PNC METALS INDUSTRY UPDATE

Transcription

1 THIRD QUARTER 2017 PNC METALS INDUSTRY UPDATE IN THIS ISSUE Trade Restrictions on Steel Aim to Boost U.S. Producers Market Share 1 Carbon Flat Roll Takes a Dip 5 Pricing for Public Notes and Bonds 6 Syndicated Bank Loan Financing 7 FOR MORE INFORMATION Contact the PNC Metals Group: David B. Gookin Executive Vice President Metals Group Diversified Ind. PNC Financial Services Group One North Franklin Street Suite 2500 Chicago, Illinois Phone: Cell: david.gookin@ Alex Mack Vice President Metals Group Diversified Ind. PNC Financial Services Group The Tower at PNC Plaza 300 Fifth Avenue Floor 10 Pittsburgh, Pennsylvania Phone: Cell: alex.mack@ Welcome to Issue #17 of the PNC Metals Industry Update. Our cover story is provided by PNC Economist Mekael Teshome. Mekael takes a look at the impact of trade restrictions on the U.S. market. These trade restrictions (both existing and new) have the potential to significantly benefit the steel producers, but how will they impact steel consumers and will they contribute to economic growth? Next, you will find our recurring sections offering insights into metal prices (carbon flat roll takes a dip), public note yields (spreads continue to tighten), and syndicated loan activity (metals activity outpaces the market as a whole). When looking at these sections collectively, we see there s evidence that market conditions are building a better foundation for the metals sector than we have seen for some time. We hope that you continue to find our Update to be a useful tool. We are always interested in hearing from our readers to learn how we might make our Update more helpful in your day-today activities. Our goal remains to offer relevant information in an easy-to-use format. Let us know how we are doing. PNC ECONOMIC REPORT Trade Restrictions on Steel Aim to Boost U.S. Producers Market Share Summary The Trump administration aims to reverse U.S. producers loss of market share by levying tariffs under the authority of Section 232 of the Trade Expansion Act of Targeted restrictions are unlikely to be effective as market forces weigh on U.S. competitiveness and China s importance as a source of imports diminishes. Broad tariffs would support domestic producers but could drive up consumer costs and squeeze profits for downstream industries. Steel prices will likely be stable in the second half of 2017 and rise modestly in 2018; moderate economic growth will support demand. On April 19, 2017, President Donald Trump signed a memorandum prioritizing an investigation into the use of Section 232 of the Trade Expansion Act of 1962 to levy tariffs on imported steel. Invoking Section 232 would restrict imports on the basis of national security. The investigation is just one of a series of efforts to reverse the unusually high market share imports have claimed in the past three years. At the time of this report s writing in mid-july, the administration was expected to be nearing its decision. Independent of the use of Section 232, steel tariffs have been ramping up for over a year. In the first half of 2017, the U.S. levied higher duties on Japanese, South Korean, Mexican, Spanish and Turkish steel that were being sold below the cost of raw materials and normal steel profits.

2 PNC METALS INDUSTRY UPDATE 2 PNC ECONOMIC REPORT (Continued) The largest duties were imposed on Japanese steel rebar and Spanish carbon steel flanges, which saw increases of 206% and 18% to 24%, respectively. These increased duties followed a raft of levies in 2016 that included a massive 522% duty on cold-rolled Chinese steel and duties ranging from 57% to 193% on Chinese stainless sheet and strip. Although the cumulative effect of such levies have given U.S. producers some relief, policymakers are swimming against a strong tide of market forces that will make it difficult for domestic producers to completely regain their lost market share. Imports still claim a relatively high share of the domestic market (see Chart 1). On average, imports claimed 28% market share in the second quarter, down from a peak of 34% in 2015 but well above the 23% average from 2010 to A strong dollar underpinned by continued U.S. economic growth and rising interest rates continues to make foreign products less expensive in the U.S. (see Chart 2). Moreover, steel is still oversupplied globally, and this could lead to a widening difference between U.S. prices and global prices (see Charts 3 and 4). Another complicating factor in the administration s efforts to shift the advantage to domestic producers is that the sources of imports are shifting. As part of a plan to shift economic drivers from heavy industries to services, the Chinese government plans to reduce steel production capacity by million tons by 2020, with about 50 million of those tons being cut in 2017 alone. As a result of the production cuts and increasing tariffs on Chinese goods, China has gone from being the fifth-largest source of U.S. steel imports in 2015 to the ninth-largest source in 2016, and that share is set to fall further (see Chart 5). In its place, other countries such as Mexico and Canada are becoming increasingly important sources of imports. If import restrictions are to effectively increase U.S. producers market share, they would have to be global rather than targeted at any particular country. The impact of import restrictions on the rest of the economy will ultimately depend on the size and scope of the administration s final decision. If tariffs are broad, overall consumer prices are likely to increase because nearly 30% of utilized steel would be affected. If the tariffs are large enough, domestic steel producers could even raise their selling prices. This would boost steel producers revenues, but it would also dampen consumer spending and possibly squeeze profit margins for users further down the production chain if they are unable to pass along the higher costs. The manufacturing industries with the highest exposures to imported steel include fabricated and primary metals, motor vehicles and transportation equipment, machinery, electrical equipment, appliances, and furniture (see Chart 6). Independent of the administration s decisions, market fundamentals point to a positive months ahead for U.S. steel producers. The Bloomberg consensus expects hot-rolled coil prices to be stable in the second half of 2017 with moderate increases expected in 2018 (see Chart 7). Domestic demand is set to rise 3.0% in 2017 and 2.9% in 2018, according to the World Steel Association. With the U.S. economy on track to grow 2.3% in 2017 and 2.5% in 2018, nonresidential construction, real estate development, energy production and aerospace manufacturing will keep steel demand growing (see Charts 8, 9, 10, and 11). With slower sales in 2017, auto production has softened, but sales should recover with the economic expansion.

3 PNC METALS INDUSTRY UPDATE 3 PNC ECONOMIC REPORT (Continued)

4 PNC METALS INDUSTRY UPDATE 4 PNC ECONOMIC REPORT (Continued) Visit to view the full listing of economic reports published by PNC s economists. The material presented is of a general nature and does not constitute the provision of investment or economic advice to any person, or a recommendation to buy or sell any security or adopt any investment strategy. Opinions and forecasts expressed herein are subject to change without notice. Relevant information was obtained from sources deemed reliable. Such information is not guaranteed as to its accuracy. You should seek the advice of an investment professional to tailor a financial plan to your particular needs The PNC Financial Services Group, Inc. All rights reserved.

5 PNC METALS INDUSTRY UPDATE 5 CARBON FLAT ROLL TAKES A DIP IN Q2 Carbon flat roll pricing fell about $60/NT during the quarter after inching upwards during most of Q1. Spreads on CRC and galvanized remained elevated at $200 for CRC and $300 for galvanized. The market, based upon the CME Midwest HRC forward price averaging $635, is expecting prices to return to Q1 levels for the balance of the year. Stainless cold-rolled coil also fell during the quarter, ending up at $1.04/lb or down 14%. This reflects the drop in nickel prices during the quarter. The other prices that we track remained basically flat during the quarter. Below is the monthly detail. METALS PRICING Carbon Flat-Rolled Steel $/NT Product April May June Hot-Rolled Cold-Rolled Galvanized Discrete Plate $/NT Product April May June A A ,040 AR ,060 Wide Flange Beam $/cwt. Size April May June 24"x12¾" "x6" MBQ $/cwt. Shape April May June 1" 1018 round Rebar $/cwt. Grade 60 Size April May June 16 mm - # SBQ $/cwt. 1 round Grade April May June HR 4140 Q&T Pipe & Tube $/NT Product April May June OCTG J55 1,000 1,030 1,030 Linepipe, ERW Aluminum $/lb Alloy April May June Stainless $/lb Cold-Rolled Coil Grade April May June Copper $/lb April May June Comex Avg Ferrous Scrap Prices $/GT Midwest Grade April May June No. 1 HMS Shredded Nickel $/lb April May June LME Avg The metals market price guide is courtesy of Sector3 Appraisals, Inc., provider of asset valuation and advisory services for ABL lenders, specializing in metals, chemicals and commodities. For more information, contact: Michael Dawson Editor, Market Research mdawson@sector3appraisals.com

6 PNC METALS INDUSTRY UPDATE 6 PRICING FOR PUBLIC NOTES AND BONDS Prices rose modestly during the quarter. The PNC IG Metals Bond Index saw spreads decline just 1.43 basis points and the PNC HY Metals Bond Index saw spreads fall basis points. This reflects the current business climate for the metals sector as general business conditions remained very similar during Q2 when compared to Q1. The only new issue during the quarter was done by Commercial Metals. CMC raised $300,000,000 for 10 years, 5-year NC at 5.375%. METALS BOND INDEX* As of Date PNC IG Metals Bond Index PNC HY Metals Bond Index 7/14/17 4/13/2017 Change 7/14/2017 4/13/2017 Change Members Effective Maturity (Years) Composite Rating BBB+ BBB+ none B+ B+ 0 Weighted Avg. Coupon 4.62% 4.80% -0.19% 7.15% 7.01% 0.14% Yield to Worst 3.26% 3.16% 0.10% 7.63% 7.57% 0.06% Option Adjusted Spread to Treasuries (bps) *Index members are market-value weighted. Source: Bloomberg METALS BOND UPDATE Issuance Date Issuer Amount Outstanding ($MM) Structure Moody's Rating S&P Rating Maturity Coupon Rate Price at Issuance Issuance Spread over Treasury 7/14/2017 Yield to Interp. Spread Worst (G-Spread) 4/13 Interp. Spread Δ in Spread (bps) %Δ in Spread Steel Mills 9/16/2014 AK Steel Corp $406.2 Sr Unsecured B3 B- 10/1/ % bps 4.070% 370 bps 442 bps -72 bps -16.4% 3/22/2012 AK Steel Corp $279.8 Sr Unsecured B3 B- 4/1/ % bps 4.793% 488 bps 519 bps -31 bps -6.0% 6/20/2016 AK Steel Corp $ st lien B1 BB- 7/15/ % bps 4.135% 305 bps 302 bps 3 bps 1.0% 3/25/2014 ArcelorMittal $750.0 Sr Unsecured Ba1 BB+ 3/25/ % bps 0.306% 97 bps 125 bps -28 bps -22.2% 6/1/2015 ArcelorMittal $324.2 Sr Unsecured Ba1 BB+ 6/1/ % bps 2.904% 145 bps 200 bps -55 bps -27.4% 2/28/2012 ArcelorMittal $1,100.0 Sr Unsecured Ba1 BB+ 2/25/ % bps 3.751% 202 bps 191 bps 11 bps 5.5% 6/1/2015 ArcelorMittal $500.0 Sr Unsecured Ba1 BB+ 6/1/ % bps 4.184% 205 bps 227 bps -22 bps -9.6% 3/7/2011 ArcelorMittal $1,000.0 Sr Unsecured Ba1 BB+ 3/1/ % bps 6.378% 367 bps 369 bps -2 bps -0.5% 5/20/2013 Commercial Metals Co $330.0 Sr Unsecured Ba2 BB+ 5/15/ % bps 4.473% 259 bps 269 bps -11 bps -4.0% 4/29/2014 GTL Trade Finance Inc $1,165.6 Sr Unsecured Ba3 BBB- /*- 4/29/ % n/a 5.412% 336 bps 380 bps -44 bps -11.5% 4/16/2014 GTL Trade Finance Inc $500.0 Sr Unsecured Ba3 BBB- /*- 4/16/ % bps 7.258% 445 bps 482 bps -37 bps -7.6% 12/3/2007 Nucor Corp $600.0 Sr Unsecured Baa1 A- 12/1/ % bps 1.640% 69 bps 86 bps -17 bps -20.0% 6/2/2008 Nucor Corp $500.0 Sr Unsecured Baa1 A- 6/1/ % bps 1.745% 59 bps 101 bps -42 bps -41.2% 9/21/2010 Nucor Corp $600.0 Sr Unsecured Baa1 A- 9/15/ % bps 2.550% 74 bps 74 bps 0 bps -0.6% 7/29/2013 Nucor Corp $500.0 Sr Unsecured Baa1 A- 8/1/ % bps 2.774% 84 bps 89 bps -5 bps -5.9% 12/3/2007 Nucor Corp $650.0 Sr Unsecured Baa1 A- 12/1/ % bps 4.140% 157 bps 181 bps -24 bps -13.3% 7/29/2013 Nucor Corp $500.0 Sr Unsecured Baa1 A- 8/1/ % bps 4.071% 133 bps 153 bps -20 bps -13.1% 9/9/2014 Steel Dynamics Inc $700.0 Sr Unsecured Ba2 BB+ 10/1/ % bps % 45 bps 201 bps -157 bps -77.8% 9/9/2014 Steel Dynamics Inc $500.0 Sr Unsecured Ba2 BB+ 10/1/ % bps 3.463% 217 bps 226 bps -10 bps -4.3% 12/10/2007 United States Steel Corp $161.3 Sr Unsecured Caa1 B 2/1/ % n/a 2.622% 193 bps 186 bps 7 bps 3.6% 3/19/2010 United States Steel Corp $431.8 Sr Unsecured Caa1 B 4/1/ % bps 4.167% 274 bps 296 bps -21 bps -7.2% 3/26/2013 United States Steel Corp $200.4 Sr Unsecured Caa1 B 4/1/ % bps 4.688% 377 bps 417 bps -40 bps -9.6% 5/10/2016 United States Steel Corp $ st lien B1 BB- 7/1/ % bps 3.766% 269 bps 275 bps -6 bps -2.1% 3/15/2012 United States Steel Corp $400.0 Sr Unsecured Caa1 B 3/15/ % bps 5.863% 490 bps 378 bps 112 bps 29.7% 5/21/2007 United States Steel Corp $350.0 Sr Unsecured Caa1 B 6/1/ % bps 7.439% 490 bps 509 bps -19 bps -3.7% Distribution 4/12/2013 Reliance Steel & Aluminum Co $500.0 Sr Unsecured Baa3 BBB 4/15/ % bps 3.248% 132 bps 164 bps -31 bps -19.1% 11/20/2006 Reliance Steel & Aluminum Co $250.0 Sr Unsecured Baa3 BBB 11/15/ % bps 5.241% 269 bps 288 bps -19 bps -6.7% 5/24/2016 Joseph T Ryerson & Son Inc $ st lien Caa1 B 5/15/ % bps 6.024% 475 bps 568 bps -93 bps -16.4% 4/13/2010 Worthington Industries Inc $150.0 Sr Unsecured Baa3 BBB 4/15/ % bps 2.456% 110 bps 139 bps -30 bps -21.5% 4/15/2014 Worthington Industries Inc $250.0 Sr Unsecured Baa3 BBB 4/15/ % bps 4.019% 185 bps 199 bps -14 bps -6.8% Specialty 2/23/2007 Arconic Inc $500.0 Sr Unsecured Ba2 BBB- 2/23/ % n/a n/a 2.522% 130 bps 91 bps 39 bps 42.6% 4/21/2011 Arconic Inc $1,250.0 Sr Unsecured Ba2 BBB- 4/15/ % bps 3.536% 197 bps 187 bps 10 bps 5.1% 2/23/2007 Arconic Inc $627.2 Sr Unsecured Ba2 BBB- 2/23/ % n/a n/a 3.741% 197 bps 227 bps -30 bps -13.4% 1/25/2007 Arconic Inc $625.0 Sr Unsecured Ba2 BBB- 2/1/ % bps 5.895% 331 bps 337 bps -6 bps -1.8% 9/27/2016 Alcoa Nederland Holding BV $750.0 Sr Unsecured Ba3 BB- 9/30/ % bps 4.452% 325 bps 316 bps 9 bps 2.9% 9/22/2014 Arconic Inc $1,250.0 Sr Unsecured Ba2 BBB- 10/1/ % bps 4.303% 220 bps 250 bps -30 bps -11.9% 9/27/2016 Alcoa Nederland Holding BV $500.0 Sr Unsecured Ba3 BB- 9/30/ % bps 5.044% 338 bps 311 bps 27 bps 8.7% 6/1/2009 Allegheny Technologies Inc $350.0 Sr Unsecured B3 B 6/1/ % bps 4.983% 375 bps 310 bps 65 bps 20.9% 7/12/2013 Allegheny Technologies Inc $500.0 Sr Unsecured B3 B 8/15/ % bps 6.984% 503 bps 562 bps -59 bps -10.5% 6/30/2011 Carpenter Technology Corp $250.0 Sr Unsecured Ba2 BBB- 7/15/ % bps 3.913% 241 bps 235 bps 6 bps 2.6% 2/26/2013 Carpenter Technology Corp $300.0 Sr Unsecured Ba2 BBB- 3/1/ % bps 3.980% 217 bps 225 bps -7 bps -3.3% 12/20/2012 Precision Castparts Corp $1,000.0 Sr Unsecured A2 AA- /*- 1/15/ % bps 1.418% 32 bps 44 bps -11 bps -26.2% 6/10/2015 Precision Castparts Corp $550.0 Sr Unsecured A2 AA- /*- 6/15/ % bps 1.772% 28 bps 51 bps -23 bps -45.0% 12/20/2012 Precision Castparts Corp $1,000.0 Sr Unsecured A2 AA- /*- 1/15/ % bps 2.470% 59 bps 71 bps -12 bps -16.8% 6/10/2015 Precision Castparts Corp $850.0 Sr Unsecured A2 AA- /*- 6/15/ % bps 2.884% 72 bps 84 bps -11 bps -13.7% 6/10/2015 Precision Castparts Corp $275.0 Sr Unsecured A2 AA- /*- 6/15/ % bps 3.810% 131 bps 138 bps -7 bps -5.4% 12/20/2012 Precision Castparts Corp $500.0 Sr Unsecured A2 AA- /*- 1/15/ % bps 3.846% 112 bps 121 bps -9 bps -7.6% 6/10/2015 Precision Castparts Corp $325.0 Sr Unsecured A2 AA- /*- 6/15/ % bps 3.884% 108 bps 119 bps -11 bps -9.0% 6/3/2014 Triumph Group Inc $300.0 Sr Unsecured B1 B 6/1/ % bps 5.276% 353 bps 424 bps -70 bps -16.6% Pipe & Tube 8/29/2016 Novelis Corp $1,150.0 Sr Unsecured B2 B 8/15/ % bps 5.004% 321 bps 342 bps -21 bps -6.0% 9/14/2016 Novelis Corp $1,500.0 Sr Unsecured B2 B 9/30/ % bps 5.342% 322 bps 346 bps -24 bps -6.9% 6/14/2016 Zekelman Industries Inc $375.0 Secured Caa1 B 6/15/ % bps 5.451% 418 bps 407 bps 11 bps 2.8% Suppliers 3/30/2015 Cliffs Natural Resources Inc $ st lien Ba3 BB- 3/31/ % bps 3.299% 214 bps 296 bps -82 bps -27.6% 11/20/2012 GrafTech International Ltd $300.0 Sr Unsecured Caa2 CCC+ 11/15/ % bps % 917 bps 1007 bps -90 bps -8.9% 10/16/2013 TMS International Corp $275.0 Sr Unsecured Caa1 B 10/15/ % bps 6.423% 518 bps 569 bps -51 bps -9.0% *+/*- Indicates ratings currently on review for upgrade/downgrade Source: Bloomberg

7 PNC METALS INDUSTRY UPDATE 7 SYNDICATED BANK LOAN FINANCING Activity in the bank loan market improved during the quarter. There were a total of 13 deals for $6.45 billion. This dollar volume is 61% higher than Q and 21% higher than the same quarter last year. Interestingly, the total U.S. syndicated loan market hit a record of $1.2 billion in the first half of 2017, but the rate of growth was significantly outpaced by the activity in metals. Those going to the bank market for capital covered a broad spectrum of the industry, including specialty metals (Allegheny Technologies), scrap metals (Alter Trading), foundries (East Jordan, Amsted, American Cast Iron Pipe), carbon long products (Commercial Metals), coke manufacturing (Sun Coke), distribution (Ta Chen), and aluminum (Wise Alloys). Below are details for some of the past quarter s transactions. Source: Thomson Reuters, LPC This newsletter was prepared for general information purposes only and is not intended as legal, tax or accounting advice or as recommendations to engage in any specific transaction, including with respect to any securities of PNC, and does not purport to be comprehensive. Under no circumstances should any information contained in this newsletter be used or considered as an offer or commitment, or a solicitation of an offer or commitment, to participate in any particular transaction or strategy. Any reliance upon any such information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Neither PNC Bank nor any other subsidiary of The PNC Financial Services Group, Inc. will be responsible for any consequences of reliance upon any opinion or statement contained here, or any omission. The opinions expressed in this newsletter are not necessarily the opinions of PNC Bank or any of its affiliates, directors, officers or employees. PNC is a registered mark of The PNC Financial Services Group, Inc. ( PNC ) 2017 The PNC Financial Services Group, Inc. All rights reserved. CIB ENT PDF