aluminum pricing decreased 3.4 percent during the quarter, from $1.18 per pound at the end of the first quarter to $1.14 per pound ($2,276 per metric ton) at the end of the second quarter. The price decrease in aluminum was driven primarily by a recovery in supply from the first quarter, easing tightness and stabilizing prices.

Copper
- Copper prices decreased 1.1 percent to $4.22 per pound at the end of the second quarter, down from $4.26 per pound at the end of the first quarter. Slower than forecasted Chinese manufacturing is believed to be the cause.

- Industry experts expect that stronger Chinese demand for copper in the second half of the year will generate a price increase later this year.

Nickel
- Nickel prices decreased 11.4 percent during the quarter, falling to $10.48 per pound at the end of the second quarter from $11.83 per pound at the end of the first quarter. Nickel prices fell throughout the second quarter as the market responded to supply surpluses.

- Industry experts believe the price of nickel will increase in the short term, due to increasing mining costs and uncertainty over new project timing, but supply surplus will ultimately limit prices.

Titanium
- Titanium prices remained constant during the period, closing at $12.00 per pound at the end of the second quarter just as it did in the first quarter. Prices remained steady due to unchanging market demand.

- Industry experts expect demand for titanium to remain constant during the next period. Despite backlogs in commercial aircraft, increased demand for titanium is not expected until later this year or in early 2012.

Zinc
- Zinc prices slightly decreased from the prior quarter, declining to 0.2 percent, but remaining at similar $1.05 per pound compared to the end of the first quarter. Zinc surpluses increased during the first two quarters of the year, which maintained price levels.

- Industry experts believe that zinc prices will stay low in the second half of the year due to the surpluses in China.

Mergers & Acquisitions
- The second quarter witnessed 22 domestic transactions, an increase compared to 17 transactions announced during the same period last year.

- In May, Cliffs Natural Resources Inc. (Cliff) and Consolidated Thompson Iron Mines Limited (Consolidated Thompson) jointly announced that Cliff had closed on its acquisition of Consolidated Thompson. The C$4.9 billion transaction was financed through a $1.25 billion term loan and $750 million bridge financing and available cash on hand. Cliffs plans to replace the $750 million in bridge financing by accessing the capital markets.

- In May, Metals USA Holdings Corps. (Metals USA) acquired nonferrous metals distributor Richardson Trident Co. The acquisition increased Metals USA’s geographic coverage in the Southeast, South central, Northeast and West Coast markets within the United States.

- In June, Arch Coal Inc. (Arch Coal) completed the acquisition of International Coal Group for $3.4 billion. International Coal Group became a wholly owned subsidiary of Arch Coal. The acquisition adds nearly 13 million tons coal to Arch Coal’s portfolio, solidifying the company’s No. 2 position among U.S.-based coal miners.

- In June, Schnitzer Steel Industries (Schnitzer Steel) acquired American Metal Group Inc. This acquisition is expected to enhance Schnitzer Steel’s supply network in Northern California, and will add a strong nonferrous franchise and a container recycling facility to Schnitzer Steel’s operations in the region.

Equity Markets
- The Houlihan Lokey Metals Index decreased by 5.1 percent during the second quarter. Most segments experienced negative returns. The largest decrease, attributable to the Integrated Producers Segment, was 12.3 percent.

- The Dow Jones Industrial Average increased by 0.3 percent. The Russell 2000, S&P 500, and Houlihan Lokey International Producer Index declined by 2.3 percent, 0.9 percent, 6.6 percent, respectively during the quarter.

Production, Shipments and Imports
- In the second quarter, the U.S. imported 7.8 million tons of steel, an increase of 23.8 percent from 6.3 million tons in the first quarter and an increase of 23.8 percent from the same period last year. Increased domestic and international demand coupled with the absence of domestic capacity drove growth, shown by increasing lead times.

- Steel mills shipped 7.6 million tons in June 2011, a 3.5 percent increase from the previous month, and a 3.5 percent increase from the 7.3 million tons shipped in June 2010.

- Domestic steel producers’ utilization rate increased to an average of 74.6 percent in the second quarter of 2011. Domestic crude steel production decreased to 16.8 million tons during the second quarter, a decrease of 27.0 percent from 23.0 million tons during the same period last year.

 

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