October 19,2011 Roundtable

Moderator: What new industries are being served by SSTTAC members?

Phil Belejchak: I’d like to go first. We have a new alloy being launched that’s a hyper device, 7207HD and we found an application for potash production in our hyper duplex setup performing titanium for that application. So I’m very excited about the possibilities in the U.S. and Canada for that application for evaporator tubes. We’ve seen a lot of activity relating to LNG plants and one of our super austenitics 254SMO. The potash production is an absolute new application for a new alloy.

Moderator: Okay, any other comments about new industries or new products?

John Coates: We’ve had good luck of late in hydrogen distribution where they require input of extremely long length coils. They’ve gotten back into some larger hollows to produce longer runs for these hydrogen distribution facilities.

Moderator: What is the current market outlook for the industry?

John Coates: Coming off of a good 2010 and 2011 I think we diversified enough amongst our products that right now I would say that the general outlook is quite good for 2012. I can’t come out and state specifically what we’re looking at but double digits is tough only really from a capacity standpoint. But there are just a lot of markets in general right now that I think are healthy as to their outlooks.

Joe Handrahan: The over two percent growth that was projected by the government is really less than two percent. I’m kind of glad because I think the market is going to last longer for us as a whole rather than maybe two or three years. We’re very busy and have a very strong backlog on bringing on some more heat treat capacity so that I can meet current demands. I’m late on a lot of deliveries. Not because of raw material but because of processing and 2011 is going to be a good year. 2010 was a pretty good year actually. 2012 I’m looking at continuous reasonable growth. We don’t have to see a whole lot of it. But nuclear is part of the commercial nuclear market. Natural gas in our area is good. We do small diameter materials for instrumentation applications. That market is pretty busy. Natural gas is really going to push a lot of products with the Marcellus shale situation.

Paul Burdette: For our production in Houston, the big tonnage product historically has been boiler tubes for the power industry. That business has really completely vanished in the last three years. The forecast is still pretty bleak for the next three or four years based on the fact that everybody is going to natural gas power plants again. But in all the other segments, business is going to be pretty steady similar to this year. We don’t see any other big changes.

Holly Both: For 2012 our outlook is strong. We expect another robust year and some growth within our aerospace market for tubing, specifically due to some product introduction, reintroduction and then within our energy markets propelled by condenser feed water heater tubes. The outlook in North America is not good but in Asia it is very strong outlook and with very attractive jobs on the horizon.

Phil Belejchak: I would say that the outlook is strong. We see activity in many different sectors driven by energy, oil and gas in particular. A lot of the capacity for OCTG is booked out. So we’re seeing opportunities there. Talk about new sectors -- fertilizers/potash production is very good. The research for nuclear in certain areas is very good. And I would say that the country’s recession hasn’t impacted our market as much as I would have expected. And new sectors for us like automotive have been very strong. I would say we’re very bullish on activities in 2012.

Joe Handrahan: Can I ask a question around the table? How does everyone feel looking in their crystal ball about the recession?

John Coates: My take is that as much as we try to talk ourselves into a double dip, we’re not going to do it. I think we have lost sight of just how far down the 2009 recession was and it is therefore a long climb back out, during which we can expect some speed bumps. So I’m not a double dip believer. Holly, what about you?

Holly Both: Nor am I. I think there are strong indicators domestically and worldwide for some continued, stable growth.

Phil Belejchak: One more big factor that impacts many of us is that the inventory levels have been brought down in many areas and I don’t think the distribution partners we have are going to let those inventory levels decline like they did in 2008. So I think that’s also a healthy factor about our market. Rufino, everybody really more or less gave an indication as far as their activity for 2012 - what are you projecting?

Rufino Orce: I have had a healthy 2011. I can see is to increase like twenty percent over my budget of 2011. But I still continue seeing a strong demand for our products, but with a lot of uncertainty. I remember before the last crisis that overnight the market disappeared, so this is my reluctancy to be too certain in my projections.

Joe Handrahan: I have a follow up question Rufino, for everyone. What does your crystal ball look for of the recessionary situations. Do you feel that it may happen or it may not?

Rufino Orce: I think it’s not going to happen. (Others agree.)

Moderator: It is a room full of optimists.

Moderator: Okay. Next question. Any new examples of quality issues with imported product?

Phil Belejchak: I have had feedback from our sales unit in China where Sinopec, which is a large consumer, has rejected certain manufacturers of Chinese origin. That’s the newest indication that I know. And not that someone else would say so but certain hollow issues have surfaced that some of the local producers from China.

John Coates: In very uncharacteristic situation, we have seen an inaccurate melt serve from a Japanese supplier. I would say that is truly an anomaly. We’ve been buying this product from them for quite some time and really have had great success. I can say sitting here that this will be the first time in my nine years in this organization where I have returned a hollow to Japan. Speaking with them, we looked at the import statistics and we see that Japan is up considerably. You wonder about the problems that they’ve had with this tsunami and so forth whether there is a lot of pressure on Japan to boost production to get the economy back in line. Are they going to reach out and make a general assumption on one error? It’s very unlike them, but maybe that does correlate right to their aggression in the market. A little more aggressive than normally. Paul Burdette: What is it, a melt problem or a tolerance problem?

John Coates: Yes. There were elements in the chemistry that were not just a little off spec. It was out of ASTM. So first thing we do is cut a piece off, have it tested, and verify everything that comes in our door. So it’s pretty clear.

Holly Both: I’ll make comment on this. There was an article in American Metal Market maybe three months ago about Chinese tubing and having some quality issues. Maybe several weeks before that we were starting to get phone calls, about opportunities that we had not quoted previously about some smaller niche areas we had not been involved in. We’ve seen that continue to increase and we’ve been capturing probably six to eight new customers throughout late summer to now as a result of that. It’s quality issues and it’s where our price levels are often double but the customers had such a problem that there will be poor quality concerns. Paul Burdette: We haven’t bought any material outside our group for the past two years so I really can’t comment on it.

Moderator: Okay. How about new production capabilities, including any new certifications?

Rufino Orce: We are this month installing a rotor machine that we expect to put in production next month. And we have ordered as well a new annealing furnace.

Paul Burdette: Bright anneal?

Rufino Orce: Yes.

John Handrahan: I’m bringing in another bright anneal from someone who had the plant. But it hasn’t been fired up in ten years so I don’t have any idea how they rebuilt it. That’s been a pincher in our operations. We have enough cleaning, we have enough drawing. We didn’t have the furnace capacity so we have two furnaces running now on atmosphere.

Phil Belejchak: And Sandvik will also invest in a new furnace for the Scranton complex. It should be operational by April - bright anneal.

Moderator: Okay, great. Thank you.

Rufino Orce: So we are expanding.

Moderator: Absolutely.

Paul Burdette: When you forecast 20 percent increase for next year, that is what happens.

Moderator: How about the availability of raw materials and the capability to meet delivery requirements in the supply chain? Let’s take raw materials first.

Paul Burdette: Everything that we currently purchase comes from Europe and we’re not a melter in Europe. So we buy bar. And the European bar people don’t want to sell bar. They want to sell some other kind of product now. So there’s a lot of cooperation going on between Sandvik and our company. They’re supplying us bar and we making product for them at the same time. That’s the only interruption in the supply chain that I’m aware of.

John Coates: Surprisingly enough, despite our reliance upon the Japanese, their problems have had very little effect on us. Most of the damage was in the north, while the production is in the south. There’s very little impact to our lead times.

Rufino Orce: I see lead times are really increasing in China clearly, in Europe too. So this is the impact I see in the supply of raw materials. Longer lead times.

Phil Belejchak: I think it’s well stated by Paul that recognizing the starting extrusion material is bar or extrusion billet, there seems to be a shortage of this product, at least in Europe. And I think that indirectly will have an impact on us all. John Coates: Shortage of extruded or shortage of bar?

Phil Belejchak: Bar. There’s a shortage of bar. As Paul indicated the bar producers would prefer to sell the value added products, so why not sell a finished bar in lieu of an extrusion bar where the pricing differential is substantial. So with the market being somewhat robust and then a scarcity of bar product, it’s hard to find extrusion bar. Sandvik used to have a supplier from Canada that is no longer in existence. We’ve never been able to replace that secondary supplier for bar. So we’re totally dependant upon our parent company and there is a shortage within the Sandvik group for bar.

Moderator: Thank you very much.