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The World Steel industry is rather concentrated in structure, with a few producers accounting for the lion’s share of sales.
Steel products are classified into four broad categories: flat steel products, long steel products, scrap and semi-finished products. Flat products include plates, hot-rolled strip and sheets and cold-rolled strip and sheets. The long steel product category comprises wire rods, beams, reinforced bars and merchant bars. The products under both these categories are rolled from steel slabs, which are considered as unfinished or semi-finished products that are generally not sold.
Historically, the automotive and construction markets have remained the largest consumers of steel, absorbing more than half of the total steel produced. Large automakers such as General Motors Company (GM - Analyst Report), Ford Motor Company (F - Analyst Report), Toyota Motor Corporation and Honda Motor Company (HMC - Analyst Report) depend upon the steel industry. Other steel consuming industries include appliances, agricultural implements, converters, containers, energy, electrical equipment and industrial machinery.
World crude steel production has continued to show a steady increase since April 2009 on the back of a moderate rise in demand and the resumption of work at idled facilities. China has emerged as a major producer and consumer of steel.
According to the World Steel Association (WSA), world crude steel production was 124 million metric tons (mmt) in September 2011, up 9.7% year over year. ArcelorMittal (MT - Analyst Report) -- a leader in all major global carbon steel markets, including automotive, construction, household appliances and packaging, with leading R&D and technology -- produced 90.6 million tons of crude steel in 2010, representing approximately 6% of world steel output. In the first nine months of 2011, the company produced 70.2 million tons of crude steel.
In the first nine months of 2011, Asia produced 728.3 mmt of crude steel, an increase of 9.5% versus the year-ago period. The European Union (EU) produced 135.7 mmt of crude steel in the first three quarters of 2011, up by 4.3% compared with the corresponding three quarters in the previous year. North America’s crude steel production in the first nine months of 2011 was 89.3 mmt, 6.1% higher than the first nine months of 2010.
In the EU, Germany’s crude steel production for September 2011 was 3.7 mmt, an increase of 10.3% on September 2010. Italy produced 2.6 mmt of crude steel in September 2011, 11.5% higher than September 2010. France produced 1.3 mmt of crude steel in September 2011, up 4.2% compared to September 2010. China’s crude steel production for September 2011 was 56.7 mmt, an increase of 16.5% year over year.
Elsewhere in Asia, Japan produced 8.9 mmt of crude steel in September 2011, a decrease of 3.8% compared to the same month last year. South Korea’s crude steel production for September 2011 was 5.5 mmt, up 17.7% compared to September 2010.
The US produced 7.2 mmt of crude steel in September 2011, an increase of 8.9% compared to September 2010.
Turkey produced 3.0 mmt of crude steel in September 2011, 16.9% higher than September 2010.
Brazilian crude steel production for September 2011 was 2.8 mmt, 3.8% higher than September 2010.
The world crude steel capacity utilization ratio of the 64 countries in September 2011 rebounded slightly to 79.1%, 1.8 percentage points higher than in August 2011. Compared to September 2010, the utilization ratio in September 2011 increased by 3.5 percentage points.
With the global economy picking up in late 2009, the steel industry started seeing signs of improvement. However, given its economic sensitivity, we expect global steel demand to improve gradually, in line with the recovery in the user industries, especially automotive and residential construction.
According to World Steel Association, in the first half of 2011, the worldwide demand for steel has remained on the improving trend line. This is despite a series of anticipated and unanticipated negative developments: the ongoing euro area sovereign debt crisis, the earthquakes in Japan , the political/social unrest in some countries of the MENA region leading to the related surge in oil prices and the tightening of government monetary measures in many emerging economies.
Today the global economy is facing increased uncertainty over the ongoing turmoil in the financial markets and how it will affect the real economy. The WSA’s current forecast for 2012 assumes that developing economies continue to drive global growth and the policy response to the European sovereign debt crisis prevents increased volatility in the equity and financial markets.
WSA expects to see growth performance varying widely across regions. Not surprisingly, the recovery of steel demand in the developed world is expected to be slow, while most of the emerging and developing world should continue to enjoy robust growth in steel demand.
China’s apparent steel use in 2011 is expected to increase by 7.5% to 643.2 mmt following an 8.5% growth in 2010. In 2012, steel demand is expected to maintain a 6.0% growth, which will bring China’s apparent steel use to 681.6 mmt.
In 2011, India’s steel use is forecast to grow by 4.3% to reach 67.7 mmt due to economic growth. In 2012, the growth rate is forecast to accelerate to 7.9%.
Apparent steel use in the US is forecast to rebound strongly by 11.6% in 2011. In 2012, steel use in the US is expected to grow by 5.2% to 93.8 mmt, bringing it back to 87% of the 2007 level. For NAFTA as a whole, apparent steel use will grow by 9.0% and 4.9% in 2011 and 2012, respectively.
In Central and South America, apparent steel use is forecast to grow by 4.7% in 2011 to reach a historical high of 47.8 mmt. In 2012, the region’s apparent steel use is forecast to grow by 9.8% to reach 52.4 mmt, almost 28% higher than the 2007 level.
European countries continued to show divergent recovery paths in 2011. While steel demand in Germany and Poland are expected to grow at impressive rates, steel demand in Spain in contrast is expected to record a sluggish 1.7% recovery.
Overall, apparent steel use in the EU is projected to increase by 7.0% in 2011 to 155.0 mmt. In 2012, the growth of steel demand is expected to stall in most of the European countries with the notable exception of Poland, which is forecast to post an impressive 9.5% growth. Overall, apparent steel use in the EU is forecast to grow by 2.5% to around 158.9 mmt in 2012, bringing it back to only 80% of the 2007 peak.
Japan’s steel use is expected to decline by 2.7% to 61.8 mmt in 2011 due mainly to the disruptions caused by the earthquake. In 2012 apparent steel use in Japan is forecast to show a growth of 0.8% to reach 62.3 mmt, 77% of the 2007 level.
In the CIS, apparent steel use is forecast to grow by a strong 14.4% in 2011 and then by 7.5% in 2012. These projections will bring the region’s apparent steel use in 2012 to almost 60 mmt, a new high for the region.
Steel demand in the MENA region is expected to fall by 0.9% in 2011, mainly due to downward revisions from North African countries. However, boosted by high oil prices, steel use in the region is forecast to resume growth in 2012 at a rate of 8.7%. Given that the political situation in the region is far from settled, there exist considerable uncertainties about the current forecasts for this region.
As per WSA’s forecast by 2012, steel use in the developed world will still be at 15% below the 2007 level whereas in the emerging and developing economies, it will be 44% above. In 2012, the emerging and developing economies will account for 73% of world steel demand in contrast to 61% in 2007.
The steel industry has recorded high growth rates in both production and consumption over the past few years, benefiting from soaring steel demand in the automobile and construction sectors before the recession. Moreover, cost effective and highly efficient steel-making technologies have lifted the demand for US steel in the Middle Eastern and Asian countries.
Here, we will discuss the recent results of a few companies, whose results were aided by higher selling prices and increased shipments, and their growth expectations.
ArcelorMittal reported diluted net earnings of 19 cents per share in the third quarter of 2011, much below the Zacks Consensus Estimate of 51 cents and last year’s 89 cents per share. Total steel shipments in the third quarter of 2011 were 21.1 million metric tons compared with 20.5 million metric tons in the year-ago quarter.
Quarterly revenues increased 22.6% year over year to $24.2 billion from $19.7 billion in the year-ago quarter and decreased 3.6% sequentially from $25.1 billion. Sales were down sequentially primarily due to lower average steel selling prices (-1.7%) and lower volume of shipments (-4.9%).
The company’s EBITDA in the second half of 2011 is expected to exceed the level achieved in the comparable period of 2010. The company expects shipments in fourth quarter 2011 to be lower sequentially, reflecting economic uncertainties leading to customers adopting a “wait and see” approach.
Higher iron ore and coal volumes will continue to be a positive underlying driver. The company’s iron ore and coal production is expected to increase by 10% and 20% respectively, by the end of 2011 as compared with 2010.
In light of the recent market uncertainty, the company is focusing on core growth capital expenditure. This will result in postponement of some planned steel investments. Accordingly, full-year 2011 capital expenditure is expected to be below the previously targeted level of $5.5 billion. Our long-term recommendation on ArcelorMittal remains Outperform, though it has a Zacks #3 Rank (Hold).
The commercial metals company AK Steel Holding (AKS - Analyst Report) posted its third-quarter 2011 results, delivering a net loss of $3.5 million or $0.03 cents compared with a net loss of $59.2 million or $0.54 cents during the year-ago quarter. However, results were below the Zacks Consensus Estimate of $0.00 cents per share.
Net sales, as reported by the company, were $1,585.8 million on the shipments of 1,368,800 tons versus $1,575.9 million and 1,465,800 tons in the prior-year quarter. Net sales also missed the Zacks Estimate of $1,662 million. Average selling price for the third quarter of 2011 was $1,158 per ton, up 8% year over year, but down 2% sequentially.
Value-added shipments for stainless/electrical increased to 229.3 tons compared with 226.9 tons in the prior-year quarter. Value-added shipments for Coated, Cold-rolled and Tubular product decreased to 577.2, 278.3 and 32.4 tons, respectively, compared with 624.4, 322.5 and 33.2 tons, respectively, in the year-earlier quarter.
Non-value-added shipments including Hot-rolled increased to 222.6 tons from 213.6 tons in the year-earlier quarter. Non-value-added shipments including secondary products decreased to 29.0 tons from 45.2 tons in the prior-year quarter. AK Steel currently retains a Zacks #3 Rank (short-term Hold rating). Our long-term recommendation also remains Neutral.
Allegheny Technologies Inc. (ATI - Analyst Report) also earned $70.6 million or 63 cents per share (excluding acquisition related expenses of $8.3 million, net of tax) in the third quarter of 2011 up from $1.0 million or 1 cent in the same quarter of 2010. Results exceeded the Zacks Consensus Estimate of 61 cents.
Sales in the quarter increased 28% to $1.35 billion, driven by higher shipments for most high-value products, higher raw material surcharges and increases in average base selling prices for many products. However, sales were lower than the Zacks Consensus Estimate of $1.39 billion.
Segment operating profit surged 157% to $161.8 million, or 12.0% of sales, from $63.0 million, or 6.0% of sales, in the third quarter of 2010.
Allegheny expects to continue to benefit from its new alloys and products, diversified global growth markets and differentiated product mix over the next 3 to 5 years. Demand is expected to be strong for its mill products and highly engineered forged and cast components from the aerospace market.
Strong growth is also expected from the oil and gas/chemical process industry for its titanium-based alloys, nickel-based alloys and specialty alloys, and tungsten products. We currently have a Neutral long-term recommendation on the stock, which is the same as reflected in the Zacks #3 Rank (Hold) rating.
Nucor Corporation (NUE - Analyst Report) reported net earnings of $181.5 million, or 57 cents per diluted share (excluding special items) in the third quarter of 2011, beating the Zacks Consensus Estimate of 51 cents per share. This was a significant increase from $23.5 million, or 7 cents per diluted share (excluding special items) reported in the year-ago quarter. Nucor’s third-quarter earnings exceeded those of last year's quarter, but they declined from the second quarter of this year on lower steel prices and significantly lower metal margins.
Consolidated sales surged 27% year over year to $5.25 billion, beating the Zacks Consensus Estimate of $4.86 billion. The growth was attributable to an increase of 24% in average price per ton and a rise of 3% in shipments (to 5.8 million tons) to outside customers. The company’s end-markets such as automotive, heavy equipment, energy and general manufacturing demonstrated strength compared to 2010 but showed very little improvement compared with the first half of 2011.
Steel mill shipments grew 9% to 4.2 million tons during the quarter. The average scrap and scrap substitute cost per ton accelerated 27% to $449.
Although Nucor expects to see only slight improvement in demand in its non-residential construction markets through the end of 2011, it remains optimistic about its combined construction businesses (steel mills and downstream facilities) and anticipates that it will continue to operate profitably.
Nucor expects fourth-quarter earnings to be below its third-quarter level. The company expects margin compression in the sheet market in the fourth quarter of 2011. Furthermore, the company forecasts a smaller compression in plate margins due to imports. The magnitude of margin compression will be favorably impacted by expected lower scrap costs through the quarter.
The company has a Zacks #3 Rank (Hold) Rank on its stock.
The global steel industry is capital intensive, cyclical, highly competitive and has historically been characterized by overcapacity. Capacity utilization rates were, however, low (around 60%) at the beginning of 2009, in response to the much softer demand. With steel demand picking up in the latter half of the year, the world crude steel capacity utilization ratio in January 2011 was 75.6%, up from 73.3% in December 2010.
Steel makers continue to add capacity besides resuming operations at the idled facilities, inspired by the expected rebound in steel industry in the longer term.
The steel industry has long witnessed volatility in prices with a large spot market. Steel prices rose steadily for most of 2008, after which there was a downtrend. Lower prices had an adverse effect on steel producers, who recorded lower revenues and margins, and had to write down finished steel and raw material inventories.
The period witnessed major steel producers slashing production to minimize inventory accumulation. U.S. Steel Corporation (X - Analyst Report), the eleventh-largest steel producer worldwide, slashed production by almost 62% during the second quarter of 2009, while Korean steel maker POSCO (PKX - Analyst Report) cut production by about 15%. This was the first time in its history that POSCO was forced to adopt such a measure, which is a proof of the adverse operating environment.
Steel prices globally have fallen from highs marked earlier this year in 2011 as the industry hasn't shaken off a pronounced slowdown in purchasing and demand since mid-year. A weakening in orders and buying sentiment first took hold this year in Europe, before spreading to North America and Asia.
Although steel prices have been stabilizing since the latter part of 2009, they are significantly below the pre-crisis level. We believe that a sustained recovery in steel prices remains uncertain in the backdrop of sluggish economic activity.
Factors Affecting Steel Prices
Chinese Imports: The steel industry is also affected by fluctuations in steel imports–exports and tariffs. China is the largest steel producer globally, and balances its domestic production and consumption, which is an important factor in global steel prices.
Consumers in the U.S. are importing cheaper steel from China, which is forcing domestic steel producers to sell at lower prices, and even at a loss, sometimes. To this end, the U.S. government has been imposing anti-dumping duties on Chinese steel imports.
Economic Sustainability: Concerns about the sustainability of economic recovery and queries regarding China’s growth momentum come into play in the pricing equation. This relatively uncertain Chinese outlook, coupled with a still tentative recovery in the developed world, is expected to weigh on prices.
Threat from substitutes: Steel has many substitutes like aluminum, which replaces it in the automotive markets. Cement, composites, glass, plastic and wood are also used as steel substitutes. This significantly influences market prices and demand for steel products.
Raw Material Trends
The key input for steel production is iron ore. Apart from this, coking coal and coke, scrap, electricity and natural gas are also used as inputs in steel production. The raw materials industry is highly concentrated with only three major players -- Vale (VALE - Analyst Report), Rio Tinto (RTP) and BHP Billiton (BHP - Analyst Report) -- having significant pricing power. The risk lies in further consolidation among raw material suppliers. For instance, the announced iron ore joint venture between mining companies BHP Billiton and Rio Tinto would further increase the pricing power of both the suppliers.
Steel makers would face higher production costs if suppliers shift to sales based on spot prices from the long-term fixed price contract system, as spot prices for most of the raw materials, especially iron ore, remained high from 2006 through 2008.
Iron ore prices have remained volatile during most of 2010 and are expected to rise sharply in 2011. ArcelorMittal’s iron ore and coal mining projects have been a key focus in the recent years and this focus is only expected to intensify in the medium term, as the company has a goal to secure 100 million tons of iron ore supply from its own mines and under strategic long-term supply contracts on a cost-plus basis.
Mergers and acquisitions (M&A) have remained an important growth strategy in the steel industry. M&A activities prevent additional steel capacity, providing production efficiency and economies of scale. The biggest example is Mittal Steel’s acquisition of Arcelor in 2006. The Tata Steel and Corus merger in 2008 is another instance of industry consolidation.
Consolidation has been primarily driven by the urge to increase global scale and operations, and access new markets. The industry is likely to see more M&A activity in the coming years as the industry players prepare themselves for a recovery in the long run.
Prospects for 2012 have remained mildly positive despite high levels of uncertainty surrounding the outlook for end-users in the EU. Activity in the manufacturing sectors and in construction will continue to grow, albeit in the case of the manufacturing industry at a significantly slower pace than in 2010 and 2011.
Particularly in the first half of 2012, real steel consumption is forecast to grow only modestly. From mid-2012 onwards improving end-user fundamentals should result in a modest acceleration in consumption growth.
In China, the government’s expansionary economic policies, easy credit and construction initiatives have thus far sustained demand. But with China attempting to rein in its overheated property sector and engineer a soft landing for its economy, steel demand will most likely soften noticeably in the coming months. This relatively uncertain Chinese outlook, coupled with a still tentative recovery in the developed world, is expected to weigh on prices.
In the short term, we are neutral on steel manufacturers like AK Steel (AKS - Analyst Report), U.S. Steel (X - Analyst Report) and Nucor (NUE - Analyst Report).
AK Steel’s cost structure is higher than its peer group due to a greater reliance on external supply of raw materials such as carbon scrap, purchased slabs, iron ore and purchased coke. Iron ore is the key raw material in steel manufacturing operations.
However, industry giants with integrated business models like U.S. Steel and ArcelorMittal have an edge over their peers. Both steel makers have substantial captive sources of iron ore and coal and source about 75%–80% of their coke and iron ore requirements from owned and/or operated facilities.