Metals - Industry Overview

US Industrial Outlook, Annual, 1994 by Charles L. Bell, David Cammarota, Barbara Males, Dave Larrabee, Graylin W. Presbury

Shipments by the major metals industries increased moderately in 1993. The principal factor influencing the boost in shipments was the increase in automotive vehicle production. This was a boon to all the industries, except titanium which is heavily dependent upon the flagging aerospace industry. Prices for steel mill products increased while prices for all nonferrous metals declined as a result of weak demand and mounting inventories worldwide. The large inventories are principally a result of export surges by the countries of the former Soviet Union.

Before reading this chapter, please see "Getting the Most out of Outlook '94" on page 1. That section will answer most of your questions concerning data collection procedures, forecasting methodology, sources and references, and the Standard Industrial Classification (SIC) system. For information on related industries, see chapter 1 (Metals and Industrial Minerals Mining), 5 (Construction), 7 (Construction Materials), 16 (Metalworking Equipment), 20 (Aerospace), and 35 (Motor Vehicles and Parts).

STEEL MILL PRODUCTS

After experiencing a decline in the value of shipments in 3 of the last 4 years (measured in constant dollars), the U.S. steel industry (SIC 3312, 3315, 3316, and 3317) experienced a turnaround in 1993. Shipments through June increased 7.2 percent (on a tonnage basis) from year-earlier levels and were expected to exceed 78 million (metric) tons for the year, up about 5 percent from 1992 and the highest level since 1981. Imports dropped 3.7 percent for the first 6 months of 1993 and import penetration fell to its lowest level since 1980. Most importantly, steelmakers were able to boost prices, which had fallen every year since 1989. After registering a 7.1 percent decline between 1989 and 1992, the Bureau of Labor Statistics (BLS) price index for all steel mill products rose 2 percent during the first half of the year. Spot price increases were substantially greater. The aggregate index is less likely to demonstrate big shifts in price because more than half of all steel is sold on a long-term contract basis.

The relatively high level of shipments was attributable in large measure to strong demand from the automotive and construction sectors - historically steel's two largest consuming industries. With light vehicle production in the United States up 14 percent through June, steelmakers were able to increase shipments to this sector by nearly 13 percent. Shipments to the construction market rose 11 percent, a surprisingly large rise considering the persistent sluggishness of that sector. The oil and gas sector also experienced a significant upturn, as did steel service centers, which purchase steel from mills and distribute it to end users.

With the improvement in both prices and volume, and with the aid of continuous cost-cutting, a number of deficit-ridden steelmakers anticipated a return to profitability later in the 1993. During the first 6 months of the year, the industry narrowed its operating loss to only $6 million, down from $220 million a year earlier. In addition to improved prices, major steelmakers credited higher volume, lower production costs, and a more favorable product mix for the improved earnings. The industry had sustained a cumulative operating deficit of $3.5 billion between 1989 and 1992, largely because of the losses of the major integrated producers. The specialty sectors and the smaller minimills, which melt steel from scrap, were generally profitable during this period. Even so, the minimills had difficulties of their own in the first half of 1993. Despite rising shipments, minimill profits were squeezed by higher raw material - especially ferrous scrap - and labor costs.

Due to the increased demand and a small reduction in capacity, the industry was able to boost its capacity utilization rate through June to 87.4 percent, up from 82.9 percent a year earlier and the highest level since 1989. Capacity utilization measures how much raw steel a mill could produce if it was running at its maximum capability. By maintaining high operating rates, steelmakers were able to make steel more efficiently and at lower costs. High operating rates allow the industry to spread high fixed costs over more units of production, reducing average total production costs.

Some experts were surprised that the industry was not operating at even higher levels - raw steel production was up only 2.5 percent through June - considering the strength of orders during the first half of the year. Apparently there was not sufficient incentive for companies to hire additional workers and restart higher-cost plants. To some extent, steelmakers improvised by substantially increasing imports of semifinished steel for further rolling.

The ongoing technological revolution in steelmaking had an important impact on industry restructuring in 1993. Nucor Corp., the nation's largest minimill, joined forces with a Canadian minimill and a joint venture between a Canadian integrated producer and Canadian minimill, to build a plant using the thin slab caster, a less capital-intensive and lower-operating cost alternative to traditional sheet manufacture. Some estimates put operating costs at about $80 per ton less. Nucor plans to expand capacity at its two current mills. The additional capacity, which is expected to exceed 6 million tons later in this decade, will clearly intensify competition in the flat-rolled market and threaten some integrated mill capacity. This market, which totalled 40 million tons in 1992, is expected to grow over the next decade.