Far from boiling

Features - Steel Industry Report

The steel industry in the U.S. is stable, but steelmakers still await further orders to put underutilized capacity to work.

May 28, 2014
Brian Taylor

During the darkest days of the recession that followed the subprime mortgage crisis of 2008, the steel mill capacity rate in the United States as calculated by the Washington-based American Iron and Steel Institute (AISI) fell below 50 percent—a dramatically rare occurrence.

Subsequently, the story of the steel industry has been, first, one of steadily rising output to reach the 75 percent neighborhood and, since 2010, a second chapter involving a plateau at that 75 percent mill capacity rate that the industry has found difficult to exceed.

In 2014, a lukewarm construction sector continues to shoulder some of the blame for the “stuck in third gear” nature of the U.S. steel industry, but an influx of imported steel also is starting to share the blame in the eyes of many U.S. steelmakers.

Not a full throttle

Steel output data collected and distributed by AISI demonstrate that the industry in the U.S. continues to languish at a capacity rate in the 75 percent range rather than at an 85 percent-plus rate indicative of more prosperous times.

AISI’s data for the week ending May 10, 2014, indicate steel production at U.S. mills was 1.84 million tons at a mill capacity rate of 76.6 percent. That represents a modest 0.5 percent gain over the 1.83 million tons produced in the comparable week in 2013.

Another (slightly) positive trend is that weekly output in early May was up 1.5 percent from the previous week (the one ending May 3, 2014), when production was 1.82 million tons and the mill capacity rate was 75.5 percent.

Year-to-date AISI figures show, however, that flatness remains the predominant feature of the U.S. steel industry in the first half of 2014. AISI figures show 33.9 million tons of output through May 10, 2014, compared with the 34.2 million tons produced during the same period of 2013, a decline of 0.8 percent.

Electric arc furnace (EAF) steelmakers based in the U.S., who consume a healthy percentage of the ferrous scrap generated in North America, are generally reporting modest profits but are not portraying 2014 as the start of a new boom cycle.

Steel Dynamics Inc. (SDI), Fort Wayne, Indiana, pointed to severe winter weather as a restraining factors in the first quarter of 2014. “The uncharacteristically severe and prolonged winter weather conditions resulted in increased energy costs, reduced production, diminished availability of transportation and lower shipments,” said SDI CEO Mark Millett in comments accompanying SDI’s first quarter report.

“This environment was a major driver of the 25 percent decline in our consolidated operating income for the first quarter [of] 2014 as compared to the sequential fourth quarter of 2013,” Millett added.

SDI’s quarterly net income of $39 million was down from the $48 million earned in the first quarter of 2013.

Millet expressed optimism that with a change in the weather will come increased sales and profitability. “As weather conditions improved, demand also strengthened with increased order activity throughout our steel operations,” he commented. (To read more comments from Mark Millet, see the Recycling Today interview with him starting on page 52 of this issue.)

The nation’s largest EAF steelmaker, Charlotte, North Carolina-based Nucor Corp., demonstrated slightly better earnings in the first quarter of 2014 compared with 2013.

Nucor’s net earnings of $111 million marked a 30.9 percent increase over the $84.8 million earned in the first quarter of 2013. The figure, however, was down 34.9 percent from the $170.5 million the company netted in the fourth quarter of 2013.

In comments accompanying its quarterly results, Nucor also pointed to severe weather as a factor hampering profitability. The company also referred to an influx of imported finished steel as a source of trouble. “Import levels negatively impacted pricing and margins at our bar and sheet mills,” Nucor said.

Steel industry trade associations have begun issuing position papers and press releases regarding imports indicating the U.S. steel industry is already pressing the executive and legislative branches in Washington to act.

Dockloads of arrivals

The AISI is among the trade associations sounding the alarm on what it considers to be unfair competition faced by steelmakers based in the U.S.

Citing U.S. Commerce Department data, the AISI issued a statement in early May saying “steel import permit applications for the month of April totaled 3.68 million net tons. This was a 4 percent increase from the 3.55 million net tons recorded in March and a 14 percent increase from the March final imports total of 3.23 million net tons.”

In the first four months of 2014, AISI says, “total and finished steel imports were 13.4 million net tons and 9.8 million net tons, respectively, up 29 percent and 19 percent from the same period in 2013.”

Considering the U.S. steel mill capacity rate is in the 76 percent range, many steelmakers are citing a correlation between the imports and the “stuck in neutral” domestic capacity rate.

Pipes and drilling equipment used in the energy exploration, pipeline and early production stages (referred to as oil country tubular goods, or OCTG, by steelmakers) drew attention of the Financial Times in a May article, as America’s growing energy sector has been hailed as an engine of economic growth.

The real and anticipated need for OCTG steel products has resulted in new investments in steel tube and pipe making, including a $1 billion tube plant built in Youngstown, Ohio, built by France’s Vallourec Group and a $1.5 billion OCTG mill under construction in Bay City, Texas, by Luxembourg-based Tenaris.

Politicians as diverse as Democratic Sen. Sherrod Brown of Ohio and Republican Sen. Jeff Sessions of Alabama are working together to rally Congress and executive branch agencies to keep import levels at bay in the belief it will benefit steelmakers and foundry operators in their home states.

The duo appeared together at a May press conference endorsing a 62-page report that spells out alleged unfair steel import practices.

AISI and Commerce Department figures point to a broader range of imports that is not skewed toward OTCG products. “Products with significant year-to-date increases versus the same period in 2013 include wire rods (up 105 percent), plates in coils (up 63 percent), cold-rolled sheets (up 54 percent), reinforcing bars (up 40 percent), sheets and strip hot-dipped galvanized (up 36 percent), sheets and strip all other metallic coatings (up 35 percent), hot-rolled sheets (32 percent), mechanical tubing (31 percent), oil country goods (up 16 percent) and cut lengths plates (up 12 percent),” AISI reports.

To what extent a trade case brought by the U.S. can convince the World Trade Organization (WTO) that OTCG products are being dumped onto the North American market remains to be seen.

A WTO case generally has to prove that “dumping” is occurring, or that steelmakers in another country, possibly backed by government subsidies, are shipping products overseas and selling them at a loss compared to production costs.

Measured by volume through the first four months of 2014, the largest offshore suppliers of steel to the U.S. were South Korea (1.57 million net tons, up 27 percent from the same period in 2013), China (965,000 net tons, up 73 percent) and Japan (692,000, up 5 percent), putting those three nations among the potential targets in a U.S. trade case.

Despite the unwelcome competition from overseas, U.S. steelmakers also retain reasons for optimism, according to participants in a roundtable at one recent industry event.

Independent thinking

While steelmakers and politicians grapple with deriving immediate benefits from America’s energy boom, a longer-term benefit may be the ability of steelmakers in the U.S. to obtain ongoing access to affordable energy.

At the Ferrous Spotlight session of the Institute of Scrap Recycling Industries (ISRI) 2014 Convention & Exposition, held in Las Vegas in April, a former steel industry association executive director commented on the challenges and opportunities in front of the steel sector in the U.S.

Thomas Danjczek, past president of the Washington-based Steel Manufacturers Association, noted that in recent years the U.S. has been the world’s leading importer of finished steel while it is not even in the top 10 among steel exporting nations.

Since 2003, Danjczek said, imported steel has accounted for an average of 26 percent of the steel consumed each year in the United States.

Although this open market may have cost the U.S. steel industry up to 87,000 jobs, Danjczek estimated, it has made the domestic steel industry resilient and well-positioned to compete.

He said low energy costs, access to the world’s largest capital markets and self-sufficiency in steelmaking raw materials are reasons for optimism within the U.S. steel sector.

Access to affordable energy has spurred Nucor, Charlotte, North Carolina, to build a direct reduced iron plant (DRI) in Louisiana. While DRI may supplement or even compete with scrap as feedstock at some mills, Danjczek said the investment should be considered a commitment to the electric arc furnace (EAF) process.

Scrap processors and dealers were likely pleased to hear Danjczek predict that the EAF sector’s share of production was “likely to increase” and that U.S.-based steelmakers overall “have stronger balance sheets” that are “much better than they were in the 1980s and 1990s.”

The recent earning reports of Nucor, SDI) and other steelmakers bear out Danjczek’s observation, as even during a time when the nation’s steel output seems stuck in third gear, EAF steelmakers are figuring out how to operate profitably in the lukewarm environment.


The author is editor of Recycling Today and can be contacted at btaylor@gie.net.