1-2009 Galvanized Outlook
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Hot-Dipped Takes a Bath in Late '08

As in other segments of the steel industry, demand for galvanized steel plummeted in the fourth quarter of 2008. Industry experts don’t expect much improvement through the first half of the new year.

By Myra Pinkham, Contributing Editor

While 2008 as a whole was a good year for the galvanized steel market, demand is now being described as abysmal, and industry observers are uncertain whether it will get measurably better in 2009. Some hope for a slight uptick as service centers and manufacturers replenish their depleted inventories, but most doubt there will be any true recovery before late this year.

“The market for galvanized steel is currently just about as bad as that for any other type of steel,” says Keith Busse, chairman and CEO of Steel Dynamics Inc., Fort Wayne, Ind. “Destocking is the order of the day. Everyone has expensive inventory and they are trying to get it off their toe.”

The underlying demand for galvanized steel—as for steel in general—has not been very strong for some time, says John Anton, manager of the steel service at Global Insight, Washington, D.C. True demand actually peaked in 2007, he says.

Galvanized steel consumption is split primarily among three markets: construction (mostly nonresidential, but also housing), automotive, and industrial equipment and other miscellaneous applications, according to Christopher Plummer, managing director of Metal Strategies Inc., West Chester, Pa. Automotive has been sour for some time, while the previously robust nonresidential construction market is weakening.

Much of the domestic galvanized steel is sold through service centers—40 to 45 percent of the market, estimates Bill Sternard, vice president of purchasing for Viking Materials Inc., Minneapolis. Many distributors—especially those heavily leveraged—are struggling with profitability due to the rapid decline in steel prices over the past few months. “Unless a company has zero inventory, they have been caught with high priced material,” he says.

Not every competitor has been slashing its stock. Some service center operators report reasonable inventory levels. “We have been able to maintain our inventories at a good level as we keep close track of our customer usage,” says Ken Dworznik, sales manager for Monarch Steel Co. Inc., Cleveland.

Galvanized steel inventories overall are actually “in fairly good shape given the downturn in the major markets,” says John Campo, vice president of sales and marketing for O’Neal Steel Inc., Birmingham, Ala.

The Metals Service Center Institute, Rolling Meadows, Ill., reports that U.S. service centers held 10,025,600 tons or 2.8 months of steel inventories (all types) at the end of October, 4.3 percent less than in October 2007. Distributors managed to pare inventory levels despite averaging only 158 tons shipped per day in 2008, a 22.8 percent drop from the 204.7 tons shipped daily in 2007.

For galvanized, like other steel products, the year combined a healthy first half followed by a precipitous decline toward the end of the year.

“In early 2008, people had a tremendous appetite for galvanized steel and steel in general,” says Busse. “But by mid-year it fell of the cliff, and how long it will remain in a freefall is anyone’s guess.”

Renee Ramey, marketing manager at Steelscape Inc., Kalama, Wash., agrees with this assessment, noting that her company was still “running pretty full out” even into September. Then the bottom fell out.

While many anticipated demand would moderate in November and December, few expected it to slow so abruptly. “I’ve never seen prices drop so fast before,” says Viking’s Sternard.

Despite the fourth-quarter plummet, galvanized steel prices are not far out of line from where they were a year ago. As of mid-December, hot-dipped galvanized sheet was selling for about $760 a ton, down only about 6 percent from the monthly average price of $810 per ton in December 2007. However, last month’s price was off nearly 42 percent from the peak of over $1,300 per ton in July, and it represented a drop of nearly 25 percent from the $1,000-plus price just the month before, according to published sources.

Busse says The Techs, SDI’s galvanizing units, were operating at about a 50 percent run rate in December compared to near-capacity production earlier in the year. He blames about 75 percent of the decline on weaker end markets and 25 percent on inventory destocking.

There is no question that demand for galvanized steel from both the automotive and construction markets is off considerably. “Automotive is in the tank,” says Paul Lowery, managing partner of Steel Base Partners, Pittsburgh, noting that production rates are off about 35 percent.

U.S. auto production (including the domestic Big Three and the foreign-owned New Domestics) was only seven to eight million units in 2008 vs. 13 to 14 million units a year earlier, Anton says, noting that the credit crunch has had a hand in this decline. Not only are consumers, concerned with their job security, holding back from making large purchases, but those interested in buying a car—even the creditworthy—have been unable to get financing.

Now that President Bush has cleared the way for the Detroit Three to at least get a $13.4 billion bridge loan from the Troubled Asset Recovery Program funds, is it good news to steel suppliers? Most remain skeptical.

“I don’t feel the bailout will have a big effect given the tremendous amount of auto inventories that are currently on dealer lots,” says Dworznik. “The bridge loan will just bail out the Detroit Three for their past sins. They need to make major changes or else they are just setting themselves up to get run over by the New Domestics.”

“[A loan] doesn’t solve the problem,” Busse agrees. “What is needed is some real labor concessions. Unless there is some meaningful restructuring of both union and management components, I’m not optimistic that it will do anything.”

Weakness in the construction market further compounds the recent decline in galvanized demand. According to the U.S. Census Bureau, U.S. construction spending fell to an estimated seasonally adjusted annual rate of $1.07 trillion in October, down 4.6 percent from a year earlier. As expected, much of that decline comes from the housing sector, where construction spending in October was reported at $346.9 million, down a whopping 23.6 percent from $454.2 million in October 2007.

The Washington, D.C.-based National Association of Home Builders reports that confidence among homebuilders remained at record lows in December. According to the U.S. Commerce Department, new home starts fell 18.9 percent to a seasonally adjusted annual rate of 625,000 in November, which was the steepest monthly decline since March 1984. Applications for building permits, a sign of future activity, declined 15.6 percent.

The decline in housing starts has affected certain large galvanized steel-consuming markets such as HVAC and appliances, notes Dworznik.

There are also indications that nonresidential construction is starting to falter. While nonresidential construction spending overall rose 8.3 percent year over year, much of that came from lodging, office, health care, education and manufacturing. Commercial construction actually fell 11.2 percent.

“While nonresidential construction has been holding up somewhat, that sector is about to fall hard and fast, as well,” Anton says. “When no one is building housing subdivisions, there is no need for shopping centers. Also, with all of the layoffs, there is no need for office buildings or warehouses. I think that will continue to fall all of 2009 and probably through 2010—even after many other markets have rebounded.”

Additionally, the credit crisis has affected nonresidential activity, says Steelscapes’ Ramey, as some construction jobs have been delayed due to increased requirements by lenders demanding more financial backing up front. “In many cases people want to build, but they can’t get financing with the requirements from the lending companies being so steep. But I think we will see building come back once credit becomes more available.”

Ramey is also encouraged by the incoming Obama administration’s plan to promote infrastructure spending, as many infrastructure projects require a lot of galvanized steel. “I’m hopeful that things will get better with the new administration and with the measures that the current administration has taken to stabilize the financial markets,” she adds.

Viking’s Sternard is fearful that weakening global markets and the strengthening of the U.S. dollar could be bad news for galvanized steel suppliers. Through much of 2008, the market for products with a lot of galvanized content, such as heavy equipment and grain bins, received a significant boost from the export market. “It isn’t the same situation anymore, as now U.S. product prices aren’t as competitive. With the world economies softening, there is less demand for U.S. products overseas,” he says.

While the stronger U.S. dollar might encourage greater imports of galvanized steel, most domestic suppliers are unconcerned. There aren’t many import offers in the marketplace at this point, Dworznik says, and buyers are cautious.

“I don’t think people have much of an appetite for foreign goods right now,” Busse adds. “No one knows where prices will be in a few months, or even in a few weeks.”

In response to the lackluster demand, many major mills are closing or idling capacity. U.S. Steel Corp., Nucor Corp., California Steel Industries and ArcelorMittal, among others, have either already begun curtailing production or will do so in 2009.

Ramey’s company, Steelscape, took the last two weeks of 2008 off. “Many companies tend to take time off at the end of the year, but this year more companies are doing so. Most of these cuts are temporary, but how temporary depends on what the market does in 2009. Everyone is currently in a wait-and-see mode,” she says.

It is difficult to pinpoint how much of the industry’s production cutbacks will affect galvanized product, as galvanized capacity is often tied to mills’ other steelmaking operations. ArcelorMittal, which has stated that it will reduce its steel production by about 40 percent in North America and 35 percent globally, recently announced the closure of its steel finishing operations in Lackawanna, N.Y., and Hennepin, Ill. How much of this capacity involved galvanizing is unclear, as the company turned down an opportunity to comment on the market.

Other major galvanized steelmakers also declined MCN’s interview requests. Their reluctance to elaborate in itself could be an indicator of the market’s distress.

Wheeling-Nisshin Inc., Follansbee, W.Va., a steel finishing company that operates aluminizing and galvanizing lines, says it will temporarily lay off about 90 of its 175 employees for a week in January.

Nippon Steel Corp. and ArcelorMittal have halted construction of an expansion project at their I/N Kote operation in New Carlisle, Ind.

The project, to add a new 540,000-ton continuous hot-dip galvanizing line, will be on hold “until such time when the partners will gain a perspective of recovery of the North American auto production,” Nippon officials say. The line was to be completed in late 2010.

Some observers express concern that the mills’ production cuts may have exceeded the decline in steel demand, leading to a potential shortfall in supply. “There could be a short period of time before supply catches up with a possible pickup in demand,” says Busse, because of the longer time it takes integrated mills to get capacity back online.

The reversal could occur early in 2009 when the current inventory-destocking period comes to an end, adds Busse. “People will start buying again, although not as much as last year. It will continue to be a rough marketplace.”

Any tightness in supply is likely to be short-lived, says Sternard, since it will be the result of inventory replenishment and not any true increase in underlying demand.

Looking ahead, O’Neal’s Campo believes the first half of 2009 may resemble the back half of 2008, with a downward trajectory. Others shared this bearish sentiment.

“We are all hoping that as the year progresses it gets better, but currently there are no signs it will do that,” says Dworznik, who feels the outlook is heavily dependent on the fate of the manufacturing sector.

Anton does not foresee any improvement in the galvanized market this year. He is calling for a weak 2009 and tepid increases in 2010, followed by good increases in 2011-12.

Nonetheless, he is optimistic most galvanized steelmakers will be able to hold out until then. “They were incredibly profitable from 2004 to the first half of 2008. Those profits should help companies make it through the next few years.”

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