AK STEEL HLDG (
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
Ford Motor Company
Toyota Motor Corporation
Honda Motor Company
) 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.
) -- 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
) 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
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
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
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
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
) 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
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
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
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.
) 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
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
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.
) 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
), the eleventh-largest steel producer worldwide, slashed
production by almost 62% during the second quarter of 2009, while
Korean steel maker
) 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
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.
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 --
) -- 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
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'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.
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