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Swept up: a wave of consolidation sweeps the steel industry in the aftermath of the section 201 tariff.

When President Bush passed the steel tariff, known as Section 201, one of the basic goals was for the domestic steel industry to "get its financial house in order."

In positing the tariff, the Bush Administration said that one of its goals would be to allow domestic steel companies to consolidate from a slew of ailing companies to fewer, but healthier, mills.

While the tariff was rescinded before it was scheduled to end, the impetus to consolidate caught fire.

Bill Heenan, executive director for the Steel Recycling Institute, Pittsburgh, says that while there are fewer domestic steel companies now, the ones still operating are much healthier.

Six years ago, no U.S. integrated steelmakers were among the top 10 global steel producers. However, with the flurry of consolidation brought on by the imposition of Section 201, two U.S. steel companies--International Steel Group (ISG), Cleveland, and U.S. Steel Corp., Pittsburgh--have moved into this category.

In fact, ISG has basically grown to become the largest steel company in North America by acquiring a host of closed or ailing mills, including LTV Steel, Acme Steel Corp., Bethlehem Steel Corp., Georgetown Steel and Weirton Steel.

While some other companies have also acquired capacity, some observers question whether this is a wise move. Some naysayers note that the steel industry is cyclical and adding capacity when markets are climbing could result in more layoffs when steel demand declines.

At the same time, the specter of the Chinese steel industry is weighing on the overall market. Significant steel capacity is coming online in China. Far from the smaller, antiquated steel operations that used to dot the Chinese landscape, these newer facilities are considered "world class." As such, these mills will be able to produce various grades of steel more cost-effectively than older, less efficient mills.

THE IMPACT OF 201. Opinions are mixed concerning the impact Section 201 had on the steel industry.

Charles Bradford, a steel industry analyst and outspoken critic of Section 201, says that the overall impact on the domestic steel industry has been less than positive.

While one of the goals of the tactic was to force steel mills to consolidate, the reality is that a number of companies snapped up older, less-efficient operations. Some steel companies also sought efficiency through the restructuring of labor contracts.

Conversely, some fairly efficient steel mills found themselves in a more difficult position, having to compete with the newly structured operations. Bradford says AK Steel, headquartered in Middletown, Ohio, fits this description.

The weakening U.S. dollar has been a significant advantage for domestic steel companies. Although the dollar has strengthened lately, if had been fairly weak compared to the Euro and to a number of other foreign currencies during the last year.

The disparity has allowed steel mills in the United States to realize a much greater competitive advantage, especially for offshore shipments. This has made exporting more lucrative, further boosting the domestic steel industry, Heenan says.

With the steel industry showing signs of a more robust market, "Now you can get an optimization of facilities. They [steel companies] are reaching a higher level of capacity," he says.

Statistics from the American Iron & Steel Institute (AISI), Washington, bear this out. According to the most recent figures available, domestic steel production is up close to 11 percent in the first five months of this year compared to figures from the same time last year.

Nancy Gravatt, a spokeswoman for AISI, adds that U.S. steel mills shipped slightly more than 10 million net tons in Match, a 10.1 percent increase from the 9.1 million net tons shipped last March, and a 10.3 percent increase from the 9.1 million net tons shipped in February 2004.

This improved environment has given some steel companies the impetus to boast steel production in a host of areas.

According to a report by World Steel Dynamics, Englewood Cliffs, N.J., "A major problem for the European steel mills has been the strength of the Euro versus the U.S. dollar since September 2003."

The report also states that EU mills have endured more than a $50 per metric ton adverse cost swing vs. the U.S. mills as a consequence

As for the ubiquitous Chinese market, the consulting group noted that China's steel output jumped by 23 percent to 270 million metric tons on an annual base. In comparison, steel output in 2000 was 129 million metric tons.

Meanwhile, non-Chinese steel output is expected to increase by 3.6 percent this year to 770 million metric tons. However, output will be around 25 million metric tons less than the potential figure, in light of the tight supply of raw materials.

For the first three months of 2004, steel shipments were 28.265 million net tons, representing an 8.6 percent increase from the 26 million net tons shipped during the same period in 2003.

CONSOLIDATED STRENGTH. The extent of this consolidation in the United States is creating greater opportunities. According to Peter Marcus of World Steel Dynamics, U.S. Steel, ISG and Nucor are expected to produce around 45 percent of the total sheet steel shipments this year. Further, the percentage is expected to increase to around 48 percent next year.

This rising market share is giving the largest steel companies even greater pricing power for raw materials.

Meanwhile, overall steel demand is strengthening. Demand for steel domestically is expected to increase by 4 million tons to 121 million tons. For next year, World Steel Dynamics forecasts steel demand to grow by an additional 5 million tons.

While many feel that U.S. Steel, ISG and Nucor will be the three strongest players in the steel industry, John Armstrong, a spokesman for U.S. Steel, notes that his company is the most integrated operation currently.

Part of the reason has been the company's ability to make more coke rather than purchase it on the open market. "We are completely self sufficient with iron ore," Armstrong says.

While many have speculated about where the steel industry will be by the end of this year, Armstrong feels that it will continue to improve. "Steel prices should remain strong. There may be a little dip in the fall, due to a slowdown in the auto industry, but overall the demand should track the overall improving economy."

However, Armstrong worries about the possible dumping of steel.

To protect against this situation, the company is constantly monitoring to make sure companies opting to ship material into the country are selling the material at fair market value.

While the steel industry has been showing robust growth during the past several quarters, an element of caution remains. For one, the steel industry is a cyclical business, so any shift in the overall economy could hurt the industry.

A related macroeconomic issue is scrutiny toward China to free up its currency on the global market. Several analysts say that the failure of the Chinese yuan to float along with the dollar gives China a much larger advantage when dealing with the value of the material from both the U.S. and China.

AISI's Gravatt says that at the present time, the Chinese have their currency pegged to the 1994 U.S. dollar.

While a significant amount of consolidation has already taken place, industry observers expect the larger steel companies to make additional moves to strengthen their balance sheets by adding components.

Along with Cargill Inc.'s apparent plans to sell off its North Star Steel operations, speculation surrounds some of the other "orphan" mills that could he part of the next wave of acquisitions.

The author is senior and Internet editor for Recycling Today and can be contacted at dsandoval@gie.net.
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Title Annotation:Ferrous Consumer Focus
Author:Sandoval, Dan
Publication:Recycling Today
Geographic Code:1USA
Date:Jul 1, 2004
Words:1288
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