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Steel industry suffers as demand for, production of machinery drops

| Saturday, Jan. 2, 2016, 9:00 p.m.
Heavy machinery from Peoria, Ill.-based Caterpillar Inc.

Add weakness in industrial and agriculture machinery to the list of problems for steel producers.

Already hammered for the past year by falling oil prices that caused energy companies to cut demand for steel pipe, and record levels of cheap imports depressing prices, U.S. Steel Corp. and others are facing a slump in another key market.

Construction equipment maker Caterpillar Inc., tractor manufacturer Deere & Co. and mining machinery maker Joy Global are cutting production — which means the companies are buying less steel. Even Mack Trucks, the manufacturer of big rigs and other heavy-duty trucks, is laying off workers as it faces falling demand.

“Other than autos and appliances, the steel business is weak,” said John Tumazos, an analyst and owner of Tumazos Very Independent Research in Holmdel, N.J.

Oil isn't the only commodity experiencing price declines. Raw materials and minerals such as copper, coal and iron ore have plunged amid concerns about slowing growth in China, which once gobbled up those commodities to fuel a red-hot economy. Caterpillar and Joy Global, which have plants in Western Pennsylvania, have responded with layoffs in recent months as they reduce the amount of construction and mining machinery they produce.

At the same time, farmers are buying fewer combines and other machinery because their profits are being squeezed by weak grain prices.

Deere & Co. will lay off 220 workers early this year at a tractor plant in Illinois as it adjusts to falling sales.

“The layoffs reflect last week's forecast by Deere that agricultural machinery sales will decrease in fiscal year 2016,” the company said Nov. 30.

Peoria, Ill.-based Caterpillar said it laid off 40 workers on Dec. 2 at its Houston, Pa., plant “to bring production in line with demand,” according to a statement from spokeswoman Lisa Miller. Prior to the layoffs, the plant employed 340 workers, who manufactured continuous miners, highwall miners and transportation vehicles.

Milwaukee-based Joy Global, which has more than 1,000 employees at five facilities in Western Pennsylvania, in October laid off 85 people at a plant in Franklin, where it employs more than 600 people. The company has struggled with falling demand for coal, and closed or announced plans to shutter plants in Kentucky, Ohio and overseas.

“Demand is down and we have to adjust to focus on what will be needed for the long term,” spokeswoman Caley Clinton said.

For steel producers, the weakness in industrial, mining and agriculture end markets means lower sales, which have already been hurt by falling demand for pipe from drillers.

U.S. Steel, for example, is seeing the weakness hit its service center business, a broad sector that includes sales to companies such as Caterpillar and Deere.

“Service center buying continues to be below where it was at this time last year, as they continue to rebalance inventories to meet forward demand expectations,” CEO Mario Longhi said on a call with analysts in November.

The company, which doesn't break out sales to industrial and agricultural end markets, declined to comment for this story.

“The industrial equipment market is in a mixed condition, with a slight improvement in demand for construction equipment, steady demand in the railcar markets, and weakness in mining equipment,” Longhi said.

Service center sales accounted for 18 percent, or $2.1 billion, of the Downtown-based company's $11.7 billion in flat-rolled steel sales in 2014, the most recent figures available. In 2013, service center sales accounted for $2.7 billion out of $14.6 billion in flat-rolled sales.

Service center owner Esmark Inc., an Edgeworth-based company with operations near Chicago and Cleveland, is seeing lower revenue and has responded by cutting costs and inventory, CEO James Bouchard said.

Revenue from Esmark's steel division was predicted to be about $410 million in 2015, down about 5 percent compared with last year, Bouchard said. The company lowered its inventory in August and September, but was starting to replenish stocks at the end of the year, he said.

“Now we're actually bringing steel in,” he said.

Expense reductions have led to improved profitability at the company, which generates about 70 percent of its revenue from selling steel that goes into consumer products, including cars, appliances, fireplace inserts and steel shelving used in distribution centers.

“Considering the steel market has collapsed, we've held our own,” he said.

“Eventually, the steel business will come back and we'll be in good position on the cost side.”

Alex Nixon is a Tribune-Review staff writer. Reach him at 412-320-7928 or anixon@tribweb.com.

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