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What's New at Berlin
March 8, 2004
 Dear colleagues, customers, suppliers and friends,
More quickly than other years it seems, 2003 came and went, and here we are in 2004 with the end of the first quarter rapidly approaching. Since I wrote the last "What's New" letter in September of 2003 several issues have continued to be in the center of our attention, material pricing and availability, supplier consolidation and China. The trade press, business press and even mainstream newspapers have featured these issues in a number of articles. I'll try my hand here at a mildly condensed version.
One of the biggest stories as last year came to a close, though it's proven to be a dramatic non-event, was the ending of the Section 201 tariffs. I devoted a large part of September's letter to this subject. There was a lot of due deliberation by the Bush administration on the economics and politics of the decision and a lot of teeth gnashing by the affected parties on both sides. The end users were stressing how important it was to end the tariffs to have access to steel produced worldwide to help them remain globally competitive in manufacturing their products. The steel producers were saying how important it was for the tariffs to continue so they could have protection from unfair imports.
The way it worked out for the first couple months after the 201's were dropped is that the overseas mills showed lukewarm interest in exporting more material to the United States. This is primarily due to the strong demand and better prices elsewhere in the world, most notably China, as well as the weakness of the US dollar which lost 40% of its value against the Euro in the last 2 years. The rising cost of ocean freight has also been a contributing factor with increases of up to $40/ton . However, recent and rapid price increases here in the States combined with a slight strengthening of the dollar in the last few weeks could intensify the overseas mills' interest.. If the spot market prices remain high and the dollar continues to strengthen, I'd expect that by the end of the 3rd quarter we'll be seeing more foreign tons in the U.S.
As a result of the foreign mills' current restricted supply into the U.S., the U.S. mills started the year with limited competition in a market that had low inventories and decent demand, a perfect opportunity for raising prices which they did enthusiastically. Adding to the dynamic of the situation have been exploding raw material prices for the steel producers for their coke, scrap and iron ore.
Coke, which had already climbed in price from $80/ton in 2002 to $110/ton in 2003, came under additional pressure with continued strong demand from the Chinese as well as a December fire at a major coking coal mine in West Virginia which limited supply here in the U.S. This fire led the owners of the mine to declare force majeure on their contracts with the steel mills and suspend shipments. According to one mill source, spot market prices for coke have recently passed into the range of $380/ton. With the integrated mills using 0.4 tons of coke to make a ton of steel, the increased costs of coke translate to as much as $120 per ton of steel produced. The mills that are self sufficient in coke or have solid, long term contracts are in a much better situation than other mills who either depend on the spot market more or were dependent on the output from the mine in West Virginia that had a fire.
Scrap, another globally traded commodity, has seen similar price increases, starting at $110/ton last year and now selling at $300/ton. As far as I know, there are no long term supply contracts available which means that every steel mill has experienced these higher prices. The mini-mills are 100% scrap fed; every dollar increase in the scrap price is a dollar increase in their cost to make a ton of steel. The integrated mills only use 20-25% scrap in their process so the effect on them is less but at $40 to $50/ton of steel produced, not insignificant.
To counteract the rapid and unforeseen increase in their raw material costs, the steel mills imposed surcharges in combination with rapid price increases to maintain, or in some cases regain, profitability. The surcharges started in January as low as $25/ton and for March are, for some mills, already at or over $100/ton. These surcharges are on top of price increases for hot rolled, cold rolled and galvanized steel of up to $200/ton. Stainless steel producers have also announced iron surcharges of $60/ton on top of price increases for their products as well. Several mills have even recently stated that the prices to be invoiced to their customers will be determined at time of shipment, not time of order placement. This is known as P.I.E. (price in effect) or P.A.T.S. (price at time of shipment). This policy works well for the mills in times of rising prices but poorly when prices decline.
The financial strengths, weaknesses and consolidation of the carbon steel mills are also playing a role in the pricing and availability in the market. Three years ago, there wasn't one steel producer in the States who shipped more than 10 million tons per year. Today there are three, ISG, Nucor and U.S. Steel, each projected to ship 14 to 16 million tons from their U.S. facilities in 2004.
Nucor absorbed Auburn, Birmingham and Trico in the last couple of years and US Steel absorbed National last year. ISG, born out of LTV, absorbed Bethlehem in 2003 and soon will do the same to Weirton. ISG's pending purchase of Weirton, long predicted by many, will make ISG the 2nd largest Tin Mill Product producer in the U.S. and one of the top 10 in the world. Tin Mill Products currently only account for approximately 3% of ISG's shipments but after their purchase of Weirton, that percentage will increase to about 8%. This is assuming that they don't reduce any capacity, the possibility of which is currently being rumored.
The size of these 3 mills lends discipline to their pricing as there are less companies chasing the same business. The weakened financial condition of Rouge, Weirton and , WCI (Warren Consolidated) led them to make capacity cutbacks when they found they couldn't get coke at their contract prices. Their order cancellations in December and January rippled through the market, tightening an already tight market.
The tight supply, rising prices, the addition of special surcharges, announcements of "price in effect" and mill consolidations are being mirrored in the stainless steel sector as well. Allegheny's pending purchase of J&L from Arcelor will leave the U.S. with 3 large producers. AK, Allegheny and North American (NAS).
For Berlin, the first priority has been to make sure we obtain the steel our customers require. With some mills canceling orders, producing short and delivering late, it's been challenging. Fortunately, we have excellent relationships with many world class mills and have not experienced any outages. Staying closely tuned in to our customers' forecasted requirements helps insure a continuous supply. It was also fortunate that we made a strategic decision to bulk up on inventory in the last quarter of 2003. This provided additional safety stock for our program customers who account for the majority of our business.
As a distributor and value added processor we depend on our suppliers to fulfill their commitments and obligations to make an ordered and specified material with good quality, on time and at the agreed price. Any changes to these basic principles has a direct impact on our ability to provide these same necessities to our customers. We expect that the turbulence in the steel market will begin to subside a little bit at a time as raw material supplies for the mills become more stable and the various corporate consolidations take effect.
2003 was a good year for us. We experienced increased revenues while managing to reduce our expenses. We're going to work hard to repeat that formula for success again in 2004. Our strength is and has always been in our people who continue to endeavor year after year to build on our collective reputation for excellence. After 37 years in business, we've seen a lot. We've not only survived but we've grown stronger and smarter. And we've prospered. 2004 will have its own special challenges but I'm comfortable and confident that our customers and vendors will continue to find value in continuing their, in many cases, long standing relationship with our company.
Best regards,
Roy Berlin
President
Rberlin@berlinmetals.com
Other Newsletters:
July, 2006 July, 2005
September, 2003 January, 2003 April, 2002
September, 2001 May, 2001 January, 2001
August, 2000 April, 2000 |
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