Hilco Valuation Services Senior Valuations Director Marc E. O'Neill authored an article for the March edition of the Journal of Corporate Renewal
Market prices for most steel, aluminum, and copper products are at or near historical lows not seen since early 2009 following the global financial crisis and resulting recession. Market barometers and the global economy indicate that the remainder of 2016 could experience further market price deterioration.
Market prices for coils, plates, bars, and most other steel products decreased by approximately $200 per ton in the fourth quarter of 2014 and first quarter of 2015, leveled off during the second quarter, showed slight improvement in the third quarter, and then drifted lower again in the fourth quarter of 2015.
Hot-rolled coils are the most basic type of flat-rolled steel product; they comprise the base material used to make value-added product such as cold-rolled and galvanized coils, along with products such as welded pipe and tube. Hot-rolled coil, therefore, serves as a benchmark price indicator for much of the carbon steel market. A market price decrease of $100 per ton typically results in a similar decrease in the market price of welded pipe and tube, cold rolled, and galvanized steel.
Market prices of hot-rolled steel were strong until the fourth quarter of 2014, reflecting a growing post- recession economy led by energy and automotive consumption. Hot-rolled market prices averaged $591 per ton in December 2014 and declined to $360 per ton in December 2015.
Market prices for hot-rolled steel coils recently hit lows not seen since early 2009, immediately after the recession. Global oversupply, resulting from increased overseas capacity, and the strong U.S. dollar have been the main causes of depressed North American market pricing. Historically, a healthy automotive industry has been consistent with a healthy steel industry, but even strong demand in the automotive sector, with a record 17.5 million units sold in 2015, has done little to stabilize steel pricing.
Although hot-rolled steel experienced some small price increases this year, those were brought about by mill price increases that were an attempt to offset declining prices and as a result of pending trade cases brought against some imports. However, these price increases are unlikely to be sustainable, given high global overcapacity and other market pressures.
Low gas prices, now at or less than $2 per gallon in most of the U.S., have been credited with contributing to the strong automotive demand. However, this brings to mind the axiom, “One man’s gain is another man’s pain.” West Texas Intermediate (WTI) crude oil fell from $110 per barrel in September 2013 to less than $32 per barrel this past January, resulting in the idling of more than 60 percent of North American rigs and a precipitous falloff in demand for steel pipe and tube and allied items.
During 2014, major U.S. steel producers undertook strategic reviews of their domestic operations to bring them in line with this new market reality. U.S. Steel announced the permanent shutdown of the blast furnace at its Fairfield Works near Birmingham, Alabama. Although the company had also announced plans to build an electric arc furnace at the Fairfield Works to replace the blast furnace, it subsequently postponed plans to build the new furnace “until market conditions improve.”
In the same vein, AK Steel announced plans to idle its Ashland, Kentucky, blast furnace. Meanwhile, north of the border, U.S. Steel Canada and Essar Steel Algoma, representing two of the three integrated Canadian producers, are operating under bankruptcy protection. At this point, steel service centers, one of the industry’s main distribution channels, have remained relatively unscathed, with the exception of some smaller regional centers that either have declared bankruptcy or have been liquidated.
The year-end custom for both producers and distributors is to reduce inventories to low levels to meet year-end shipment goals and, in the case of distributors, to reduce carry-over of high-priced inventory. This typically dictates an increased order rate in the first quarter. Producers are hoping that various trade cases that allege unfairly priced imports will be decided in their favor, which potentially could improve pricing. However, customers and/or distributors remain fearful of making long-term purchase commitments due to the potential for continued price decline.
Aluminum product prices in North America are typically based on the cost of pure aluminum as reported by the London Metal Exchange (LME); the Midwest Premium, which accounts for transportation, financing, and warehousing; and fabrication costs to convert aluminum ingots into semi-finished products, such as coils, sheets, or bars. Fabrication costs for common products, such as sheets, coils, and extrusions, vary from 40 cents to 70 cents per pound. Fabrication costs fluctuate slowly over time, reflecting changes in supply and demand, increasing in periods of high demand and decreasing in periods of low demand. LME and Midwest Premium prices change daily, and the sum of the two numbers is referred to as the Midwest Transaction Price (MTP).
Aluminum prices trended downward throughout 2015, averaging 82 cents per pound in January and ending the year at 68 cents per pound in December. Domestic aluminum producers compete with importers of finished products (e.g., coil, plate, bars, and extrusions) and semi-finished material (e.g., ingots and billets). Excess global capacity, much the same as in the steel industry, and a slowdown in the Chinese economy, which increased Chinese exports of aluminum, are the main drivers behind this price decrease.
The Midwest Premium was at a historical high in January 2015, averaging 24 cents per pound, but decreased rapidly, averaging 10 cents per pound in May 2015, before stabilizing at 8 cents per pound in December, which is in line with historical averages. The record high January 2015 price was attributable to financial considerations and warehousing rules that limited shipments from LME warehouses and caused severe logistical issues. Changes in warehouse practices subsequently have lessened the chance of re-occurrence.
Due to the global overcapacity issue, one major U.S. producer (Alcoa) announced that it will split into two companies— one for raw aluminum and one for engineered finished products—thus partially sheltering it from aluminum price swings. Additionally, the highly touted aluminum takeover of steel for various automotive applications (e.g., to save weight and increase mileage) has been moderated by low gas prices and the development of lower-weight high-strength steels.
Similar to pricing for aluminum products, the market price of copper products in North America is based on the cost of pure copper as reported on COMEX or LME and fabrication costs to convert copper cathodes into semi-finished products, including coils, sheets, bars, and rods. LME and COMEX prices are driven by global demand, primarily from the world’s largest consumer, China. Reduced Chinese demand brought about by that country’s economic slowdown, as well as increased global production, led to falling copper prices throughout 2014 and 2015. Copper averaged $3.67 per pound in January 2015 and had fallen to $2.08 in January 2016.
Unlike steel and aluminum, however, lower copper prices can lead to increased demand for certain finished copper products, such as wire, HVAC coiled tubing, and some architectural products. Often, in times of higher copper prices, cheaper metals such as aluminum are substituted for various wire and HVAC coiled tubing applications. Similarly, the use of copper for architectural applications becomes more appealing when copper sheet is lower in price.
New mine capacity in North America and overseas (e.g., Chile, Peru, Indonesia, and Mongolia) and continued lower demand in China likely will contribute to low copper prices throughout 2016 and perhaps beyond.