Steel makers forecast grim first quarter

PITTSBURGH - Two steel makers forecast a grim first quarter Tuesday as the recession continues to slow demand for everything from washing machines to sport utility vehicles, suggesting that more plant shutdowns and job cuts could be on the way.

U.S. Steel and AK Steel said they expect operating losses in the first three months of 2009, while a third steel company, Nucor Corp., forecast "only marginally better" earnings compared with its fourth quarter. The forecasts came in earnings reports showing a reversal of fortune for an industry that recently notched record profits.

Steel prices soared to record highs last summer, helped by a big appetite for construction beams, cars and appliances in developing nations. Then demand and prices plunged in the final five months of the year as the economic slowdown spread from the U.S. to the rest of the world, undermining key markets like construction, autos and industrial equipment.

The slump grew worse in the year's final quarter. While fourth-quarter net income rose for one of the three steel makers reporting Tuesday, all their underlying operations showed weaker demand in the form of lower shipments and idled mills.

"Entering the first quarter of 2009, conditions remain as challenging as they were in the fourth quarter," said Daniel DiMicco, Chief Executive Officer of Nucor Corp. The No. 2 U.S. steel maker by output reported a 71-percent fall in quarterly earnings.

Although the lower steel prices may help heavy equipment makers and other industrial buyers of the metal, analysts say consumers are unlikely to benefit from those savings as production wanes for cars and other goods. If they do see discounts, it won't be until later this year, when manufacturers' contracts — which lag the market by six to 12 months — reflect the savings.

United States Steel Corp. reported a substantially higher fourth-quarter profit, largely due to skyrocketing sales of tubular steel products used in oil and gas drilling. Analysts said those sales were boosted by orders that built up over the course of the year. Sales of tubular steel — pipes used mostly in the energy sector — are expected to drop significantly, however, from the fourth quarter. The company expanded its tubular business through the acquisition of Lone Star Technologies Inc., a Dallas-based welded pipe maker, in 2007.

Sales of U.S. Steel's other products faltered during the last three months of 2008 and it faces an "extremely difficult global economic environment," John Surma, its chief executive, said in a statement.

"We do not know when conditions may improve," he said, "but we are well positioned to fully participate in a market recovery when it occurs."

Steel prices have recovered modestly from their lows in December, but 2009 is still expected to be "a very poor year for industry profits," according to a recent metals industry report by Morgan Stanley.

"We believe full-year global demand will contract 5 percent, its first contraction since 1998," the report said.

Net income at U.S. Steel, the largest U.S.-based steel producer, based in Pittsburgh, rose to $308 million, or $2.65 per share, from $35 million, or 29 cents per share, a year earlier. Quarterly sales rose to $4.57 billion from $4.54 billion last year.

Shares climbed $2.03, or nearly 7 percent, to $31.49 on Tuesday, but have fallen nearly 80 percent since last summer.

Sales of the company's flat-rolled steel — a sheet-like product used in autos and appliances — are expected to decrease substantially from the fourth quarter due to weaker demand and prices, the company said. Results for U.S. Steel's European operations, which fell dramatically in the fourth quarter, are due to remain comparable to fourth-quarter levels, it said.

During the quarter, flat-rolled operations were at 45 percent of capability as the steel maker temporarily idled several facilities, including its Hamilton Works and Granite City Works, Great Lakes Works and Keetac iron ore operations.

Also during the quarter, U.S. Steel said it was laying off 675 workers in North America and that its idled plants affected about 3,500 workers.

AK Steel Holding Corp., meanwhile, swung to a fourth-quarter loss, hurt by a big pension charge and falling demand. The West Chester, Ohio-based company's quarterly loss totaled $430.6 million, or $3.88 per share. A year earlier, it earned $106.7 million, or 95 cents per share. Shares fell 8.1 percent to $8.64 on Tuesday, and have fallen more than 81 percent since last summer.

In November, AK Steel said it was temporarily closing plants in Ohio and Kentucky, affecting more than 1,100 workers, because of sharply lower demand.

Higher raw material costs and a drop in demand lowered the fourth-quarter earnings of Charlotte, North Carolina-based Nucor to $105.9 million, or 34 cents per share, from $364.8 million, or $1.26 per share, a year earlier. Earnings were also hurt by $147 million in charges and expenses, offset partially by a $81.2 million credit.

The company declined to give a specific forecast for its first quarter.

"Anybody speculating as to how 2009 is going to end up is kidding themselves ... There is way too much uncertainty out there," DiMicco said.

Nucor said market conditions are poor across its product lines, which include fasteners, steel bars and joists. Customers are reducing the size of their inventories due to their own business slowdowns and the shortage of credit for big building projects.

DiMicco said Nucor put about $2 billion worth of possible acquisitions on hold after the credit markets froze up this fall, but that the company would be open to any potential deals if the market conditions are right.

Shares of Nucor rose 6.3 percent to $39.80 on Tuesday, but have fallen about 34 percent in the last six months.

Mirko Mikelic, senior portfolio manager with Fifth Third Asset Management Inc., said buyers of appliances such as washing machines made by Whirlpool Corp. wouldn't be the immediate beneficiaries of lower steel prices. Manufacturers will simply adjust production as demand changes.

Charles Bradford, an analyst with Bradford Research, said the decline in steel prices probably will have no impact on consumers. Steel remains less than 5 percent of the cost of a typical car, for example, and auto production has fallen sharply.

"The effect is on things like construction, if you're putting up an office building," he said. "But nobody in their right mind is building an office building today."

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AP Business Writer Stephen Manning in Washington contributed to this report.

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