Algoma Provides Updates on Operations

Automation challenges related to outfitting an older mill with modern process controls continue to impact the commissioning of phase one of the company’s plate mill modernization project, CEO Michael Garcia said on the call. The mill will continue to run at about 80% of utilization until the project is completed in early 2023. A second project phase is now expected to begin in the middle of next year, but Algoma will be “mindful of market conditions when we make the decision to commence,” Garcia said.

The plate mill commission delays resulted in an impact of approximately CAD$65 million during fiscal Q2, with some additional impact anticipated to flow over into fiscal Q3. An additional $40 million in capex is expected for the project, most of which will be spent on phase two. It remains a big wildcard as to when that project will be completed, CFO Rajat Marwah said, and once it is finished it will take another five months to ramp up the higher volumes.

Although all repairs are now complete and its coke ovens are operating at capacity, Algoma continues to feel the impact of an August fire on one of its coal conveyors. The company had to purchase coke on the spot market during the quarter at high prices and a lot of that higher-priced inventory will impact the current quarter’s results, especially as steel prices are falling.

Production at Algoma’s direct strip production complex was lower than expected in fiscal Q2 due to a concentrated Covid outbreak that caused significant labor availability issues. The company is now cross-training more employees to better handle this type of absenteeism event, Garcia said. No additional financial impact is expected in the current quarter.

The steel industry and customers continue to face challenges from inflation, rising interest rates, supply chain issues, and recessionary fears, Garcia said. Despite this, the company is seeing consistent demand from the automotive, construction, and oil and gas industries. Another positive is the attractiveness of imports into the North American market being reduced by global pricing dynamics and trade measures.

Algoma is currently in the midst of several annual contract negotiations, and Garcia said it hasn’t faced a huge amount of pressure or expectations of lower pricing levels. “Everybody we speak to has some expectations that there’s going to be a recession or recessionary conditions next year,” he explained, but this is helping with negotiations as having clarity on pricing and order books provides less risk for customers than could not have any business at all during a recessionary period.

This same fundamental is helping to develop a competitive environment for Algoma’s contractor base and potential business partners as it relates to construction contracts for the company’s EAF transition project. “Contractors are eager to get the business and bring clarity to their own book of business for next year,” Garcia said, adding that he is satisfied with and encouraged by the pricing environment on recent bid packages. “We’re benefiting from that from a cost perspective and engagement from potential suppliers as we select the best ones for this project,” he stated.

For the EAF project, the company has approximately 62% of committed fixed-price contracts with contractors completed. The overall project budget is CAD$703 million, and as of Sept. 30, CAD$162.5 million has already been spent. About 8% of spending was completed in fiscal 2022, 60% is planned for fiscal 2023, and the remaining 32% is planned for fiscal 2024 and onwards.

Garcia noted on the call that Algoma is pleased with the five-year labor agreements it reached with the United Steelworkers (USW) union late this summer, as they ensure labor stability during the company’s transition to EAF steelmaking.

The project to add two EAFs remains on track and on budget for the planned 2024 startup.

By Laura Miller, Laura@SteelMarketUpdate.com