Local galvanizing plants suffer effects of steel slowdown

May 30, 2009 (The Pittsburgh Tribune-Review - McClatchy-Tribune Information Services via COMTEX) -- STLD | Quote | Chart | News | PowerRating -- With the steel industry cutting production, closing plants and laying off thousands worldwide, three steel-galvanizing plants in the Pittsburgh area, known as The Techs, are feeling effects of the slowdown.

Production is off more than 50 percent, and the 215 employees at The Techs are working reduced schedules. But they still are collecting paychecks most of the time, supplemented by unemployment compensation when they are on temporary layoff, said James Anderson, general manager and a partner in The Techs -- a unit of Steel Dynamics Inc. of Ft. Wayne, Ind.

"We're reducing costs, but we're keeping our employees for when things pick up," said Anderson, 48, a 25-year veteran of the steel industry. "We don't want to lay off workers. That's an action of last resort."

The three plants -- MetalTech in South Oakland, GalvTech in Pittsburgh's Hays neighborhood, and NexTech in Turtle Creek -- produce hot-dipped galvanized, low-carbon steel of varying gauges and widths.

In 2008, the three plants produced 824,000 tons of flat-rolled steel, about 15 percent of the company's total shipments, according to Steel Dynamics, the nation's third-largest steel producer by sales.

This year, the Techs have been hurt by the downturn in key markets such as construction and agriculture, as well as some appliance markets, Anderson said. The dropoff in production pushed The Techs' sales down by 54 percent in the first quarter, to $118.3 million, from $262.0 million for the same quarter in 2008, the company reported.

"I've never seen it this bad for this long. We've had slow months, but nothing this prolonged," said Anderson. Even so, "we are reaching the point at which a lot of inventory stockpiles are low. Once service centers deplete their inventory ... our sales will match consumption." Steel service centers buy and process steel for resale to manufacturers.

Steel consumption in the United States is projected at 68 million tons of steel this year, down about 37 percent from 2008 consumption of 107 million tons, said Nancy Gravatt, a spokeswoman for the American Iron and Steel Institute, an industry trade group based in Washington.

That decline is not surprising, Gravatt said, given the fact that domestic mills are operating at about 40 percent of capacity. In March, steel mill shipments dropped to 4.13 million tons, almost 55 percent below 9.1 million tons shipped in March 2008, and 4.2 percent below February's output.

"There's no significant light at the end of the tunnel," said Steel Dynamics CEO Keith Busse at the company's recent annual meeting in Fort Wayne.

Each month since September, steel consumption has fallen, although the rate is slowing, said Christopher Plummer, steel industry consultant for Metal Strategies Inc., an industry research firm in West Chester.

"Most steelmakers are hopeful, but none are seeing any substantial recovery in markets or product lines," Plummer said.

Companies are looking, and hoping for, a consistent uptick in orders across the board, Allegheny Technologies Inc.'s CEO L. Patrick Hassey said. Some observers believe the economy has hit the trough of the recession, "if not, we're pretty close to it," he said.

Recoveries in the housing and energy markets will increase steel demand, Hassey said. It will be important to see how the auto industry develops a business model that sustains itself, Hassey said.

While Busse was confident that Steel Dynamics will be in a good position to take advantage of the recovery when it occurs, this recession could result in "some permanent capacity reduction."

"I believe we are going to see a second shakeout in the steel community," such as the closing of about 15 million tons of steel production capacity, Busse said.

He does not see the U.S. returning to the days of annual steel consumption of about 130 million tons, but it may settle at between 110 million tons to 115 million tons, in a gradual build-up from 80 million tons. That still leaves that between 15 million tons and 20 million tons of overcapacity that can push prices down, even without imports, Busse said.

Recovery of steel consumption to pre-recession levels might take three-to-five years, Plummer said.

Steel industry analyst Charles Bradford of Affiliated Research Group LLC of New York, agreed that some steel operations may not survive. Some steel mills might shutdown because of stiffer environmental regulations, while other mills, which he declined to name, should never have been allowed to remain open, Bradford said.

"I don't think anyone really knows what the new normal is," Bradford said. The auto industry, an important steel market, will not return to its pre-recession production levels of 17 million vehicles annually, but it is likely not to remain as low as nine million vehicles, he said.

Steel Dynamics typically does not come to the forefront in discussions about Western Pennsylvania's steel industry. It does not have the expansive steelmarking operations in the region like U.S. Steel Corp.'s Mon Valley Works, or Allegheny Technologies Inc.'s mills in the Brackenridge or Washington areas, yet it is the third-largest American-owned steel producer, with mills in Indiana Virginia and West Virginia.

Steel Dynamics, with five mini-mills producing steel in electric arc furnaces, sold $8.5 billion worth of steel products last year, earning $463 million in net income, on steel shipments of 5.6 million tons. It has about 6,500 employees.

At the MetalTech plant along Second Avenue in South Oakland, the massive steel coils shipped into the plant are cleaned and annealed, then dipped into a molten bath of 875-degree zinc, to create galvanized steel. The coils, some weighing as much as 24 tons, are unwound as the steel threads it way through the dipping and drying process, than rolled back into coils at the end. The South Oakland plant makes heavier-gauge steel than its sister plants.

The steel coils for the The Techs' galvanizing operations come from U.S. Steel's Irvin plant in West Mifflin, Severstal N.A., Duferco Farrell Corp. in Farrell, Nucor Corp., ArcelorMittal and other Steel Dynamics plants, Anderson said.

The Techs came into the Steel Dynamics fold in July 2007, when Steel Dynamics purchased the privately-owned company for $360 million.

The Techs was created in 1984 with the purchase of the former J&L Steel Corp.'s galvanizing plant, which became MetalTech. NextTech, a light-gauge galvanizing plant at the former Westinghouse Electric Co. plant in Turtle Creek, was purchased in 1990. GalvTech was formed out of the former Hays ammunition plant, which had sat idle from 1970 until The Techs reopened it in 1996.

Three limited partnerships owned The Techs when they sold the business to Worthington Industries Inc. of Columbus, Ohio, in 2000, for $300 million. The business was sold twice in 2004 to private equity groups, said Anderson, who retained part ownership.

Joe Napsha can be reached via e-mail or at 724-836-5252.

To see more of The Pittsburgh Tribune-Review or to subscribe to the newspaper,
go to http://www.pittsburghlive.com/x/pittsburghtrib/. Copyright (c) 2009, The
Pittsburgh Tribune-Review Distributed by McClatchy-Tribune Information Services.
For reprints, email tmsreprints@permissionsgroup.com, call 800-374-7985 or
847-635-6550, send a fax to 847-635-6968, or write to The Permissions Group
Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA.

More News:   Market Updates | Stock Alerts | All Trading News | Stock Index