Above: Universal Stainless produces forging billets at its Bridgeville, Pennsylvania, plant.

Makers of carbon, alloy and stainless bar must wait out the doldrums before an inevitable recovery

March 2016 - End-user demand for carbon and alloy bar products has declined 8.8 percent in 2015, despite a  surge in U.S. construction activity. But markets are cyclical, so experts advise metal movers to look beyond today’s troubles to tomorrow’s upswing.

Broken down into four categories—reinforcing bar (rebar), merchant bar quality (MBQ), special bar quality (SBQ) and stainless bar—the long products market has been lackluster for at least 12 months.

In terms of imports, rebar was the biggest outlier, with a 38.6 percent surge in volume. A major contributor to this surge was Turkey—led by its largest producer Habas—which was part of a major trade case in 2014 primarily targeting Mexico and Turkey. 

“While Mexico, including its lead rebar producer Deacero, were essentially blocked out of the U.S. market, Habas and other Turkish producers were found not to be dumping or benefiting from unfair subsidies. Atop already high volumes over the last few years, Turkish rebar imports rose 63 percent in 2015,” says Christopher Plummer, managing director at Metal Strategies Inc., West Chester, Pennsylvania. Turkish mills shipped about 1.6 million tons of rebar to the U.S. last year. 

Stainless imports rose, too, fueled by a strong dollar, says Chris Zimmer, executive vice president and chief commercial officer for Universal Stainless & Alloy Products Inc., Bridgeville, Pennsylvania. To combat the onslaught, “We need the trade laws already in place to be enforced. Leveling the playing field is a major area that needs work and we are actively working with the SSINA to this end,” Zimmer says of the Specialty Steel Industry of North America, Washington, D.C. “We’re all for fair trade, but fair is the key word.”

Demand for the higher-quality SBQ category—used in the auto, machinery and energy sectors—was down 16.9 percent in 2015 including shipments down 19.4 percent, exports off 23.1 percent and imports down 11.7 percent, says Plummer. Momentum for imports declined toward year end. For example, December’s rebar imports were 24.5 percent below the average volume in 2015. 

U.S. exports were weak all year and are expected to decline further in 2016. “Bar product exports were down about 25 percent in 2015 and over the last couple of months that run-rate decline has dipped further to more than 30 percent,” Plummer says. “That’s not a good sign for domestic producers.”

Industry outlook

David Anderson is hopeful regarding the forecast for carbon steel bar products within the automotive sector, a bright spot in an otherwise weak environment. Anderson is senior director for the Automotive Market and Long Products Program at Steel Market Development Institute (SMDI), Southfield, Michigan. He cites Ward’s Auto estimates of 2015 light vehicle sales, which reached 17.4 million units, a rate that should remain flat this year.

At Universal Stainless, which makes semi-finished and finished specialty steel long products and plate, 5 to 10 percent of  sales are in tool steels, largely driven by automotive sector demand. “We have seen a steady increase in activity during the last three to four years,” Zimmer says.

With some technology advancements that might benefit SBQ, Anderson believes aggressive lightweighting does not leave steel out of future vehicle designs. High strength, lighter alloys are increasingly being used for parts like crank shafts and connecting rods. Such components are being used in smaller engines that perform with as much torque and speed as the larger engines.

“V6 cylinder engines are replacing V8s and we see 4-cylinder engines being replaced by 3-cylinder engines in some cases,” Anderson says. “Redesigns help with the tolerance of the engine, allowing for increased power for smaller engines.” All-wheel-drive vehicles, which use extensive gearing and shafting, is another area to spur demand for SBQ.

SMDI’s research, developed with steelmakers, has proven steel can match the weight of aluminum in certain applications. For example, “We matched the weight of aluminum with steel in the front lower control arm at a 34 percent lower manufacturing cost,” Anderson says. “That should open the minds of some OEMs for steel solutions where forged aluminum is the go-to.”

Power generation, making up 10 to 15 percent of Universal Stainless’ revenue, is undergoing an extended period of maintenance to existing turbines. That MRO business is where most of the demand is coming from. “The market experienced a strong surge in new unit deliveries both domestically and internationally in 2007 and 2008 but since then has primarily been upgrading existing units with more efficient designs,” Zimmer says, noting that long-term demand for the land-based turbine market is expected to climb to support the increasing global demand for power. 

Cold finished bars are produced at Universal Stainless' Dunkirk, New York, and North Jackson, Ohio, plants.

Market influences

Construction is “the single largest market for bar products,” says Metal Strategies’ Plummer, and it has experienced a solid and sustainable recovery since mid-2014 and continuing into 2016. “Nonresidential construction was up almost 11.8 percent and public works 6.5 percent—unheard of normally for that sector,” Plummer says. “Normally growth or decline is muted at 1 or 3 percent.”

Makers of capital equipment and machinery—another large consumer of bar—are often big exporters but their exports faltered due to unfavorable exchange rates, says Plummer. “The dollar is up 22 percent against a broad basket of currencies in the dollar traded weighted index.” The dollar’s appreciation at that magnitude drastically reduces U.S. steel mills’ ability to export bar to offshore manufacturers.

Domestic machinery builders like Deere and Caterpillar have idled and consolidated production facilities in the face of much higher import activity. “Unfortunately that is likely to continue as the dollar strengthens while most other economies struggle to gain traction,” the analyst says. 

Universal Stainless’ single largest end market is aerospace. “Boeing and Airbus have built seven-to nine-year backlogs of orders, which has created a very strong long term demand environment,” Zimmer says. “While long term demand for the specialty steels needed to build these planes is intact, the aerospace supply chain does go through periods of stocking and destocking. 2015 was one of those destocking years.”

Despite lower mill activity in 2015, Zimmer says he’s “optimistic about 2016—with the exception of the oil and gas market,” particularly as inventories now appear to be in much better shape. “We expect to see a bullwhip effect of demand as the entire supply returns to buying at their actual demand levels.”

Commodity prices

Nickel, iron and molybdenum are trading at prices the market has not seen in 15, sometimes 20 years, Zimmer says. “Raw material surcharges have dropped at a faster rate than we can cycle our melt through the mill,” he says. “The disconnect between surcharges and material costs has negatively impacted our margins.”

Declining surcharges also impact the psyche of the supply chain. “If our customers don’t absolutely need to buy material they will hold off because they believe they can get it cheaper next month,” he says. “Once we get some commodity stabilization—it doesn’t have to be an upturn, just three or four months of stability—that’ll get the mojo of the market going again.” Zimmer expects an uptick in mill activity in 2016 “because destocking and declining commodity prices cannot continue forever. We believe that we are at, or very near the bottom so there’s nowhere to go but up from here.”

Above all, Zimmer emphasizes the need to approach this current downturn in the marketplace as a cyclical occurrence. “This too shall pass. Strong periods of demand are not sustainable, and neither are periods of poor demand,” Zimmer says. “It can sometimes be hard to see the bigger picture in the middle of a down cycle.“We don’t want to miss the opportunity to capitalize when the market does heat back up.” MM