Coming on the heels of a record-setting 2004, hints of pessimism are creeping into comments from producers and distributors.

Just as fears of higher inflation, higher interest rates and weaker profits have agitated the stock market so far this year, the metals market has also gotten off to a nervous start.

Though GDP remains at a healthy level, spiking energy prices and disappointing employment growth weigh heavily on consumer confidence. Surveys of steel users suggest that business conditions and order activity may be slowing slightly in some industries.

In the bellwether automotive sector, production and sales of cars and light trucks are expected to slip a bit this year, albeit from a lofty level. Automakers and their parts suppliers continue to chafe under high raw materials costs.

Service centers can expect to feel continued pressure from automotive customers seeking cost relief in 2005.

Service center shipments of steel were down a few percentage points in January and February, compared to the same period in 2004. Aluminum shipments declined a bit in February, though they continued to lead last year. Distributor shipments of copper and copper alloy products dipped by 3.6 percent in the first two months of this year.

At the same time, steel imports grew 20 percent. Analysts expect to see a decline in steel imports in the second quarter, however. U.S. spot prices for hot- and cold-rolled sheet fell in February for the fifth month in a row, as the sky-high prices of 2004 continued to moderate. Meanwhile, prices in Asia and Europe are on the increase, making it less attractive for domestic buyers to seek import sources.

Some steel users contend they are still plagued by shortages and late shipments of many steel products, and they worry that lower import levels will worsen the supply situation. That adds volume to their cries for the ITC to remove antidumping and countervailing duties on various steel products during sunset reviews upcoming in Washington. Steel industry executives, of course, will argue that the government must continue to protect the domestic industry from unfairly subsidized foreign competition.

That metal users would still have trouble finding material is a bit surprising considering the abundance in warehouses across the country. True demand in the marketplace is being masked by excess inventory throughout the supply chain, as service centers find themselves saddled with late-arriving material ordered during the short-supply frenzy of last year.

As of February, MSCI members were holding 3.5 months of steel inventories and 3.8 months of aluminum inventories—20 percent more than in the same month last year. Those figures do not include stacks of foreign steel sitting in U.S. ports or an unknown quantity in various other stages of the pipeline.

Japanese and European metals warehouses typically keep only one to two months’ supply on hand, compared with over four months for many service centers in North America. The domestic target should be 2.7 months, says one executive, who estimates that U.S. service centers are sitting on 1.5 million tons of excess inventory.

“I am not bullish as far as the second quarter is concerned. All parties will be working off much larger inventories
than we anticipated,” says Michael Hoffman, president of Macsteel Service Centers USA.

Many expect inventory levels to normalize in May, but it may be the second half before supply syncs with demand and service centers can breathe a little easier.