March 2010 - Fundamentals within the domestic metals industry remained weak during the fourth quarter despite prices finding support through foreign demand and investor speculation. The fourth quarter concluded with positive news for steelmakers as Chinese government officials took measures to improve steel production efficiency through an ordinance aimed at promoting industry consolidation. Domestically, the number of U.S. transactions stabilized during the quarter amid an equity market rally and signs of renewed activity in the credit markets.
The U.S. economy expanded for the second consecutive period during the fourth quarter as gross domestic product rose a seasonally adjusted 5.7 percent. During the fourth quarter, China's economy expanded 10.7 percent from a year earlier, picking up from 9.1 percent in the third quarter and bringing full-year growth to 8.7 percent. Chinese steel demand continued to increase as a result of improved property and automotive markets.
U.S. shipments of steel mill products reflected continued low levels of demand in November, yet stood as evidence that demand has improved slightly from the depths of the late-2008 global economic crisis. In contrast, December shipments of steel products from U.S. metals service centers declined compared with December 2008 volume. In all, 2009 steel product shipments declined year-over-year by 36.8 percent. Average U.S. steel mill operating rates climbed to 62.8 percent during the quarter. Analysts expect mill utilization rates to climb above 70 percent by the middle of the year before retreating in late 2010 due to seasonal factors.
HRC pricing decreased by $10 per ton, or 1.7 percent from the previous quarter's levels, falling from $580 per ton at the end of the third quarter to $570 per ton at the end of the fourth quarter. Hot-dipped galvanized prices rose to $820 per ton, an increase of 5.1 percent from the prior quarter. Facing declining rig counts, OCTG prices decreased 1.1 percent to $1,370 per ton from $1,385 at the end of the third quarter.
Scrap prices declined quarter-over-quarter as No. 1 HMS scrap decreased to $175 per ton from $180 per ton in the third quarter. Strong demand from Turkey and Egypt boosted U.S. exports of No. 1 HMS scrap by 45 percent in November. Analysts expect scrap prices to increase throughout the first quarter of 2010 as mills attempt to restock and scrap supply tightens.
Nonferrous metal prices, with the exception of titanium, increased during the quarter. Despite growing inventories, aluminum pricing increased 19.2 percent from $0.84 per pound at the end of the third quarter to $1 per pound at the end of the fourth quarter. Due to traders taking advantage of attractive warehouse financing deals, analysts suspect that substantial volumes of aluminum were locked in financing deals and not available for immediate withdrawal, which created tightness in the physical market and increased spot prices. Copper prices increased 19.7 percent from $2.78 per pound at the end of the third quarter to $3.33 per pound at the end of the fourth quarter. Copper prices were driven higher by a number of factors including increased Chinese restocking and investor speculation. Nickel prices increased 6.6 percent to $8.38 per pound at the end of the fourth quarter from $7.86 per pound at the end of the third quarter. Increased prices were supported almost solely by increased Chinese off take, in part due to restocking. Zinc prices climbed 34.3 percent from the third quarter, increasing from $0.87 per pound to $1.17 per pound at the end of the fourth quarter. Zinc prices were also supported by investor interest and Chinese restocking.
During the fourth quarter, aluminum prices exceeded the marginal costs of production for most mills and analysts estimate that only aluminum producers at the upper end of the cash cost curve had negative cash margins. Price levels were driven higher primarily by Chinese restocking and investment funds flows, despite growing stock levels. Titanium prices remained flat during the period despite the Dreamliner's maiden flight in late December and renewed hope for the U.S. titanium industry.
Merger and acquisition activity improved slightly during the fourth quarter, with several notable transactions occurring in the metals and mining sectors. The fourth quarter witnessed 18 domestic transactions with a total announced value of $552 million, an increase compared to the nine transactions announced during the same period last year. Internationally, 49 transactions were also announced with an aggregate value of $3.9 billion compared to 45 transactions announced during the same period last year.
One of the noteworthy developments of the quarter was Chriscott Group Inc.'s (Chriscott) bid to purchase the assets of bankrupt tube and pipe producer Barzel Industries Inc. The transaction was structured as a sale of substantially all of Barzel's assets pursuant to Section 363 of the U.S. Bankruptcy Code and the Canadian Companies' Creditors Arrangement Act.
In November, SBI Trading submitted an offer of $13.2 million for the remainder of Crucible Materials Corp.'s service center network. The acquisition expands SBI's presence in the tool and specialty steel market and provides a new platform for growth in specialty tubing. Allegheny Technologies Inc. made a bid to acquire Crucible's compaction metals and research assets for $41 million during the previous quarter.
Other notable activity included Williams Advanced Materials Inc.'s (WAM), a subsidiary of Brush Engineered Materials Inc., agreement to acquire Academy Corporation, a leading provider of precious and non-precious metals and refining services. Earlier during the quarter, WAM also acquired Barr Associates Inc., a manufacturer of precision thin film optical filters. The acquisitions should expand WAM's global manufacturing services and broaden its advanced materials technologies and product portfolio.
During the quarter, Metalico Inc. purchased the assets of Atlas Recycling Inc. and Youngstown Iron & Metal Inc. to complement its scrap yards in Ohio and Pennsylvania. The combined Youngstown and Atlas yards generated about $50 million in revenue annually over the last few years with average annual shipments of 115,000 tons of ferrous scrap and 15 million pounds of nonferrous scrap.
A thawing credit market and continued stability in the equity markets promoted M&A activity in the fourth quarter as steelmakers and service centers attempted to further streamline their business models. Going forward, analysts believe the case for consolidation in the steel industry remains strong as overcapacity has been accentuated by the downturn and supports a market with fewer players.
Steel pricing and demand
Domestic ferrous prices decreased during the fourth quarter of 2009, driven primarily by reduced order flow and weakening scrap prices. In November, U.S. exports of steel mill products dipped nearly 5 percent, or 83,000 tons, compared with the previous month as demand from NAFTA countries remained weak HRC prices decreased 1.7 percent, or $10 per ton, to $570 per ton during the fourth quarter, driven lower by declining U.S. auto sales. Steel bar decreased 15.2 percent during the quarter, from $548 per ton to $465 per ton, in response to decreasing scrap prices. Cold-rolled sheet and OCTG decreased 1.5 percent and 1.1 percent, respectively, from the end of the third quarter. In contrast, hot-dipped galvanized prices increased 5.1 percent during the quarter from $780 per ton to $820 per ton.
Scrap prices declined quarter-over-quarter, as No. 1 HMS scrap fell to $175 per ton from $180 per ton in the third quarter. Analysts believe that the price decline was a result of sluggish demand from foreign countries and the static prices Turkish mills received for their rebar.
Nonferrous metals pricing and demand
Nonferrous metal prices increased during the fourth quarter, led by zinc and copper, which increased by 34.3 percent and 19.7 percent, respectively. Nickel and aluminum prices also improved markedly throughout the quarter, while titanium remained flat despite Boeing's Dreamliner taking its maiden voyage after a more than two-year delay.
Nonferrous metal prices, with the exception of titanium, were supported by a number of factors, including Chinese restocking, investment speculation and a weak U.S. dollar.
Aluminum pricing increased 19.2 percent during the quarter, from $0.84 per pound at the end of the third quarter to $1.00 per pound at the end of the fourth quarter. Aluminum pricing increased despite growing LME inventories and traders are optimistic that prices will remain firm into 2010 given the large quantities of aluminum tied up in warehouse rent deals.
Analysts believe that supply and demand fundamentals will tighten somewhat in 2010 as Chinese consumption is expected to increase by approximately 25 percent. Such growth will be driven primarily from by the construction sector as China focuses more on urbanization.
Copper
Copper prices increased 19.7 percent to $3.33 per pound at the end of the fourth quarter, up from $2.78 per pound at the end of the third quarter. Copper prices were driven higher by market participants taking a large speculative position and Chinese import strength as demand continued to climb.
With inventories continuing to rise, analysts believe that fundamentals do not justify the recent price increase. Thus, as investment fund flows decline and fundamentals reassert themselves, the historic inventory price relationship suggests downside pricing risk.
Nickel
Nickel prices increased 6.6 percent during the quarter, climbing to $8.38 per pound at the end of the fourth quarter from $7.86 per pound at the end of the third quarter. Nickel has outperformed analyst expectations in recent months due largely to better-than-expected investment speculation, fueled by ongoing and potential new labor issues at key producing operations.
In the near term, analysts believe Vale's ongoing labor disruptions will continue to support the price of nickel. However, with inventories near historically high levels, current prices appear unsustainable from a fundamental perspective.
Titanium
Titanium prices remained flat during the period, closing at $8.75 per pound at the end of the fourth quarter. Despite the Dreamliner's maiden flight in late December and renewed hope for the U.S. titanium industry, prices were unable to improve from third quarter levels.
According to industry experts, build rates on existing airliners aren't expected to increase in 2010 as selected cutbacks on programs such as the Boeing 777 are implemented. In addition, airline flight hours remained at low levels during the fourth quarter, leading analysts to believe that the engine spares market may remain stagnant in the near term.
Zinc
Zinc prices rose 34.3 percent from the prior quarter, increasing to $1.17 per pound from $0.87 per pound at the end of the third quarter. Global zinc demand remains weak, supported almost solely by increased Chinese off take.
With inventories continuing to rise and low capacity utilization rates, analysts believe that fundamentals don't justify the recent price increase. Thus, analysts expect prices to stabilize at $0.80 per pound in 2010 as investor demand falls and fundamentals reassert themselves.
Mergers & Acquisitions
The fourth quarter witnessed 18 domestic transactions with a total announced value of $552 million, an increase compared to the nine transactions announced during the same period last year. Internationally, 49 transactions were also announced with an aggregate value of $3.9 billion compared to 45 transactions announced during the same period last year.
One of the noteworthy developments of the quarter was Chriscott's bid to purchase the assets of bankrupt tube and pipe producer Barzel Industries Inc. The transaction was structured as a sale of substantially all of Barzel's assets pursuant to Section 363 of the U.S. Bankruptcy Code and the Canadian CompaniesÕ Creditors Arrangement Act.
In November, SBI Trading submitted an offer of $13.2 million for the remainder of Crucible Materials Corp.'s service center network. The acquisition expands SBI's presence in the tool and specialty steel market and provides a new platform for growth in specialty tubing. Allegheny Technologies Inc. made a bid to acquire Crucible's compaction metals and research assets for $41 million during the previous quarter.
Equity markets
The Houlihan Lokey Metals Index increased by 10.9 percent during the fourth quarter. Most segments experienced positive returns, with the exception of scrap processors, service centers/processors, tube and pipe producers and mini-mill steel producers. The largest increase, attributable to the aluminum producers segment, was 15.2 percent. Most metals related equities experienced outsized gains when compared to broader gains by the overall equity market.
The Dow Jones Industrial Average and S&P 500 increased by 4.3 percent and 2.3 percent during the quarter, while the Russell 2000 increased 2.2 percent. The Houlihan Lokey International Producer Index also jumped 9.3 percent during the quarter.
Production, shipments and imports
In the fourth quarter, the U.S. imported 4.4 million tons of steel, an increase of 38.4 percent from 3.2 million tons in the third quarter and a decrease of 38.4 percent from the same period last year. Imports for 2009 represented the lowest yearly tonnage of finished steel imports since 1991. However, finished steel import market share has remained high despite a severely depressed domestic market. Analysts believe that imports will remain subdued until demand increases or U.S. prices increase to a level attractive to foreign producers.
Service center shipments fell 5.6 percent from the third quarter, decreasing 0.4 million tons to 7.2 million tons. Shipments declined 17.6 percent from the same period last year. Although service center shipments declined markedly year-over-year, analysts suspect that end user destocking has exaggerated the decline in service center shipments. Going forward, a lean supply chain positions mill shipment volumes to increase throughout 2010.
Domestic steel producers' utilization rate, which steadily declined from September 2008 through April 2009, increased to an average of 62.8 percent in the fourth quarter of 2009. Domestic crude steel production increased to 19.7 million tons during the fourth quarter, an increase of 6.5 percent from 18.5 million tons during the same period last year.
