Quarterly Earnings..Conversations with Mr. Bull and Mr. Gloom

Quarterly Earnings..Conversations with Mr. Bull and Mr. Gloom

Mr. Bull: Mr. Gloom, have you noticed all these incredible earnings reports lately? Nucor triples profits compared to last year, even while shipping less. Major steel service center Reliance Steel and Aluminum Co's sales are up 23.8%. Even loss making outfits such as Allegheny Technologies and Stelco are now making money. Seems like the North American industry is very healthy in every segment again. Are the gloomy times for American steel over - forever? Mr. Gloom: The North American steel industry is far from being healthy. In general, they had a bumper year last year, but then again, who didn’t? Some of the strong business was carried into the first quarter and that is why certain segments of the steel industry are still very profitable. A lower scrap price helps as well. But the fact is that the market has begun to slow down noticeably. Some blame it on the extremely wet winter, others on the sluggish economy. Most likely, it's a combination of both factors. Car sales in the US are slumping, leaving this industry deep in the red. The EU market is comatose and steel mills there, especially for long products, are willing to cut just about any deal. The world's largest steel market, China, is still strong, but it covers a lot of its needs internally. No, the strong cycle of last year is over and the world market will go through a transitional phase to a new and lower price plateau. We will witness almost daily price cuts in flat rolled and an array of cancellations. In time, this will show negative effects on the balance sheets of the domestic steel industry as well. All the strong financial announcements we are hearing about these days are compared to the first quarter of last year. How would today's numbers stack up against the fourth quarter of last year? Not very well, I bet. The first quarter of last year was still relatively weak, with the market taking off later Mr. Bull: We are looking at a completely different steel landscape today. Three years ago, there were too many competitors. The industry consolidated and they are now reaping its benefits. For wire rods, Gerdau Ameristeel emerged as the undisputed market leader. Nucor bought enough rebar mills to dictate prices to the rest of the market and they are still buying mills (Marion Steel). There has been further consolidation in the flat rolled area. There is more discipline in the marketplace now. Even if the demand is less than stellar, these well-managed companies will not let the prices go in to a death spiral again. They will cut production, export if necessary, and maintain price levels. I think that the producers now realize nothing good will come out of boosting production. They would rather focus on profits. Once the long winter is over, you will see how quickly things will pick up again. We will see even higher profits from these guys. Mr. Gloom: The consolidation is well understood but it does not change the inherent weak market situation. Gerdau can command all the market presence in the US they want. In the end they will face the alternative of lowering the price or cutting production. Export is too simplistic an answer. Exports for US wire rod can be done for specialty grades, but on the high volume carbon grades the US mills cannot compete with the world market price leaders of China, Turkey or South America. There are already the first signs of a distinct market weakening in wire rods. Major domestic suppliers have hinted they might fight import pricing aggressively. The spiral is pointed downward. It is not a death spiral yet, but it's going down. Mr. Bull: It's obvious the weakness is temporary. We had an unprecedented long and wet winter, not only in North America but also in Europe. This has delayed projects and construction so far, but the pent-up demand has been growing. Actually, all the economic indicators were pretty positive last month and there is no significant concern that the economy will slow down dramatically. Already, inventory levels have declined according to Metals Service Center Institute (MSCI). Service centers now have 3.1 months worth of steel inventories, and that the lowest level since last August. Canadians are experiencing the same situation. People are spooking themselves for no good reason, and once the demand is finally released, US manufacturers and stockists will find themselves short of inventories again. Mark my words. Mr. Gloom: Yes, the weather is a factor. And it snowed again in large parts of Ohio and Michigan this past weekend. No, the turnaround is not imminent. There may be a certain strengthening but it will not go back to the previously strong level. The inventory depletion is very spotty in certain sectors only. On the bread and butter items, e.g. rebars and hot rolled sheets, the inventory level remains high. Bottom line: The recovery will be milder than we think and it will be too late to turn the year around for most steel companies. Mr. Bull: I think the steel producers and their customers are experiencing a fantastic year so far so no turning around is needed. With a little luck, we’ll get out of this stagnant market shortly and things will be dandy again. Let’s leave it at that, for now…