Keeping the Balance

Jonathan Tulkoff, President of trading and marketing firm Uniwire International, Ltd., discusses the current situation and future prospects for the import/domestic dynamic in the US wire rod market.

The end of 2011 was marked with a sharp downtrend in import activity for wire rod. Do you expect imports to pick up ahead of the 2012 spring “stock-up” season? Or do you think US buyers will continue to stick to domestic product instead?

JT: There will be some blue water imports of wire rod, but I don’t think there will be many bargains. I expect that the market will remain to a large extent domestic; US mills are competitive and can supply at the current level of demand. I expect the total wire rod import numbers for Q1 2012 to be similar to last year at approximately 250,000 to 300,000 tons, which includes Canadian producers who have averaged approximately 85,000 tons over the last two years for January to March shipments.

The devastating earthquake and tsunami in Japan last March highlighted the US’ dependence on certain Japanese wire products, as a large portion of US automotive production was shut down while waiting for wire shipments to resume. Do you think this might spur some US wire producers to broaden their product range?

JT: I think the question is “localization.” The Japanese have had a localization strategy for years, but there are some items that have lagged in accomplishing this goal and rod and wire is in this category as opposed to flat-rolled steel. The earthquake and tsunami certainly highlighted this issue, but the historically high value of the Japanese yen is also a major problem.

Based on our discussions with experts in the CHQ market, it is clear that the Japanese are now looking at developing new supply chains to support fasteners and other auto parts made from rod and wire. They most likely will succeed in accomplishing this over the next few quarters. The question remains as to the extent of the localization which speaks to the transplant car company’s willingness to accept domestically made steel.

In the last year, the LME has opened several delivery locations for steel billet in the US, and the CME has expanded its steel offerings. Do you think this increase in the steel futures market’s presence has lessened some of the US steel industry’s ambivalence toward it? When do you foresee the industry’s full acceptance of futures, at least to the point where liquidity in the US market is equivalent to the LME’s markets overseas?

JT: There are now three publicly-traded companies who own mills that are LME branded in North America, and there are large buyers of long products in the US who are trying to develop hedging strategies and are considering the option of using futures. The US market is now at least on the learning curve, whereas 18 months ago futures were just a concept which was being pitched by the exchanges.  The acceptance of futures will increase when the contract’s liquidity increases. There had been some momentum earlier in the year and then in late summer the markets hit a speed bump due to an oversized position taken by one of the trading companies. This ended up being in violation of the exchanges’ lending guidelines rules which are based on any one entity owning a majority of the outstanding warrants in any commodity. Hopefully this has started to work its way through the system and we will see increased market participation from both producers and consumers in 2012.

Although Turkey is one of the US’ top sources for imported low-carbon wire rod, do you think the economic situation in Europe might soon make wire rod from that region more attractive to US buyers?

JT: The cost of making steel is the same everywhere, so there are no longer countries which have a manufacturing cost advantage. The US mills are as efficient and cost effective as anywhere else in the world including Turkey. Through September 2011, total imports of wire rod were approximately 700,000 tons which is very close to 2010 numbers. Rod from Turkey accounted for 170,000 tons in 2010 and should be similar in 2012. We will see some shifts in the origin of the wire rod imports from some low carbon producing countries due to trade violations and others based on domestic issues in their respective countries. We do not expect to see a dramatic surge of imports because the returns are not there for the overseas mills to make it profitable for them.

As the US steel industry continues to expand its export capabilities, which region (aside from NAFTA partners) do you see as the most promising for US-sourced wire rod?

JT: I do not expect much US wire rod to be exported; although we will try, primarily to Latin America.

During the fall 2011 Assofermet conference in Italy, Antonio Marcegaglia, Managing Director of Marcegaglia, said that in the last decade, it has become essential for international traders to control part of the production of steel products, through direct investments or exclusivity agreements. How much, if at all, does Uniwire currently participate in this trend?

JT: Our business was built by representing strong producers, not by making spot opportunistic deals. We do not call ourselves traders. We are the marketing arm for the producers that we are aligned with. We have always felt that the longevity of our relationships with our producers is based on our codependence on one another. We fully subscribe to Mr. Marcegaglia’s thesis.

In various quarterly conference calls, major US steel mills seem to have an overall positive outlook for 2012. Smaller distributors and manufacturers, on the other hand, seem to be a little more worried about the demand outlook—specifically in the long product sector. As a company that deals with both sides of the supply spectrum, who do you think has the most accurate foresight when it comes to 2012 trends?

JT: The supply and demand for long steel products is somewhat in balance between producers and consumers at this level of imports. As you go down the chain, supply starts to outstrip the requirements for distribution and finished products. This obviously is not a good long-term prospect—mills need healthy customers. However, there has also been some vertical integration; Nucor is a good example of this strategy, which limits the market for independents.

The US end-use sector that was hit the hardest in the economic crisis (and has experienced the slowest recovery) was construction. Do you see a pick-up in construction activity in 2012, or will the year resemble much of 2011?

JT: The US construction market continues to be hit hard and for the most part it will continue to see limited growth. Although there are pockets of activity in several major cities like New York and Washington DC, the majority of the country remains flat. Most notably, the Southeast and West Coast are slow to recover with almost limited-to-no growth projected.

What specific aspect of construction (residential, commercial, infrastructure, etc.) has had the most growth in 2011, and why? Which do you think will have the most growth in 2012, and why?

JT: The residential market is still very slow although there seems to be interest in multifamily rental projects as many Americans are unable to obtain mortgages for new homes and are relocating to rental apartments. Commercial construction is still slow as a result of major tenants not spending money for new buildings and preferring to renegotiate lower rents in existing buildings. The potential bright spot is the increase in infrastructure projects as the federal government is looking to create jobs and improve the deteriorating infrastructure, bridges and roads.

While rebar and wire products generally seem to have parallel trends in terms of demand and pricing, US domestic wire rod experienced substantial softening in late Q3/early Q4 2011, while rebar fared relatively well. What do you think was behind the diverging trends?

JT: Demand has been weak for both products. I don’t agree that the wire rod producers have been under more pressure, although the rebar producers may have a relative advantage in their ability to keep pricing in a tight range due to virtually no foreign inventory on the ground and the domestics have been able to meet import prices. NAFTA imports, specifically Mexico, have been priced for the most part at domestic levels. Turkey has recently been a factor and some bar will land here in Q1, but future shipments must now start to price with the scrap cost increases factored in.

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