Domestic Steel Producers Grappling With Rising Costs, Excess Capacity

Industry contends with higher iron ore and scrap prices while imports and capacity rise.

U.S. steel makers expect tough third-quarter results as the slow economic recovery, volatile steel prices and excess capacity hinder growth.

The outlook dampens positive quarterly results recently reported by several major U.S. steel firms.

AK Steel Holding Corp. said July 26 its net income rose 24% in the second quarter to $33.1 million, or 30 cents per share. The company posted its best results in the past six quarters, said James Wainscott, AK Steel's president and CEO.

A day earlier U.S. Steel Corp. reported a $222 million profit in the second quarter compared with an $86 million loss in the same period last year. The company benefited from higher prices in its flat-rolled segment and stable raw materials prices, said Chairman and CEO John Surma.

Last week, Nucor Corp. said its earnings rose 229% to $299.8 million, or 94 cents a share, over the year-earlier period. But the company cautioned that increased sheet steel imports have already begun impacting prices and margins. The company expects the new supplies to impact third-quarter results.

Other domestic steelmakers project similar pressures in the third quarter to drive down earnings. U.S. Steel said increasing capacity and imports will result in a lower operating profit in the third quarter.

Increased production from China continues to pose challenges for U.S. steel producers, says Nick Sowar, global steel industry leader for Deloitte Touche's Global Manufacturing Industry group.

"There was lot of discussion that the Chinese were going to slow down, and excess iron ore in market and pricing were going to come down, and steelmakers would be in a better position from an EBITDA standpoint," Sowar says. "That hasn't happened. China continues to produce at record levels, and iron ore pricing is still strong."

AK Steel expects rising raw material prices to significantly impact operating profit in the third quarter. The company expects its operating profit to drop to $15 per ton in the third quarter after reaching $46 per ton in the second quarter.

In June scrap cost Nucor $71 more per ton than it did in June 2010 and $51 per ton more for Steel Dynamics Inc., says industry analyst John Tumazos, owner of Very Independent Research LLC.

Steel producers experienced a similar scenario in the fourth-quarter 2010 and the current-year first quarter when fluctuations in steel prices and increases in input costs resulted in near-breakeven results or losses, he says.

In addition, higher production levels from foreign steel producers with U.S. operations will raise capacity and lower prices. Russian steel maker OAO Severstal added capacity in June when it launched the second phase of an expansion project in Columbus, Miss. ThyssenKrupp also continues to ramp up production in Alabama.

Also in June, RG Steel LLC, a subsidiary of the Renco Group holding company, restarted a blast furnace at its Sparrows Point, Md., mill that had been idle for nearly a year.

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