Advisor takes pulse on the state of service centers and suppliers: 2014 looks good
December 2013 - While the winds were brisk outside the Omni Chicago Hotel last week, the atmosphere among about 80 steel executives was warm without blowing hot air.
“The economy is strong,” said Delaware Steel Co. president Lisa Goldenberg, before members of the Association of Steel Distributors at its regional meeting on Dec. 5. Goldenberg is the group’s acting president.
The group hosted Vincent Pappalardo, a metals industry investment banker who told the group that steel has taken the economy out of recessions before.
“There’s no reason it shouldn’t this time,” said Pappalardo, managing director—metals industry group head at Stout Risius Ross , a financial advisory firm.
Looking at five key critical areas for steel—automotive, agricultural, oil and gas, construction and aerospace—Pappalardo emphasized the importance of focusing on steel customers rather than end markets. It’s a discipline that could lead to more profit for service centers.
“Service centers typically don’t keep track of steel after it’s sold,” he said.
Here some highlights from his discussion:
Construction markets accounted for 42 percent of steel shipments in the U.S. in 2012, followed by the automotive sector at 24 percent. However, he said, even though it’s no secret construction is the biggest, it’s been the hardest hit of the end markets. That said, the American Institute of Architects reported the September Architecture Billings Index (ABI) score was 54.3, up from 53.8 in August. A score above 50 indicates expansion in architectural services demand, much like Purchasing Managers’ Indexes.
The ABI points to a stronger second half of the year for building construction, with strength continuing into 2014. Plus, the ABI has shown growth in design activity for 10 of the past 11 months, with growth in inquires for new projects in the past several months. U.S. construction spending hit a near 4-1/2 year high in August this year. This all suggests momentum is slowly picking up, signaling an uptick for 2014 in nonresidential construction.
A growing hunger for equipment in Brazil, China and India should be a boon for the agricultural market, Pappalardo said. The future demand for exports in emerging markets will be steady. Population expansion and healthy economies in those countries will pressure the agricultural sector’s efficiency and productivity, resulting in rising farm machinery sales.
The U.S. agricultural OEM industry is expected to generate revenues of about $40.7 billion in 2013.
“In the industrialized world, farm equipment sales will be determined largely by demand for replacement machinery,” he said.
In the oil and gas world, steel distributors should pay attention long term. While natural gas is more available and at historically low prices, there’s not the wide-scale infrastructure in the U.S. to liquefy it, which is necessary for its transport.
Right now, the U.S. is a net importer of natural gas, but the recent and ongoing expansion in shale gas production is changing that. Still, imports are decreasing. By 2020, the U.S. should become a net exporter of natural gas—and refineries will need steel to liquefy that product. The International Energy Association projects the U.S. surpassing Saudi Arabia as the world’s top oil producer by 2015. U.S. production will peak at about 12 million barrels a day by 2025 and then gradually taper off. The growing production should push gas prices down.
Planes and automobiles
That’s good news for car companies because the average age of cars on the road today is 11.4 years. Low interest rates for financing, coupled with pent up demand, will drive new buyers to dealer lots. But upstream, steel suppliers should be aware that many auto companies have consolidated their supply base as more onshoring occurs. Honda and Toyota, for example, have announced more activity at manufacturing plants in Indiana. High volumes needed to meet more stringent fuel efficiency standards means a large proportion of components will be made domestically—a silver lining for service centers, consolidation notwithstanding.
By 2020, exports should reach 2.1 million units, mainly to Europe and South America. “The weaker dollar will get us to those numbers,” Pappalardo said.
Service centers can expect superalloy steels to do well in the aerospace sector as they typically have. In 2032, aircraft OEMs estimate approximately 85 percent of the commercial aerospace fleet will comprise new aircraft manufactured between now and then.
“The runway is long for aerospace,” he said. MM