Reliance Concerned about Shadow Imported Steel at Ports

Total shipments for second quarter were 1.5 million tons, down 2.4 percent from Q1 and 2.1 percent from second quarter 2014.

Carbon steel sales were down 2 percent sequentially to 1.23 million tons. Average steel selling price dropped 7 percent from the previous quarter and 8.9 percent from the year before.

Carbon steel prices continue to be under a great deal of pressure, said Reliance, mainly due to “record high levels of imports in the marketplace, as a well as a rapid decline in raw materials, a strong US dollar, a soft global economy and high inventory levels throughout the supply chain.”

Carbon products account for 15 percent of total sales at Reliance, with hot rolled 7 percent. The company believes the recent trade case on coated products is supportive of domestic pricing and additional filings would also be positive for pricing. Plate is largest portion of carbon sales for Reliance followed by structurals, bars and tubing. Pricing for these products is still under pressure but Reliance believes it is near the bottom and sees potential for pricing increases by the end of the year. Year to date sales are down 6.2 percent from 2014.

President and CEO Gregg Mollins said he was pleased with the operational performance in second quarter.

“We believe that customer demand is relatively strong and will continue to slowly improve, even though our second quarter demand levels were somewhat lower than we had anticipated. Currently, we see ongoing strength and opportunities for growth in the aerospace end-market and through our toll processing operations related to the automotive market. Although still below peak demand levels, we also continue to be encouraged by momentum in our non-residential construction businesses.”

Mollins noted that automotive demand remains strong in the U.S. and Mexico. The increased use of aluminum in automotive applications is a growth area for Reliance, he said. Energy products sales declined significantly due to the drop in oil prices. The sector is expected to remain under pressure for the balance of the year. Shipment volumes for the energy business were down 34 percent in the first six months of 2015 when compared year over year.

A focus on inventory management resulted in an inventory turnaround rate of 4.6 times, the closest Reliance has come to its goal of 4.5 turns.

Commenting on the outlook, Senior Executive Vice President and CFO Karla Lewis said, “Overall we expect the U.S. economy to continue its modest improvement throughout the remainder of 2015. With the exception of our businesses directly servicing the energy market we expect underlying demand, generally to strengthen subject to normal seasonal patterns. With that said, we anticipate a decrease in tons sold of 1-2 percent in third quarter of 2015 over the second quarter 2015, compared to more typical seasonal trend of down 3-5 percent. Although we expect metals pricing to remain under pressure for those products we sell, we do expect a slight improvement in pricing from current levels with our overall average selling price expected to be flat or up 1 percent from second quarter levels.”

Mollins said he would be surprised if there was not a trade case filed on carbon plate since “there has been so much of that material coming in from foreign suppliers at ridiculous rates.”

There was question during the earnings conference call on how reliable MSCI data is. MSCI inventory is heavily weighted toward flat rolled markets, said Lewis. Most of that goes to the automotive which has been strong and is a positive for the numbers being reported. However, she said, “There may be a few ports where there might be some inventory sitting around.” She added that inventory at docks are not reported to MSCI data because they are not owned by service centers at that point.

Mollins concurred, citing Long Beach and Houston which have a fair share of material on the docks. It will be there for the short term, certainly, said Mollins, “and that is problematic.” Despite reports of imports starting to decline and licenses going down, imports are still near the 3 million ton mark he said. “We’re hopeful that that’s going to decline, we think it’s going to decline, but we are running our business like it’s not going to decline.”

The Reliance executives were asked about the growth of aluminum in the automotive industry. In response Mollins said that in his opinion, “The F-150 has grown I think more than even Ford Motor Company even realized—how quickly it has grown. We thought we were going to do X number of million pounds of that and now it is double of what our first expectations were. I think it will change the picture of automotive and light truck.”

“More and more we are hearing that they may not go all aluminum, or aluminum intensive, but there are going to be more and platforms converting parts to aluminum.”

“Aluminum seems to be the sexy trend right now,” added Jim Hoffman, Executive Vice President, Operations.