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Quarterly Financial Report
Tuesday | 22 November, 2011 | 1:18 pm

Third quarter 2011

By Houlihan Lokey

December 2011 - During the third quarter the domestic steel market discontinued its recent growth from the first half of the year, as macroeconomic factors slowed and demand levels retreated. During the quarter, analysts witnessed the M&A market recovery slow somewhat, as it remained flat and transaction values decreased. Domestically, the number of U.S. transactions was unchanged during the period, though the outlook for M&A remains upbeat for the rest 2011 and 2012.
 
houlihan-q311metalpricesFor the ninth quarter in a row, the United States economy showed continued economic growth, despite declining consumer sentiment, as the economy grew real GDP at 2.5% versus 1.0% in the second quarter. China's economic growth continued to lose speed in the third quarter, with annualized GDP growth of 9.1%, as many are still concerned with the implications of substantial inflation.
 
Steel producers’ utilization rate increased to an average of 76.2% during the quarter. Domestic crude steel production increased to 24.6 million tons during the quarter, an increase of 9.0% from 22.6 million tons during the same period last year.
 
HRC prices decreased 5.1%, or $37 per ton, to $698 per ton during the third quarter. Steel bar decreased 0.9% during the quarter, from $760 per ton to $753 per ton, due to substantial service center inventory buildup of 4.0% quarter over quarter. OCTG increased 0.5% from the end of the second quarter. In addition, cold-rolled sheet and hot-dipped galvanized prices decreased 5.0% and 6.4%, respectively, during the quarter, with cold-rolled sheet falling from $850 ton to $808 per ton and hot-dipped galvanized falling from $970 to $908. Scrap prices fell slightly quarter-over-quarter, as #1 HMS scrap fell $10 per ton to $325 per ton from the second to the third quarter. Analysts expect scrap prices to be supported by increases in demand next year, but weaken in the near term on increased uncertainty in the Euro region.

Nonferrous metal prices primarily decreased during the third quarter, led by zinc and nickel, which decreased by 13.2% and 10.1%, respectively.  Aluminum prices also decreased throughout the quarter, while titanium improved slightly. Aluminum pricing decreased 8.5% during the quarter, from $1.14 per pound at the end of the second quarter to $1.04 per pound ($2,296 per metric ton) at the end of the third quarter on growing concerns about global demand. Copper prices decreased 10.6% to $3.77 per pound at the end of the third quarter, down from $4.22 per pound at the end of the second quarter. Nickel prices decreased 10.1% during the quarter, falling to $9.25 per pound at the end of the third quarter from $10.48 per pound at the end of the second quarter, on weaker demand for stainless and uncertain mid-term outlook. Titanium prices improved slightly during the period, closing at $12.20 per pound at the end of the third quarter up $0.20 from the second quarter, pushed by steady demand and a positive 2012 outlook. Zinc prices slightly decreased from the prior quarter, declining by 10.3%, despite significant gains of 3.3% in July.

Merger and acquisition activity remained steady during the third quarter, as compared to the same period last year. The third quarter witnessed 19 domestic transactions in the metals and mining sectors, consistent with 19 transactions announced during the previous quarter.

In August, BHP completed the acquisition of Petrohawk Energy Corporation for $38.75 per share. The offer implies an enterprise value of approximately $15.1 billion. The acquisition provides BHP with proven reserves that cover approximately 1,000,000 net acres in Texas and Louisiana.

In July, Lincoln Electric Holdings, Inc. announced its acquisition of the assets of Techalloy Company, Inc. and certain assets of Central Wire Industries, a producer of nickel alloy consumables for welding applications for $39 million. This acquisition will allow Lincoln Electric to broaden its product offering to key customers. Houlihan Lokey acted as financial advisor to Central Wire Industries.

In August, PSC Metals announced its acquisition of Shapiro Brothers Inc., a Midwestern scrap processor for $22 million. The acquisition supports PSC’s current push to increase its presence in the Midwest region.

In August, Xstrata announced it completed the First Coal Corporation acquisition for $153 million. The acquisition provides Xstrata with access to coking coal exploration leases in Canada.

The last quarter has seen a moderation in the recovery of the metals markets. As the 2012 outlook for the metals industry remains healthy, analysts expect substantial volatility, continued macroeconomic concerns and credit market turmoil to be the near term drivers in the domestic and international M&A markets.

houlihan-q311steelprices

Steel Pricing and Demand

- HRC prices decreased 5.1%, or $37 per ton, to $698 per ton during the third quarter.  Steel bar decreased 0.9% during the quarter, from $760 per ton to $753 per ton, due to substantial service center inventory build-up of 4.0% quarter over quarter. OCTG increased 0.5% from the end of the second quarter. In addition, cold-rolled sheet and hot-dipped galvanized prices decreased 5.0% and 6.4%, respectively, during the quarter, with cold-rolled sheet falling from $850 ton to $808 per ton and hot-dipped galvanized falling from $970 to $908.

- Scrap prices fell slightly quarter-over-quarter, as #1 HMS scrap fell $10 per ton to $325 per ton from the second to the third quarter. Analysts expect scrap prices to be supported by increases in demand next year, but weaken in the near term on increased uncertainty in the Euro region.

Nonferrous Metals Pricing and Demand
- Nonferrous metal prices primarily decreased during the third quarter, led by zinc and nickel, which decreased by 13.2% and 10.1%, respectively. Aluminum prices also decreased markedly throughout the quarter, while titanium improved slightly.

- Aluminum pricing decreased 8.5% during the quarter, from $1.14 per pound at the end of the second quarter to $1.04 per pound ($2,296 per metric ton) at the end of the third quarter. The price decrease in aluminum was driven primarily by growing concerns about global demand and some analysts believe pricing may fall to levels where producers will begin to rein in output.

Copper
- Copper prices decreased 10.6% to $3.77 per pound at the end of the third quarter, down from $4.22 per pound at the end of the second quarter. Substantial volatility over the period scared caused some buyers to remain cautious. Copper prices fell over 24% in the month of September on economic uncertainty and a presumed weakening in Chinese growth.

- Despite the near-term drop in copper prices, experts believe Chinese demand for copper will continue to sustain the market over the long term.

Nickel
- Nickel prices decreased 10.1% during the quarter, falling to $9.25 per pound at the end of the third quarter from $10.48 per pound at the end of the second quarter. Nickel prices fell throughout the third quarter on weaker demand for stainless and uncertain mid-term outlook.

- Industry experts believe the price of nickel will stay relatively weak in the near term, due to macro concerns and possibly weakening demand from China.
 
Titanium
- Titanium prices improved slightly during the period, closing at $12.20 per pound at the end of the third quarter up $0.20 from the second quarter, pushed by steady demand and a positive 2012 outlook.

-Industry experts expect demand for titanium to grow as build rates for commercial airlines continue to increase.

Zinc
- Zinc prices slightly decreased from the prior quarter, declining by 10.3%, despite significant gains of 3.3% in July. Zinc prices fell on poor manufacturing and industrial product performance in the third quarter.

- Industry experts believe in a strong outlook for zinc next year as Chinese mine supply will remain tight.

Mergers & Acquisitions
The third quarter witnessed 19 domestic transactions, flat compared to 19 transactions announced during the previous quarter.

- In August, BHP completed the acquisition of Petrohawk Energy Corporation for $38.75 per share. The offer implies an enterprise value of approximately $15.1 billion. The acquisition provides BHP with proven reserves that cover approximately 1,000,000 net acres in Texas and Louisiana.

- In July, Lincoln Electric Holdings, Inc. announced its acquisition of the assets of Techalloy Company, Inc. and certain assets of Central Wire Industries, a producer of nickel alloy consumables for welding applications for $39 million. This acquisition will allow Lincoln Electric to broaden its product offering to key customers. Houlihan Lokey acted as financial advisor to Central Wire Industries.

- In August, PSC Metals announced its acquisition of Shapiro Brothers Inc., a Midwestern scrap processor for $22 million. The acquisition supports PSC’s current push to increase its presence in the Midwest region.

- In August, Xstrata announced it completed the First Coal Corporation acquisition for $153 million. The acquisition provides Xstrata with access to coking coal exploration leases in Canada.
   
Equity Markets
- The Houlihan Lokey Metals Index decreased by 34.1% during the third quarter.  Most segments experienced negative returns. The largest decrease, attributable to the Integrated Producers Segment, was 54.3%.

- The Dow Jones Industrial Average decreased by 13.3%. The Russell 2000, S&P 500 and Houlihan Lokey International Producer Index declined by 23.3%, 15.5% and 40.1% respectively during the quarter.

Production, Shipments and Imports
- In the third quarter, the U.S. imported 7.2 million tons of steel, a decrease of 8.5% from 7.8 million tons in the third quarter and an increase of 7.0% from the same period last year. Lower domestic pricing and increasing economic uncertainty drove the reduction.

- Steel mills shipped 8.1 million tons in September 2011, a 3.1% decrease from the previous month, and a 9.8% increase from the 7.4 million tons shipped in September 2010.

- Domestic steel producers’ utilization rate increased to an average of 76.2% in the third quarter of 2011. Domestic crude steel production increased to 24.6 million tons during the third quarter, an increase of 9.0% from 22.6 million tons during the same period last year.

Ferrous Pricing
- Domestic ferrous prices decreased slightly during the third quarter of 2011, driven by economic uncertainty, with varied results from region to region.  Domestic crude steel production increased to 24.6 million tons during the third quarter, an increase of 9.0% from 22.6 million tons during the same period last year.

- HRC prices decreased 5.1%, or $37 per ton, to $698 per ton during the third quarter. Steel bar decreased 0.9% during the quarter, from $760 per ton to $753 per ton, due to substantial service center inventory build-up of 4.0% quarter over quarter. OCTG increased 0.5% from the end of the second quarter. In addition, cold-rolled sheet and hot-dipped galvanized prices decreased 5.0% and 6.4%, respectively, during the quarter, with cold-rolled sheet falling from $850 ton to $808 per ton and hot-dipped galvanized falling from $970 to $908.

- Scrap prices fell slightly quarter-over-quarter, as #1 HMS scrap fell $10 per ton to $325 per ton from the second to the third quarter. Analysts expect scrap prices to be supported by increases in demand next year, but weaken in the near term on increased uncertainty in the Euro region.

Nonferrous Pricing
- Nonferrous metal prices primarily decreased during the third quarter, led by zinc and nickel, which decreased by 13.2% and 10.1% respectively. Aluminum prices also decreased throughout the quarter, while titanium improved slightly.

- Aluminum pricing decreased 8.5% during the quarter, from $1.14 per pound at the end of the second quarter to $1.04 per pound ($2,296 per metric ton) at the end of the third quarter. The price decrease in aluminum was driven primarily by growing concerns about global demand and some analysts believe pricing may fall to levels where producers will begin to rein in output.

- Copper prices decreased 10.6% to $3.77 per pound at the end of the third quarter, down from $4.22 per pound at the end of the second quarter. Substantial volatility over the period caused some buyers to remain cautious.

- Nickel prices decreased 10.1% during the quarter, falling to $9.25 per pound at the end of the third quarter from $10.48 per pound at the end of the second quarter. Nickel prices fell throughout the third quarter on weaker demand for stainless and uncertain mid-term outlook.

- Titanium prices improved slightly during the period, closing at $12.20 per pound at the end of the third quarter up $0.20 from the second quarter, pushed by steady demand and a positive 2012 outlook.

Production, Shipments and Imports
- In the third quarter, the U.S. imported 7.2 million tons of steel, a decrease of 8.5% from 7.8 million tons in the third quarter and an increase of 7.0% from the same period last year. Lower domestic pricing and increasing economic uncertainty drove the reduction.

- Steel mills shipped 8.1 million tons in September 2011, a 3.1% decrease from the previous month, and a 9.8% increase from the 7.4 million tons shipped in September 2010.

- Domestic steel producers’ utilization rate increased to an average of 76.2% in the third quarter of 2011. Domestic crude steel production increased to 24.6 million tons during the third quarter, an increase of 9.0% from 22.6 million tons during the same period last year.

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