A Delicate Balance
By Myra Pinkham | Contributing Editor
on Jan 17, 2023
The strength in SBQ has outlasted the market for many steel products, but how long will it continue?
While both demand and prices for special bar quality – or high-performance engineered bar – products have recently softened somewhat, the market continues to hold up much better than many other steel goods. And it is expected to continue to do so for the rest of this year, and even possibly into 2023, despite predictions that the Federal Reserve’s aggressive moves to raise interest rates could propel the U.S. economy into a recession.
That, according to AISI President and CEO Kevin Dempsey, is because, at least in the near term, prospects for its use in such applications as automotive engine components, energy sector drilling equipment and certain other industrial equipment are expected to remain positive. This, he says, is even though the recovery of the automotive sector, which according to some estimates accounts for about 50 percent of U.S. SBQ consumption, has over the past year and a half been restrained by such supply chain issues as the semiconductor chip shortage.
However, Rodrigo Belloc, president of Gerdau Special Steel North America, noted in a recent statement that he foresees greater supply chain stability in the aftermath of the COVID-19 pandemic and that his company is prepared to support the pent-up automotive demand and its transformation toward electrification.
“I believe that demand for SBQ by the energy market will continue to grow into 2023, both within the oil and gas segment, as well as such newer energy solutions as wind and solar,” says Darren Wojahn, marketing manager for Charter Steel, a relatively new supplier in the SBQ space.
Higher prices for oil and natural gas, as we have been seeing, are generally supportive of exploration and production and therefore SBQ demand. However, exploration and production companies, who have become more efficient in their drilling, are being more judicious about energy investments than usual.
Also, according to John Anton, ferrous steel director of S&P Global’s market intelligence unit, only about 10 percent of SBQ demand is energy related.
Anton says industrial equipment and machinery, which accounts for about a 50 percent share of SBQ demand, is actually one of the strongest durable goods sectors, although production of such equipment has been adversely affected by the tight labor pool. According to Philip Gibbs, a senior equity analyst for KeyBanc Capital Markets, it is uncertain how much SBQ will benefit from that, given such industrial users are currently in a raw material destocking mode after having been actively replenishing their inventories over the past 18 months.
Also, there have been variations in the market strength based on different types of SBQ, some market participants point out, with the supply of hot-rolled bar being much tighter – and even in hard or soft allocation – as opposed to cold-finished bar, for which there is more spot availability.
While its swings haven’t been as dramatic as with hot-rolled and some other steel products, SBQ has been going through similar upheaval over the past few years. Gibbs says that isn’t surprising given the SBQ market tends to be marked by “cyclicality on steroids.” He notes that after going through a material COVID pandemic-related decline in 2019-20, with U.S. SBQ production volumes down about 30-35 percent over those two years, it “shot out the cannon” last year, climbing about 28 percent. It remained very strong for much of this year, helped by the sizable base price increases that domestic mills got on their 2022 contracts. In fact, he says it is possibly that there could be another 10 percent volume increase this year.
But over the past few months, as with a lot of other products, the SBQ market eased in line with the perception, and in some cases the reality, of a slowing economy. That is partly because service centers, which by some estimates account for about 30-50 percent of cold-finished SBQ demand, are now taking their foot off of the gas after being in a restocking mode for the past year or so, concerned their inventories have gotten a little bit higher than they would like.
“They continue to buy what they need or expect that they will need, but they are keeping their cards very close to the vest,” a cold-finished SBQ mill executive explained. Charter Steel’s Wojahn, says falling scrap prices have contributed, making all market segments conservative.
Because of this, as well as several other factors, SBQ lead times have shortened somewhat over the past few months, Gibbs says, noting at their peak mill lead times stretched out to over 20 weeks. But while that figure is still longer than normal, as of late October lead times had shortened to about 12 weeks. While conditions vary by mill, he says most domestic mills have effectively caught up with their order backlogs.
While some of that was demand driven, Anton says it was partly due to changes in production capabilities as several mills have started to bring some previously idled capacity back online, or, in certain cases, invest in mill upgrades.
“The SBQ industry made several moves to right-size itself over the past two to three years,” Gibbs points out, with such players as Gerdau Special Steel North America, Republic Steel and TimkenSteel idling capacity in 2020 and 2021. He notes, however, that over the same time period, some mills that didn’t retrench their SBQ capacity, such as Nucor and Steel Dynamics, continued to profitably pick up business at the margins.
Anton says that these moves came after average U.S. SBQ mill capacity utilization rates fell in early 2020.
But perhaps the biggest SBQ capacity change this year came as the result of the July 26 explosion that resulted in about a month of downtime at the melt shop at TimkenSteel’s Faircrest SBQ plant in Ohio, which has the capacity to produce more than a million tons of steel per year. During the steelmaker’s third-quarter earnings conference call, President and CEO Mike Williams said that largely because of that incident, TimkenSteel’s average melt utilization rate declined to about 40 percent in the quarter. It is expected to return to about 85 percent – where it had been in the second quarter – by the end of the year or the first quarter of 2023.
He said that while the Faircrest assets are now fully repaired, TimkenSteel is taking its time ramping up production there, ensuring the newly hired workers are proficiently trained and are working well together. Anton says that similar labor and training issues are also affecting other SBQ producers, noting that while they have been trying to rehire the workers that they had previously laid off, many either retired or found other jobs.
The impact of recently restarted SBQ capacity, however, will be at least slightly tempered by the fact Liberty Steel USA is already winding down production of its SBQ flats mill in Chicago Heights, Ill., which it plans to shut down by the end of the year. That decision was motivated by the need for investments at the mill at a time when the steelmaker would rather dedicate its resources to its core wire, wire mesh and wire rod product lines. Flats are a niche SBQ product and it is expected the lost output of about 1,000-1,500 tons per month could at least in part be met by certain other specialty flat bar producers.
There are also some SBQ outlays in the works. For example, in late October Gerdau announced plans to invest an additional $40.4 million in its Monroe, Mich., mill, which, according to Belloc, will further the steelmaker’s goal to optimize the clean steel capabilities of the mill to support current and future needs of SBQ end users in North America. Gerdau has invested nearly $400 million in Monroe over the past decade.
Belloc noted this final phase of Gerdau’s Monroe rolling mill project includes such upgrades as a new bundler table, bundler area and the installation of a third saw, balancing Monroe’s melting and rolling capacity and allowing it to ship more tons once these improvements come online in 2023 and 2024. Currently Monroe’s melt shop capacity is 850,000 tons. After the new capital investment comes online, its rolling capacity will be 720,000 tons.
It is somewhat uncertain what impact these capacity issues will have upon the U.S. SBQ market given that, dependent upon the mill and their end use customers, about 50-70 percent of business is done on a contract basis, with the automotive sector in particular requiring at least six-month contracts. That said, Anton points out that virtually all SBQ price contracts have surcharges to cover scrap and other input costs given that buyers don’t want to lock in high prices and then have them come down from under them.
He adds it is because of those surcharges, as well as some softening of the underlying demand, why U.S. SBQ prices had fallen to $1,700-$1,800 per ton as of early October, down from a peak of $2,100-$2,200 per ton. Anton says that while down, they remain much higher than where they tend to be historically, which is about $1,100-$1,200 per ton.
Even with spot prices easing over the past few months, based on a late-September announcement by Gerdau calling for at least a $280 per ton increase, it is possible 2023 contract prices could be up as well. Given the negotiations TimkenSteel has already had with about half of its contract customers, Williams believes there will once again be year-on-year contract price increases.
That, Gibbs says, might be asking too much, stating it would be a great scenario for the U.S. SBQ market to just hold their prices steady, especially since the market ended the year on a softer note than it began, especially with buyers pivoting from a restocking to destocking mode amid softening consumer and industrial economy confidence amid concerns the U.S. economy is headed for an economic downturn.
“The market is in a delicate balance,” Anton notes. “While it has to be concerned about the expected recession, it is currently operating at far below full production capacity.”
Gerdau is once again investing at its special bar quality production facility in Monroe, Mich.
(Photo courtesy Gerdau Special Steel North America)