The bankruptcy of RG Steel, the nation's fourth-largest steel producer, comes as its U.S. competitors face threats from falling prices, rising imports and demand that has never fully recovered since falling off a cliff in late 2008.
The Baltimore producer filed for federal bankruptcy court protection Thursday, saying cost cutting and other defensive measures were overwhelmed by weak industry conditions and the lack of a meaningful economic recovery.
Meanwhile, renewed questions surfaced about the strength of the recovery. The U.S. Department of Commerce said Thursday that the economy grew only 1.9 percent in the first quarter, down from its original estimate of 2.2 percent. Most economists are forecasting growth of about 2 percent in the current quarter and forecasts for the rest of the year and 2013 do not offer much more hope.
Those doubts are reflected in the depressed prices of cyclical steel stocks, which have fallen farther and faster than the broad stock market.
"I don't look for any good earnings. I don't see any catalysts on the horizon now. I think the best they can do is the status quo with declining prices," said Jeff Mindlin, a Pittsburgh investment manager.
There are some encouraging signs.
Industry analysts say the rebounding U.S. auto industry has given steel producers a shot in the arm. So have the makers of farm equipment and other large machinery and energy companies, which use large amounts of steel. And steel exports are up 16 percent this year.
But analysts say the recovery in the auto industry is muted by the fact that consumers are buying more fuel-efficient cars that contain less steel. And even though imports are below levels that caused a spate of bankruptcies in the 2000s, they are up 22 percent this year and account for nearly a quarter of U.S. steel purchases. Finally, analysts say the recovery is at least a year away in the non-residential construction industry, a major steel customer.
"That's what steel needs. That's between 30 and 35 percent of the market," said longtime industry analyst Charles Bradford.
"The profitability of the major steel producers is clearly under pressure," he wrote to clients this week, noting that the price of commodity sheet steel has fallen $100 a ton this year.
Mr. Bradford noted that construction of shopping malls, office buildings and other commercial buildings typically does not pick up until a year or two after the housing market bottoms. Some economists are hopeful that housing is at or near bottom.
U.S. mills are currently operating at 79 percent of capacity, up from 73 percent a year ago, according to the American Iron and Steel Institute, which represents North American producers.
"It's wonderful the steel market is as good as it is without non-residential construction and high imports," said John Tumazos, a Holmdel, N.J., metals analyst. "Autos, appliances and capital goods are steadily improving from the abysmal 2009."
Mr. Tumazos said U.S. steel producers have only themselves to blame for the recent rise in imports. He said they were too aggressive in raising prices, which opened the door to lower-priced imports. Mr. Bradford linked higher imports to steel diverted from European buyers because of economic turmoil there. Others blame failed U.S. trade policies, which enable higher-cost, less efficient, government-subsidized foreign producers to sell into the U.S. market.
"In the long term, that doesn't make economic sense," said Tony Taccone of First River, a Pittsburgh-based consulting firm.
RG Steel was cobbled together in March 2011 from the operations of three defunct U.S. steelmakers. Private equity concern Renco Group purchased the plants from Russian steel producer OAO Severstal for $1.2 billion, including $125 million in cash.
The mills, which can produce 7.5 million tons annually, are Sparrows Point in Baltimore, formerly operated by Bethlehem Steel; former Wheeling-Pittsburgh Steel plants in the Ohio Valley; and a former WCI Steel plant in Warren, Ohio.
Wheeling-Pitt went bankrupt in 2000, followed a year later by Bethlehem and three years later by WCI.
Creditors and analysts had anticipated RG's bankruptcy for weeks. RG Steel announced last week it would begin idling all of its mills June 4 for an undetermined period of time. The largest, Sparrows Point, employs 1,975. Company spokeswoman Bette Kovach declined to provide employment numbers for the other two plants. She said operations will be wound down as existing orders are filled. That should happen by the end of this month, she said.
RG intends to find buyers for all or pieces of the company's operations, but Mr. Taccone doubts there will be much interest.
"The RG assets are very bad assets with very poor cost structures and no raw materials positions," he said.
Mr. Tumazos anticipates some of RG's equipment may run again, but not before a more robust economic recovery takes hold.
Doubts about the course of the economy here and abroad have caused steel stocks to swoon in recent weeks. Mr. Taccone said fears of a slowdown in China are reflected pretty quickly in steel, coal and other commodity stocks.
The slide continued Thursday. Downtown-based U.S. Steel shares shed another $1.10, closing at $20.30. They are off 33 percent since April 2, when the S&P 500 peaked. Since then, the broad market index has fallen 8 percent.businessnews
Len Boselovic: firstname.lastname@example.org or 412-263-1941. First Published June 1, 2012 12:00 AM