The Stel Salaried Pensioners Organization wishes to
thank The Hamilton Spectator for permission to post the following article by
Reporter Steve Erwin published in the June 6, 2005 edition
TORONTO
(CP) - Canadian steel giants Stelco Inc., Algoma Steel Inc. and, to a lesser
extent, Dofasco Inc. will all see their margins pressured through the rest of
this year by rising input costs and steel prices that have fallen off cyclical
peaks, according to a new report on the sector.
Dominion
Bond Rating Service said the impact of rising iron ore and coal costs will be
most notable at the three integrated steel producers through the remainder of
2005, given their exposure to those commodities.
Stelco
and Algoma use significant amounts of coal in their blast furnaces during the
steelmaking process. Dofasco is less sensitive to iron ore and coal price
shifts given that they use more natural gas in their manufacturing processes.
The
higher input costs come as steel prices have fallen from 2004 highs posted last
fall.
But
weaker industrial demand, increased exports from China and high inventory
levels have contributed to a steady decline in benchmark U.S. flat-rolled steel
prices, according to DBRS steel sector analyst Jarrett Bilous. Flat-rolled
steel prices are now 35 per cent below August 2004 levels, reflecting a market
correction, Bilous said.
Industry
observers have said steel prices are now well below $540 US per ton, compared
to $640 US per ton at the beginning of this year. Current prices will likely
remain stable through the rest of this year, Bilous said.
Sky-high
steel prices last year boosted the bottom lines of virtually every steelmaker
in North America, including Stelco, the Hamilton-based company which has been
operating under bankruptcy protection since early 2004.
Stelco
posted a profit of $49 million for the first three months of this year, its
highest quarterly operating profit on record, despite $21 million in restructuring
costs. However, just last week the company - which is still looking to raise
capital for its restructuring - said its second-quarter profits will be
considerably below the preceding period.
Bilous
said Monday that raw materials prices, particularly iron ore and metallurgical
coal, have sharply increased in recent months, adding that integrated producers
could see their credit profiles challenged.
The
contrast in industry conditions highlights the volatility faced by steel
companies.
One company
well able to withstand the steel market changes is Ipsco Inc., Bilous said. The
analyst contends that the credit profile for Ipsco, which has operations in
Saskatchewan as well as in the United States, will remain favourable due to
declining prices for scrap steel, which is Ipsco's primary feedstock.
Ipsco
also benefits from high exposure to the robust energy sector, which it provides
with tubular steel.
While
steel prices are stabilizing for this year, the longer-term outlook remains
highly uncertain, said Bilous, who envisions further mergers in the industry as
steelmakers look to partner their operations to improve market share and
achieve cost efficiencies.
Global
consolidation is expected to reduce the number of industry participants,
improve discipline, and reduce market volatility through a cycle, Bilous said.
Still,
the steel sector will be altered depending on the rate of expansion of China's
economy. Surging Chinese demand drove the 2004 steel price rebound, but China -
now the world's largest producer and consumer of steel - has been a net
exporter of steel in recent months.
As a
result, Bilous said China's emergence as a significant and sustainable net
steel exporter will significantly influence steel prices.