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),
Ford Motor Company
(F),
Toyota Motor Corporation (TM) and
Honda Motor Company (HMC) depend upon the steel
industry. Other steel consuming industries include appliances,
agricultural implements, converters, containers, energy, electrical
equipment and industrial machinery.
Production
The global steel industry has been going through major changes
since 1970. 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.
According to the World Steel Association (WSA), world crude steel
production was 127 million metric tons (mmt) in April 2011, an
increase of 5.0% from April 2010. In 2010, world crude steel
production reached a record 1,414 mmt, up 15% year over year.
ArcelorMittal (MT) is the world’s largest steel
company, with crude steel production of 90.6 million tons in
2010.
China’s crude steel production for April 2011 was 59 mmt, up 7.1%
year over year. Japan produced 8.4 mmt of crude steel in April
2011, down 6.3% year over year due to the production disruption
caused by the recent earthquake and tsunami. South Korea
experienced an increase of 15.9% from April 2010, producing 5.9 mmt
of crude steel in April 2011.
The US produced 7.1 mmt of crude steel in April 2011, an increase
of 2.1% year over year.
In the EU (European Union), Germany’s crude steel production for
April 2011 was 3.8 mmt, down 1.7% year over year. Italy’s crude
steel production was 2.5 mmt, up 9.8% year over year. Spain
produced 1.5 mmt of crude steel in April 2011, down 5.8% year over
year.
Turkey’s crude steel production for April 2011 was 2.8 mmt, up
14.3% year over year. Egypt crude steel production in April 2011
was 0.5 mmt, down 0.8% year over year.
In April 2011, the world crude steel capacity utilization ratio of
the 64 countries was 82.8%, up 0.9% than in March 2011. Compared to
April 2010, the utilization ratio remained unchanged.
Growth Trends
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, steel demand in the U.S. was
down 41.6% in 2009 to 57.4 million tons. However, with the economy
in recovery mode, production increased by 7.7% to 7.1 million
metric tons in March 2011 from 6.6 million metric tons in February
2011. This marks a 0.2% decrease from the March 2010 production
level.
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.
As per the WSA, India was the fourth largest producer of crude
steel during January to September 2010. India produced 50.1 million
tons crude steel during the period. However, according to the
industry estimates, India is likely to be the second-largest
producer of crude steel in the next four years from its current
fourth place.
In the short term, local steel demand in Japan will be lower as the
country's carmakers have suspended production following the
earthquake. However, the need for reconstruction of
earthquake-devastated areas offers the steel industry significant
hope. In the medium term though, steel demand will likely
surge.
However, WSA expects the Chinese steel consumption to decelerate in
2011 as China tries to ease back on its own economic boom.
Here, we will discuss recently quarterly results of a few
companies, whose results were aided by higher selling prices and
increased shipments, and their growth expectations.
Steel giant ArcelorMittal reported diluted net earnings of 69 cents
per share in the first quarter of 2011, above the Zacks Consensus
Estimate of 47 cents as well as last year’s 42 cents per share.
Total steel shipments in the first quarter of 2011 were 22.0
million metric tons compared with 21.0 million metric tons in the
year-ago quarter.
Quarterly revenues increased 27.3% year over year to $22.2 billion
from $17.4 billion in the year-ago quarter and increased 7.2%
sequentially. Sales were higher over the previous quarter primarily
due to higher shipment volumes (+4%). However, the results were
slightly below the Zacks Consensus Estimate of $22.8 billion.
For the second quarter of 2011, management expects EBITDA to be
approximately $3.0 - $3.5 billion. Steel shipment volumes, average
steel selling prices and EBITDA/ton are expected to increase
sequentially, while capacity utilization levels are expected to
improve to approximately 80%.
Additionally, operating costs are expected to increase sequentially
due to higher raw material prices. The company also expects mining
production and profitability to improve sequentially in the second
quarter.
The company expects working capital requirements to increase in
line with the increased activity levels and prices resulting in
further increase in net debt in the second quarter. The company
expects its full-year 2011 capital expenditure to reach $5 billion,
of which $1.4 billion is estimated to be spent on mining.
The commercial metals company AK Steel Holding (AKS) posted
its first-quarter 2011 results delivering an EPS of 8 cents
compared with 2 cents during the year-ago quarter and striding
ahead of the Zacks Consensus Estimate of a loss of a cent.
Net sales were $1,581.1 million on the shipments of 1,423,100 tons
versus $ 1,405.7 million and 1,385,800 tons in the prior-year
quarter. It however, missed the Zacks Estimate of $1,609 million.
The improvement in shipments was mainly due to higher pricing,
which increased 9% on a year-over-year basis to $1,109 per ton.
The company expects shipments in the second quarter of fiscal 2011
to be in the range of 1,500,000 and 1,550,000 tons, indicating a
strong increase over the first-quarter shipments. The company also
anticipates its average per-ton selling price to be 7% higher
compared with the first quarter. The operating profit is expected
to be approximately $65 per ton for the second quarter.
AK Steel is uniquely positioned to focus on products with high
margins. Electrical steel continues to be the company’s strongest
product line, with demand recovering in the U.S. and abroad, though
at a slower rate. AK Steel is operating its plants at above 80%
capacity and is well positioned to serve the end markets when the
demand rebounds.
However, higher input costs, particularly iron ore, are eroding
margins of the company. Iron ore pricing concerns have led to a
negative outlook for steel manufacturers.
Allegheny Technologies Inc. (ATI) also earned
$56.3 million, or 54 cents per share, in the first quarter of 2011,
surpassing the Zacks Consensus Estimate of 49 cents and last year's
$18.2 million, or 18 cents per share. First-quarter results were
impacted by $5.8 million, or $0.05 per share, for previously
announced executive retirements and a discrete tax item.
Quarterly revenues soared 36.5% year over year to $1.23 billion
from $899.4 million on higher shipments and rising raw material
prices. Revenues were above the Zacks Consensus Estimate of $1.12
billion.
Segment wise, revenue increases were distinct in the Engineered
Products segment (46%) and in the Flat-Rolled Products segment
(38%), while sales in the Higher Performance Material segment
increased (32%).
Allegheny continues to expect 2011 revenue growth to be in the
range of 15% to 20% compared with 2010, and expects segment
operating profit to be approximately 15% of sales. The company
targets a minimum of $100 million in new gross cost reductions.
Capital expenditures are forecasted at $300 to $350 million.
During the second quarter of 2011, management anticipates utilizing
approximately $395 million of cash on hand to fund the cash portion
of the merger consideration for the previously announced
acquisition of Ladish and to pay related fees and expenses.
Currently, Allegheny has a short-term (1 to 3 months) Zacks #2 Rank
(Buy).
Nucor Corporation (NUE) reported a stupendous
increase in profit to $190.8 million or 56 cents per share
(excluding special items) in the first quarter of 2011 from $55
million or 15 cents per share (excluding special items) in the same
quarter of 2010. With this, the company has beaten the Zacks
Consensus Estimate by 21 cents per share and its own guidance of 30
cents–35 cents per share.
Consolidated sales surged 32% to $4.83 billion due to a 22%
increase in average price per ton and a 9% rise in shipments (to
6.0 million tons) to outside customers. It was higher than the
Zacks Consensus Estimate of $4.43 billion.
Steel mill shipments grew 10% to 5.2 million tons during the
quarter. The average scrap and scrap substitute cost per ton gained
33% to $424.
Nucor expects results in the second quarter to improve over the
first quarter, despite some market weakness that may impact results
at the end of the second quarter. Further, the company continues to
see slow but steady improvement in real demand in certain end
markets.
The most challenging markets for its products are associated with
residential and non-residential construction. The company retains a
Zacks #3 (Hold) Rank on its stock.
According to the World Steel Association (WSA), in 2011 world steel
demand is expected to grow by 5.9% to reach a historical high of
1,359.2 mmt, up from 1,339.7 mmt predicted in October 2011. While
2012 global steel consumption is forecast to rise 6% to 1,440.6
mmt, the WSA noted that the forecast was made prior to the Japanese
earthquake, which would likely lead to steel demand coming in below
63 mmt estimated by the association in 2011, while steel
consumption will probably be higher than the 2012 forecast of 63
mmt.
Industry Capacity
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.
Price Trends
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. The
U.S. Steel
Corporation (X), the eleventh-largest steel producer
worldwide, slashed production by almost 62% during the second
quarter of 2009, while Korean steel maker
POSCO
(PKX) 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.
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 import–export 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),
Rio Tinto (RTP) and
BHP Billiton (BHP) -- 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 dropped 5.7% to $168 a ton for ore with 62% iron content
delivered to China.
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. As part of this strategy, in January 2011,
the company announced the acquisition of Baffinland, which holds a
substantial undeveloped iron ore deposit in the Canadian territory
of Nunavut.
Consolidation
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.
Zacks Recommendation
Steel demand in the emerging markets outside China is expected to
grow strongly in 2011. 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 Holding Corporation (AKS),
Steel
Dynamics Inc. (STLD) and
Allegheny Technologies
Incorporated (ATI).
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.
AK STEEL HLDG (AKS): Free Stock Analysis Report
ALLEGHENY TECH (ATI): Free Stock Analysis Report
BHP BILLITN LTD (BHP): Free Stock Analysis Report
FORD MOTOR CO (F): Free Stock Analysis Report
GENERAL MOTORS (GM): Free Stock Analysis Report
HONDA MOTOR (HMC): Free Stock Analysis Report
ARCELOR MITTAL (MT): Free Stock Analysis Report
NUCOR CORP (NUE): Free Stock Analysis Report
POSCO-ADR (PKX): Free Stock Analysis Report
STEEL DYNAMICS (STLD): Free Stock Analysis Report
TOYOTA MOTOR CP (TM): Free Stock Analysis Report
VALE RIO DO-ADR (VALE): Free Stock Analysis Report
UTD STATES STL (X): Free Stock Analysis Report
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