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April 20, 2011 Dear Friend,
The proportion of steel in the U.S. made
in scrap-using electric arc furnaces has risen from 7% in 1951 to almost 63%
currently, and the proportion of blast furnace virgin iron output to total
steel output in the U.S. has fallen from peaks of 72% in the 1950s and 68.5%
as recently as 1975 towards 33% currently. This paper includes a 60 year
history of the electric arc steel mix in the U.S., blast furnace operations,
a U.S. domestic steel demand model, recent U.S. steel capacity additions and
withdrawals and an analysis of scrap steel price movements as they determine
finished steel prices.
However, scrap steel prices were stable near $100 until 2003, when the electric arc market share rose above 51%. Weather disruptions to scrap steel and met coal supplies drove number one busheling clean scrap steel prices to peaks of $890 in Spring 2008 and $495 in Spring 2011, which drove finished hot-rolled sheet asking prices in the U.S. to $1,100 in Spring 2008 and $900 recently. Many other diverse factors also influence scrap steel prices. Iron ore, coal, coke and scrap steel input prices have come to determine steel prices. Operating rates, the U.S. demand level, additions to furnace or rolling capacity or related domestic U.S. supply-demand variables have become poor predictors of steel prices. Scarce scrap steel inputs drive the steel price, even with poor local demand or 25 million tons of capacity additions since 2007 past demand peaks. It is a new paradigm. Notwithstanding, Steel Dynamics discussed adding a new 1.7 million ton electric arc furnace plant for pipe and light gauge plates yesterday. It is possible the electric arc furnace share in the U.S. exceeds 70%, or that U.S. scrap steel exports cease given the large local demand for these ingredients.
We rate Nucor Underweight, and U.S. Steel
and Worthington Industries each Neutral. We do not expect the recent Spring
2011 scrap steel, met coal or $900 per ton hot-rolled sheet steel asking
prices to continue over the balance of 2011.
Separately, we have Overweight ratings on almost all of the large diversified mines that supply iron ore and coal, as those ingredients remain relatively tight. We rate Teck, Xstrata, Anglo American, Vale and BHP Billiton each Overweight and Rio TInto Neutral. We emphasize that Anglo American and Vale trade at seven times estimated 2011 earnings as the cheapest large capitalization stocks that we cover. Faithfully, John C. Tumazos, CFA |
Copyright © 2008 John Tumazos Very Independent Research,
LLC
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