SBQ orders and shipments drift but market remains less volatile than others

March 2015 - With lower raw material costs, an onslaught of import tons and excess supply, some companies producing material from sheet to pipe to wire rod were practically making cold calls last month even as they’ve had to drop their spot prices.

But these products—hot-rolled coil, oil country tubular goods, industrial quality rod—are strictly commodities. Special-bar quality has commodity grades and sizes, to be sure, but the vast range of value-added characteristics have made this product line somewhat less vulnerable to wild gyrations, particularly if bread-and-butter automotive demand continues apace, which it promises to do in 2015.

Strong demand among some end users is often offset by weakened demand in others. Caterpillar Inc., for example,  turned more negative on prospects for 2015 than it had been previously. The Peoria, Illinois-based manufacturer of agricultural, construction and mining machinery cited declines in commodity pricing, like iron ore, copper, coal and wheat, which usually means miners and farmers will use their old equipment for another year.

OEM outlooks

Then there’s that new bugaboo: The volatile price of crude oil.

Cat’s oil and gas exposure “ranges from engines for drilling, engine transmission and pressure pumps for well servicing, engines that go into compressor sets for gas gathering, engines and turbines that move oil and gas along the pipeline. And turbines for offshore production pipelines,” Mike DeWalt, vice president of financial services, told shareholders. “Without a doubt, the impact of substantially lower oil and gas prices is the most significant reason we’re expecting lower sales in 2015.”

Executives at Terex Corp., a Westport, Connecticut-based maker of large-scale lifting and material handling equipment, agree.

“End markets for our equipment were unpredictable, if not declining,” Chairman and CEO Ronald M. DeFeo said during a Feb. 18 earnings call. “The recent sharp move in oil prices has caused uncertainty for some customers.”

Order backlogs for all sorts of equipment have softened. “Lower commodity prices such as iron ore and coal continue to drag sentiment down, exacerbated by geopolitical uncertainty, especially in markets like Russia and the Ukraine,” said DeFeo.

“When oil falls off precipitously, it raises the eyebrows of capital goods buyers,” remarked Matthew Fearon, president of Terex’s Aerial Work Platforms unit. “So they postpone the acquisition of equipment.”

Another piece of the steel bar demand pie is Class 5-8 tractors and trailers.

Heavy vehicle engine manufacturer Cummins Inc. said its backlogs are healthy, citing a forecast 8 percent increase in North American Class 8 truck build rates this year and a 1 percent increase in production of medium-duty trucks. Chairman and CEO Tom Linebarger also cited a new passenger light truck program that Cummins will supply.

Although questioned about the risk that fleets serving the oil patch may cancel orders, Linebarger said, “We haven’t seen any cancellations in North America.”

Dana Holding Corp., a Maumee, Ohio-based maker of drivetrain components for passenger, commercial and off-highway vehicles, has increased its sales backlog 30 percent and won new programs with major OEMs around the world. A consumer of steel bar, Dana has begun production of front and rear axles for the Chevy Colorado and GMC Canyon.

Mill forecasts

Domestic SBQ producers plan to continue upgrading capabilities to be able to match the most difficult requirements, relying less on squeezing profits from commodity grades that are more vulnerable to spot price trends.

TimkenSteel Corp. commissioned a jumbo bloom vertical caster last year, which combined with a new forge press, “further strengthens our ability to provide SBQ in large sizes for the most demanding applications,” Chairman, President and CEO Tim Timken said during an earnings call.

“We anticipate weaker oil and gas markets this year, due to lower oil prices and the associated decrease in energy exploration and production spend,” he said, yet the order book through first quarter was solid and the company is adding capacity in quench-and-temper heat-treated steels. Visibility beyond first quarter is cloudy. “With the energy side coming off, we’re obviously going to feel the pinch of that,” Timken said. “The automotive market still remains strong; industrial markets, with a few exceptions like mining and ag [equipment], are all feeling pretty good.”

Steel Dynamics Inc. commissioned a new small-diameter bar rolling mill last year. The Engineered Bar Division shipped 647,000 tons last year, up 30 percent from 2013. “We expect to increase by that amount again in 2015,” President and CEO Mark D. Millett said.

SBQ customers “are busy, they are confident and they express growth of 5 to 10 percent through 2015. Manufacturing is solid. Automotive is incredibly strong. The truck trailer and material handling markets are strong.” Segments that are softer, Millett said, include off-road equipment and mining.

Prices, inventories

Major mills reduced their scrap surcharges effective March 1 by $100 per ton, following the sharp decline in No. 1 bundles and No. 1 busheling prices.

”From an operation view, we expect some headwinds from raw material spread,” TimkenSteel CFO Chris Holding said.

The drop in the surcharge automatically lowers inventory value of tons on the floor at cold finishers and service centers.

“Our inventory is not affected too badly but the values won’t go up soon, either,” says Mack White, vice president of sales and marketing for Murphy & Nolan Inc., Rochester, New York. “Sales are good; we are not seeing any slowdown in orders and shipments. We aren’t shying away from carrying inventory. If we don’t have it, we cannot sell it. We’re bringing in truckloads every week.”

Ross Bushman, president of Summit Steel Corp., Chagrin Falls, Ohio, said, “We have to be at market price, so when the surcharge falls, we pass it along.”

Dave Trump, vice president of sales for Kreher Steel, Franklin Park, Illinois, sees the SBQ market of 2015 as a bit challenging. “You have a declining scrap surcharge that is quite dramatic for March. Who knows about where it will go in April?”

Pennsylvania Steel Co. President and COO Barry Walsh is well aware “of the direction of scrap prices but it’s not the flash point that it was over a decade ago,” when surcharges were first implemented on a monthly basis. In fact, “our outlook for 2015 is good,” apart from shipping days lost to severe East Coast snowstorms. 

Capacity questions

Some SBQ buyers worry about additional production capacity that’s been installed in the past few years. The U.S. market consumes 8 million to 10 million tons of SBQ in good years. But Bushman suggested that overcapacity may not be felt until the next recession or when an automotive production slowdown is paired with a sluggish mining and agricultural equipment sector.

“ArcelorMittal announced a shutdown. Republic still has their issues,” says Trump. ArcelorMittal idled its Indiana Harbor Long Carbon facility beginning with the electric arc furnace on March 1, and is idling the rolling mill operation during the second quarter. The plant ”has been challenged by low utilization, scheduling inefficiencies and high costs [and] has incurred losses since 2011,” a spokeswoman says. Republic Steel Co. laid off 100 people in Canton, Ohio, last fall when it idled one of two casters, citing surplus capacity. Bill Sellers, president of United Steelworkers Local 1200, says, “We have had spotty callbacks, two to three at a time, and 71 people are still on layoff. We are told that orders are picking up slowly.” Efforts to reach Republic executives about their plans for the Canton steel casting operations were not successful. MM