Appraisals, Liquidations, Auctions, and Consulting

Steel: Notes From The Front Line

In our many travels throughout steel country over the past six months, we have benefited from interviewing principal advocates on all sides of the Section 201 debate now pending before the Bush Administration. Among those with whom we have had the opportunity to speak are knowledgeable parties at integrated mills, mini mills, scrap dealers, and service centers. Obviously, with such disparate interests between competing factions, industry groups and lobbyists, there is little consensus on the major issues, but there seems to have occurred over a relatively short time span some galvanization. It is virtually impossible to generalize on such a complicated topic, but we are fortunate to make a few observations by virtue of the latitude, breadth and access afforded us in the appraisal process.

1. Regardless of competitive position, consolidation appears to be an accepted, albeit painful, reality. The excess capacity in the industry is understood at every level, from the top executive to the shop foreman. At the center of the debate is the question of whether the proposed tariffs (40%) will allow for a managed “time-out” during which the industry’s inevitable consolidation can take a more sanguine course. On the other side is the impact the tariffs could have on the downstream end users who will bear the brunt of what is arguably a government subsidy of a crippled industry. Only one thing is clear; there will be, in the very near future, a significant reduction in domestic capacity. The final closure of LTV, bankruptcy filings of integrated giants such as Bethlehem and the poor financial performance generally within this segment of the market all point to what in our view is a foregone conclusion. However, in this regard, and what buttresses hope, especially in the mills we have visited many times, is the increased focus on efficiency at every level that hard times invariably produce.

2. The issue of legacy costs seems to be the one that stirs the most passion and may be the most misunderstood. The economic reality of one worker supporting four retirees’ is easy enough to calculate, but difficult to fathom. To paraphrase one of the perhaps more prescient observations we heard from a very straightforward executive was that the administration could impose whatever tariff or taxes that come from the debate, but if the industry did not ultimately get out from under the legacy costs negotiated in much different times, the result will be the same.

3. There seems to a movement away from the Clinton Administration’s “light-tariff” or tariff-rate quota as too weak. From what we have seen, very few experts predict that a strong stand, even one compromised through the process, will not materialize. The industry may not get the 40% it is clamoring for, but it seems unlikely that tariff quota approach will be accepted this time around. In a last minute flurry, studies conducted by the Consuming Industries Trade Action Coalition (which argues against onerous tariffs), and the Massachusetts Institute Technology (arguing for) may serve to cancel each other out. Having perused both, lost in the arcana of “facts” and statistics, is a panorama calling for decisive action, one way or the other.

As the appraisal staff at VRG monitors so many steel and steel-related loans, we track these developments very closely and their potential impact on each client’s inventory. As an interesting side-note (and since everybody else is) we will take a short ride on the Enron bandwagon. Reports are that Enron’s steel commodity arm (which apparently sensed a market not yet cornered) is dumping its steel holdings. The inventory is purported to be a mix of slab, sheet, and plate, with a total of up to 350,000 tons, primarily located in Philadelphia and Chicago. Bid closings are expected by publication.

Nonferrous Scrap Exports

According to the latest statistics from the U.S. Department of Commerce, U.S. exports of nonferrous scrap went from a three-year high of 115,189 short tons in October 2001 to 99,183 short tons in November of that same year, which was a 14% decline. This decline was believed to by largely caused by a steep decline in offshore sales of copper and brass scrap. This segment of scrap alone dipped 23% to 40,823 short tons in November, which was down more than 12,000 short tons from the previous month. Copper and Brass Scrap continued to top the year-to-date list of nonferrous scrap exports. The tonnage exported through the first 11 months of 2001 stood at 538,074 short tons, which was an increase of almost 11% from the same year-earlier period, and nearly 104,000 tons higher than offshore sales of aluminum scrap through November. Though a decline was also seen in Aluminum, Nickel, and Zinc, Red Metal Scrap was shown to be the weakest segment of the nonferrous export market.

Aluminum scrap exports dipped by less than 2,800 tons in November, as compared with the previous month. However, the year-to-date total remained more than 5% above a year earlier. Nickel scrap exports plunged 36.8% to 2,420 short tons in November from 3,831 short tons in October. This is believed to be due to softer sales to importers in Canada and Japan, and the absence of South Korean buyers from the market. Meanwhile, Zinc scrap exports slid 17.1 % to 1,542 short tons from 1,859 tons in October, with the traditional market leader, Taiwan, taking not even a pound of secondary zinc from U.S. suppliers.

Only lead and aluminum used beverage cans (UBCs) posted higher figures in November than the prior month. The gain in lead scrap exports was registered by Chinese importers, whose intake rose to a record 5,310 short tons in November, which was an increase of almost 1,500 tons from the previous month, and surpassing their Canadian rivals, who have dominated the U.S. lead scrap market for the past decade.

U.S. Exports of Nonferrous Scrap (in short tons)
	Nov.	Oct.	Sept.	2001	2000	YTD % Change
Aluminum	43,482	46,276	37,542	434,679	412,454	5.4
UBCs	432	360	252	5,870	5,022	16.9
Copper	40,823	53,051	42,491	538,074	485,647	10.8
Lead	10,484	9,812	9,509	110,043	72,039	52.8
Nickel	2,420	3,821	2,272	31,805	29,941	6.2
Zinc	1,542	1,859	1,417	27,415	22,289	23.0
Totals	99,183	115,189	93,483	1,147,886	1,027,392	11.7
Source: U.S. Department of Commerce

Ferrous Scrap Exports

Scrap exports, the engine that has been pulling the ferrous scrap market along for the past few months, may be losing some of its steam.

Sales of three cargoes of ferrous scrap to a major South Korean steelmaker were booked last week by one British exporter and two U.S. West Coast yards--all three reportedly at $110 a long ton for the No. 1 heavy melting steel portion of the shipments, down $1 a ton from previous sales.

This may be a sign of things to come. Some industry sources said they believed the overseas markets may have peaked and the price would remain at these levels or would be slightly lower in the coming weeks. Others, though, argued that there was still plenty of demand, particularly in the Far East, and that ocean freight rates may have had more impact on the purchases than any weakening in scrap demand.

There is still little or no material coming out of the Russian and Ukrainian Black Sea export yards, said one West Coast trader, creating a supply shortfall in Turkey as well as in Asian scrap importing markets like South Korea, which had become more dependent in the past few years on A3 grade (a mix of No. 1 heavy melt and 5-foot plate and structural scrap) from scrap exporters in former Soviet bloc nations.

Higher prices had been reported for the export sales of ferrous scrap by some Japanese yards, he said, and others in the region, besides the Korean steelmakers, were still looking for melt material.

U.S. exports of ferrous scrap crossed the 1-million-short-ton mark in November, the first time they passed that threshold in more than four years. The last time U.S. scrap shippers topped 1 million tons in a single month was September 1997, when they sold 1,043,052 tons to foreign iron and steel scrap buyers. November's total of 1,022,007 tons was a little shy of that mark but nevertheless a 52.4-percent gain from 670,559 tons sold overseas in October and more than 167,000 tons higher than the 854,615 tons exported in August, the next-highest monthly total recorded thus far for 2001.

China remained the prime outlet for U.S. exporters, who shipped 273,853 tons there in November, almost 100,000 tons more than the previous month. Nearly three quarters of the tonnage shipped to China was shredded scrap, much of it from U.S. West Coast yards.

However, China was not the only nation with a bigger appetite in November. Exports to Mexico jumped to 142,648 tons from 53,228 tons in October, while shipments to Malaysia soared to 108,273 tons--the largest one-month total shipped there by U.S. scrap exporters in more than three years--from just 17,234 tons the previous month.

The Pacific Rim was not the sole hot spot for ferrous scrap buying in November. Turkish steelmakers returned to the U.S. market and took delivery of more than 100,000 tons of shredded and cut scrap, their first substantial buy in several years. Turkey once had been a key outlet for many U.S. yards but in recent years had come to rely more heavily on supplies of ferrous scrap from Russia and Ukraine. The flow of melt material from the Commonwealth of Independent States declined steadily in the past year, however, because of stronger demand and higher prices in the domestic markets there and exports taxes.

U.S. Exports of Ferrous Scrap by Grade

(in Short tons)

Grade

Nov.

Oct.

Sept.

2001

2000

YTD % Change

Alloys

57,274

55,890

54,940

625,518

835,228

-25.1

Borings

11,431

10,660

8,838

163,584

201,198

-18.7

Cast Iron

144,912

64,778

72,613

694,234

642,871

8.0

No. 1 Bundles

0

564

1,108

12,515

56,976

-78.0

No. 2 Bundles

17,445

16,076

34,819

226,081

26,736

745.6

No. 1 Heavy

97,398

175,317

33,239

1,008,862

822,240

18.0

No. 2 Heavy

51,116

44,095

9,233

265,287

197,601

34.3

Plate/Structural

82,151

25,230

32,946

330,126

158,297

108.5

Shavings

13,246

11,926

7,716

148,693

181,202

-17.9

Shredded

388,444

158,686

225,307

2,369,874

1,363,276

73.8

Stainless

19,877

39,401

28,924

449,047

474,905

-5.4

Tinned

5,864

6,493

4,562

92,151

123,714

-25.5

Unspecified

132,849

61,483

63,746

885,830

801,032

10.6

Totals

1,022,007

670,599

577,991

7,271,802

5,918,276

22.9

Source: U.S. Department of Commerce

U.S. Exports of Ferrous Scrap by Destination

(in short tons)

Country

Nov.

Oct.

Sept.

2001

2000

YTD % Change

Canada

95,731

105,474

97,611

1,117,404

1,315,781

-15.1

China

273,853

175,183

260,181

2,641,485

1,051,814

151.1

Hong Kong

7,278

4,848

6,040

46,160

47,270

-2.3

Japan

5,377

2,970

1,677

48,042

74,658

-35.7

Malaysia

108,273

17,234

64,439

360,224

103,294

248.7

Mexico

142,648

53,228

62,964

857,926

1,029,538

-16.7

S. Korea

155,162

260,559

54,549

1,339,124

1,518,150

-11.8

Taiwan

9,698

14,844

16,072

309,748

314,492

-1.5

Thailand

350

0

142

37,779

146,759

-74.3

Others

223,637

36,259

14,316

513,910

316,520

62.4

Totals

1,022,007

670,599

577,991

7,271,802

5,918,276

22.9

Source: U.S. Department of Commerce

Titanium Scrap

Because Titanium Scrap is so dependent on the aircraft industry, it tends to be among the most volatile of scrap metal markets, cycling up and down rapidly both in price and demand. "Because it cycles up and down so much," said one trader, "the scrap industry never seems to have enough capacity or materials on-hand on the way up, and has too much on the way down.” Suffice it to say that the commercial aerospace industry is suffering from extreme turbulence, which has affected both the primary and secondary markets for Titanium, the heavyweight of the lightweight metals.

Declines in the production of aircraft and aircraft engines have been steadily jabbing the metal, cutting the flow of prompt scrap back to ingot producers. Not that this would be of much help anyway, since production at ingot makers has all but collapsed because of the absence of any demand for their product. In addition, with demand in the secondary market already staggering from those blows, the Sept. 11 terrorist attacks dropped the market to the canvas.

"Sept. 11 had a major impact on the industry, but there were already clouds on the horizon before that happened," said one scrap broker. Most titanium ingot makers are resigned to the fact that they are unlikely to see much of a turnaround until late 2003 and possibly not until 2004 in the aircraft industry, he said. Most people in the scrap industry agreed, the broker added, and look for their own recovery to start perhaps three to six months ahead of that pickup. Aerospace, as always, dominates the titanium market and, as a result, dominates the demand for titanium scrap as well. Titanium typically is used as a casting or forging in structural aerospace parts. "A lot of people will point to Sept. 11 and blame the industry woes on that," another trader said. "And there is no doubt that it has hurt the aircraft industry. However, the passenger airlines were already in financial trouble before that happened. It just blackened what was already a dark picture." “ I can't peg this market," said a veteran titanium scrap trader. Ingot producers are melting at reduced rates and even their demand for scrap is weaker because many of them had built raw materials inventory and must now work that down before they can begin to buy more, he said. The only bright spot, he said, had been the Ferro-Titanium market, where prices firmed during the second half of 2001 due to the scrap shortage. Sales to specialty steel producers also recovered somewhat, and that had been a plus for scrap suppliers. Helping to boost that demand further was a decline in the supply of obsolete titanium scrap from the former Soviet bloc.

Obsolete scrap had been steadily flowing out of Russia, the Ukraine, and elsewhere in the region for the past five years, and Russia was acknowledged as the world's second-largest supplier of titanium, flooding the world market with titanium scrap, and unsold titanium parts during the mid-1990s. Now, though, most of the scrap metal that was easily brought to market is gone, and the Russian government, as well as others has tightened their grip through quotas and export taxes in an effort to reduce the flow of what remains. Consequently, European traders, who once had plenty of titanium scrap to sell to ferro alloy producers, no longer have those supplies. With a modest pickup in specialty steel output, producers have been forced to look elsewhere for scrap supplies. However, these are merely what is considered to be the small signs of life in the market; Ingot output, and its flow to the aircraft industry must get off its knees if there is to be any hope for the metal.

Stainless Steel Imports

According to data released by the Washington based Specialty Steel Industry of North America, U.S. imports of stainless steel and specialty steel products continued their sharp decline through the first nine months of 2001. This information is the last period for which composite information is available.

During this period, as compared with the same period of the year 2000, U.S. Imports of Stainless Steel & Specialty Steel were down as follows:

1. Stainless Steel: 33%

2. Specialty Steel: 27%

Specialty Steel includes: Stainless Steel, Electrical Steel, and Tool Steel.

Imports of stainless steel captured 23% of the U.S. market during the first nine months of 2001, which was down 28% from 2000; whereas imports of specialty steel captured 25% of the U.S. market, which was down 28% in 2000.

U.S. consumption was down for the first nine months of 2001 as compared with the same period of 2000, and is outlined below:

1. Stainless Steel: 21%- 1,629,158 tons;

2. Specialty Steel: 20% - 2,060,526 tons;

Stainless Steel Rod: 32%;

Tool Steel: 30%;

Stainless Steel Wire: 26%;

Stainless Bar: 15%;

Stainless Plate: 14%;

Electrical Steel: 14%

The following highlights the drop in U.S. Imports for the first nine months of 2001, as compared with the same period of 2000.

1. Stainless Steel Plate: 45% - 31,066 tons;

2. Stainless Sheet & Strip: 39% - 198,051 tons;

3. Stainless Rod: 30% - 45,962 tons;

4. Stainless Bar: 17% - 82,431 tons;

5. Electrical Steel: 5% - 85,753 tons;

6. Tool Steel: 5% - 55,727 tons.

The import penetration increase through the first nine months of 2001 was most prevalent in tool steel. Imports garnered 93% of the tool steel market compared with 67% a year earlier. Many domestic producers and distributors are anxiously awaiting a decision on possible import restrictions to be included in the pending Section 201 trade case, citing it as the prime wild card affecting overall business conditions this year (AMM.com, Jan. 7).

Imports grabbed 48% of the U.S. Stainless wire market, which was up from 36% as compared with the same period in 2000. Import penetration of stainless rod was 78%, up from 76% in the year-earlier period, and import penetration of stainless bar was 47%, down from 48%. Other nine-month import penetration comparisons included electrical steel at 23%, up from 21%; and stainless sheet and strip at 17%, down from 22%.