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Metals outlook better, but rising rates may stem price increases
Sunday, April 09, 2000 By Len Boselovic, Post-Gazette Staff Writer
U.S. steel producers are enjoying better pricing than last year, but rising interest rates and raw material costs may dampen what's shaping up to be a pretty decent year.
Prices are firming because of stronger markets overseas and trade complaints filed by U.S. steel producers following a surge in imports in mid-1998.
In the first quarter, steelmakers raised prices about 5 percent for sheet steel, which accounts for more than half of U.S. shipments. They have announced second quarter increases of 5 percent or more, and analysts expect the increases to stick since mills are running flat out to meet demand. Prices for plate, bar and other types of steel are recovering from the import surge.
January shipments were up 23 percent from year-ago levels, and January orders were the second highest for that month on history, said Salomon Smith Barney steel analyst Michelle Applebaum.
"Steel markets in virtually every region of the world continue to improve, with South Korea and Europe showing the strongest recoveries," Applebaum recently told clients.
Says Fred Harnack, general manager of U.S. Steel's Mon Valley Works: "We have tremendous demand for our products right now."
Donaldson, Lufkin & Jenrette's Scott Morrison believes news on the pricing front could turn negative in the second half, traditionally the time when steel demand softens. Charles Bradford, an independent analyst, says new steel plants coming on line later this year also may make it harder to keep prices rising.
"A lot of people would like to raise prices July 1, but I haven't seen a third-quarter price increase stick," Bradford said.
Just how much producers benefit from rising prices depends on how much they sell through long-term contracts with carmakers and other major customers. Many of those contracts determined this year's prices months ago and do not allow steelmakers to pass on rising costs for scrap and other raw materials. The recent steel price increases apply to so-called spot market sales.
Take AK Steel, which sells 75 percent of its steel through long-term agreements.
Prices under those contracts will be about 1 percent lower this year than they were in 1999. However, AK Steel forecasts prices for the other 25 percent of its sales should rise about 5 percent. On balance, the Middletown, Ohio, steelmaker expects that its average ton will sell for 3 to 4 percent more than it did last year.
Although stronger overseas markets are helping, imports continue to be a concern for domestic producers.
They topped 2.9 million tons in January, up nearly 9 percent from year-ago levels. Imports of slabs and other semifinished steels increased 100 percent, a reflection of the domestic industry's inability to produce all the raw steel their customers need. Rather than invest millions in expanding their steelmaking capacity, domestic producers purchase the semifinished steel overseas and convert it into higher value products.
With demand strong, slab-short U.S. producers will be paying more to supplement their production. Overall raw material prices, which began increasing late last year, remain a concern. AK Steel expects to pay $100 million more for raw materials this year, with rising scrap and slab prices accounting for the bulk of the increase.
While AK Steel may feel the pinch, modest raw materials price increases should benefit U.S. Steel, which produces more iron ore than its mills consume, Applebaum said. She's made the nation's biggest steel producer her top stock in the sector, setting a target price of $40 for U.S. Steel shares.
Allegheny Technologies and other stainless steel producers have instituted surcharges to protect themselves against rising prices for nickel, which have hit a five-year high. Nickel is a key ingredient in stainless steel.
The Federal Reserve Board's inflation-fighting interest rate increases could temper steel demand. Auto and appliance makers, home builders and other big steel customers are sensitive to higher interest rates. Midwest Research analyst David S. MacGregor sees indications those customers may not be ordering as much in the months ahead.
"Higher interest rates are starting to have a little bit of an impact on these traditional steel markets," MacGregor says.
The year also could bring further consolidation in the steel industry, which witnessed AK Steel's acquisition of Armco last year. Much of the speculation focuses on LTV Steel and Bethlehem Steel, whose stocks have been battered enough that they may present a tempting bargain. Many analysts believe consolidation is inevitable, but so far the mating ritual has all the excitement of an Animal Planet special.
Steelmakers have been much more restrained than aluminum producers when it comes to merging.
Government regulators in the United States and Europe are reviewing two blockbuster aluminum mergers, including Alcoa's offer to acquire Reynolds Metals of Richmond, Va. While opponents of the merger argue it would reduce competition, most analysts believe antitrust concerns can be resolved and that the acquisition will clear government regulators. Alcoa expects to complete the purchase by midyear.
Even as it waits for word on Reynolds, the world's biggest aluminum producer seeks other avenues of growth. Last month, it announced plans to acquire Cordant Technologies for $2.9 billion in cash and assumed debt. Cordant would expand Alcoa's presence in the aerospace business, improve its offerings to automotive customers and provide entry into several new markets. President Alain J.P. Belda says Cordant is just another step in Alcoa's plan to become a $40 billion company by 2004.
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