ShareThisBy LEN BOSELOVIC
Sunday, November 05, 2006
Softening demand and rising imports used to give the U.S. steel industry a bad case of the flu. But as the industry enters its second down cycle since undergoing dramatic restructuring earlier this decade, analysts don't expect the weakening market to give steelmakers much more than a mild cold.
The reason: Mergers and acquisitions consolidated the fragmented industry, spawning fewer, more powerful players.
In the past, weaker producers exacerbated market declines by deeply discounting their steel. Today, three large sheet producers _ all of them bigger and stronger because of acquisitions _ dominate the market and are more disciplined about curbing production when demand sours. While smaller steelmakers still cut prices, they don't have enough clout to spark the kind of downward spiral that plagued the industry in the past.
John Anton, an analyst with Global Insight, said the fruits of consolidation were evident when the market softened in 2005 and that he expected them to be just as evident this time around.
"Consolidation is having an effect," he said. "It isn't stopping the cycle, but it is having a moderating effect."
The dimmer short-term forecast is evident at U.S. Steel. This week the company reported a fourfold increase in third-quarter profits but warned that fourth-quarter results would be lower because of rising customer inventories, the softening U.S. economy and higher imports. Three or four blast furnaces will be idled for maintenance during the quarter and will be restarted only when demand warrants, Chairman and Chief Executive Officer John P. Surma said.
"Our order book is not robust. That's the reason we're making less steel," he told analysts during a conference call.
Mittal Steel and Nucor, the nation's two other large sheet producers, also have announced they will curb production by idling furnaces. That should help to improve the balance between supply and demand, which has swung in favor of steel buyers in recent months.
Imports are up 45 percent through September and on pace to top 36.6 million tons this year, the highest level in six years' according to the American Iron and Steel Institute. The industry group is projecting that U.S. mills will ship 108 million tons this year, up about 3 percent from 2005.
Some of that steel is beginning to pile up at steel processors and distributors, the industry's middlemen. The Metals Service Center Institute estimates it will take nearly four months to work off the 16.6 million tons of steel that service centers had on hand at the end of September. The imbalance is expected to cause sheet steel prices, which have fallen since peaking this summer, to continue to slide.
"I'm not going to say they are going to crash. But there will be weakness in automotive and appliance, and this goes straight to sheet demand," Anton said.
For the third quarter, U.S. Steel's net income totaled $417 million, or $3.42 per diluted share, vs. year-ago earnings of $93 million, or 71 cents per diluted share.
Analysts were expecting earnings of $3.21 per share. Sales increased 28 percent to $4.11 billion while shipments rose 18 percent to 5.6 million tons.
U.S. Steel shares finished Tuesday at $67.60, down $1.41. They have traded between $36.29 and $77.77 over the last 52 weeks.
