Arcelor Mittal (MT), AK Steel (AKS), and U.S. Steel (X) all reported this week. I have included some quotes from their earnings report to provide some examples of the pressures that these companies face.

Arcelor Mittal

“In Q3 the business performed towards the lower end of our expectations against a background of seasonally lower volumes, weakening spot prices and higher costs. Our outlook for Q4 remains cautious as the expected higher input prices continue to work through the business and demand remains muted, though with some regional differences.”

“Sales were lower during the third quarter of 2010 as compared to the second quarter of 2010 due to seasonally lower volumes (-8%), partly offset by higher average steel selling prices (+4%).”

“Sales in the Stainless Steel segment were $1.4 billion for the three months ended September 30, 2010, a decrease of 12% as compared to $1.5 billion for the three months ended June 30, 2010. Sales declined primarily due to lower steel shipments (-8%) as discussed above and lower average steel selling prices (-5%) due to a weak market environment and pressure from imports.”

AK Steel

“The company said its average selling price for the third quarter of 2010 was $1,075 per ton, a 2% decrease from the $1,101 per-ton price in the second quarter of 2010, and approximately 8% higher than the $994 per-ton average price realized in the third quarter of 2009.”

“2010 Iron Ore Price Increase Impacts Third Quarter:
AK Steel said that it has agreed with two of its three primary iron ore suppliers that the requirements for the establishment of the annual benchmark price of iron ore for 2010 have been met. That 2010 benchmark is an increase of 98.65% over the 2009 benchmark, and is higher than the 65% increase the company had previously estimated for the first half and for its third quarter guidance. The third primary supplier of iron ore to the company has not acknowledged yet that an annual benchmark price has been established. Instead, that supplier continues to seek a price increase in excess of the 98.65% annual benchmark price. The company does not agree that this supplier has a right under the parties’ contract to charge based on other than an annual benchmark price and, for purposes of the iron ore purchased from this supplier, the company has used an estimated benchmark price increase of 98.65% in its third quarter financial results.”

“The company’s third quarter 2010 financial results reflect the year-to-date impact of the higher iron ore price, which increased the company’s third quarter operating loss by approximately $76.0 million, or $52 per ton.”

“AK Steel said it expects shipments of approximately 1,300,000 to 1,350,000 tons for the fourth quarter, with an average selling price per ton decrease of approximately 4% from the third quarter. While the company expects fourth-quarter maintenance costs to decrease by about $20 million from the third quarter, it nonetheless expects to incur an operating loss of approximately $80 per ton for the fourth quarter of 2010, largely due to the lower shipments and selling prices combined with continued high iron ore and other raw material costs.”

U.S. Steel

(Quotes transcribed and paraphrased)

“Results declined in 3rd quarter from 2nd from lower flat-rolled average prices, higher raw material costs in flat-rolled segment and European operations: decreased shipments and production volumes, decreased average realized prices, increased costs for facility repair and maintenance (higher activity, not input costs), and consumption of higher cost coal, coke and iron ore purchased to support earlier facility restarts. Decreased spot prices more than compensated for increased contract prices.”

“In 4th quarter, expect lower average realized prices, lower spot and contract.”

“Tubular operations had higher average prices for fifth quarter in a row. Decreased costs for steel substrate. Not expecting same price performance in 4th quarter but costs should continue down.”

Disclosure: author owns X and AKS

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The price of steel rose all summer and finally stumbled again in September. On Sept 4, Reuters reported: “Chinese spot steel prices fell 2.6 percent in their third consecutive weekly fall, led by construction steel, as major mills continued to cut prices on weakened demand following a steep price run-up in recent months. After a months-long rally to a 10-month high in early August, China’s steel prices turned lower and prices of benchmark hot-rolled coil fell.” Two weeks later, the Wall Street Journal had dour news about the U.S. steel industry: “Steel Prices Drop, Reversing Course in Sign Mills Ramped Up Too Quickly.” Specifically, “Hot-rolled steel, a benchmark grade that typically is processed into cars, building structures or appliances, cost about $600 to $620 a metric ton in August. Now it can be had for about $550-$570 a ton, a drop of about 8%.” However, the article also quotes the president of the American Institute for International Steel claiming that “Steelmakers overreacted in swiftly closing steel mills last year and in early 2009…they took out too much production.” Indeed, U.S. steelmakers increased production each of the previous 11 weeks.

Overall, it seems that the recent price decline remains a hiccup amidst an upward trajectory from an ugly bottom. The evidence from this summer’s bout of price increases suggest that demand for steel is firming and customers are absorbing a myriad of price increases (including surcharges). The list below is a sample of the wide array of price increases in steel-related products from this past summer. Given the stall noted for September, October’s round of earnings announcements will be critical in determining whether the upward momentum still has legs. Until then, it seems to me that the decline in steel prices and production has been arrested for now and further increases in demand will drive additional inflationary momentum in steel.

1. June 1: AK Steel (AKS) announces “…it will increase spot market prices for its carbon steel products by $20 per ton effective with new orders scheduled for delivery on July 1, 2009 and later.”
2. June 18: AKS announced “…it will increase spot market prices for all carbon and stainless flat rolled steel products.” The various price increases appear comprehensive in scope and type.
3. July 09: AKS announced “…it will increase spot market prices for its carbon steel products, effective with all new orders for August and September shipments. Base prices for hot rolled products will increase by $40 per ton. Base prices for cold rolled and coated products will increase by $50 per ton.”
4. July 23: Nuecor (NUE) announced during its earnings conference call that it would implement price increases for the first time in nine months: “With stronger demand, we are implementing price increases in each of our products for the first time in about nine months. These stronger business conditions have continued into July. Across all of our steel mill products, we believe the catalyst for this upturn in demand is the result of service centers completing their inventory, destocking cycle.” (Seeking Alpha transcripts)
5. July 23: Synalloy Corporation (SYNL) announced during its earnings conference call that “…surcharges have increased every month since May 2009, and our steel suppliers implemented a 6% price increase on May 1, 2009 and a second 6% price increase on July 1, 2009, which the industry thinks will be accepted in the marketplace.”
6. July 28: U.S. Steel (X) responded to an increase in demand by increasing prices: “We have began to bring up idle facilities inline with customer demand, and we have implemented price increases in our Flat-rolled and USSE segments in the third quarter.” (Seeking Alpha transcripts).
7. Jul 29: Arcelor Mittal (MT) announced during its earnings conference call that it expects increases in base prices in Europe. (Briefing.com)
8. July 30: AKS announced “…it will increase spot market prices for its carbon steel products by $40 per ton, effective with all new orders for September and October shipment.”
9. Aug 04: AKS announced “…it will increase base prices for all 200, 300 and 400 series flat rolled stainless steel products by 6% to 9%, depending upon the grade and product form, effective with shipments on August 30, 2009.”
10. Aug 06: Gerbau Ameristeel claims during its earnings conference call that “During the quarter, we saw a stabilization of volumes as destocking by our customers appears to be slowing, as well as a firming of steel prices across all steel products.”
11. Sept 01: AKS announced “…it will increase spot market prices for its carbon steel products, effective with all new orders. Base prices for hot rolled products will increase by $40 per ton. Base prices for cold rolled products will increase by $50 per ton. And, base prices for coated products will increase by $60 per ton.”

Be careful out there!

Full disclosure: long X calls, STLD

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