Analysts and market experts are “quite encouraged” that demand for steel products and processing services will carry on strong well into 2005.

By Corinna C. Petry,
Managing Editor

Sidebars and Tables:

• Logistics Bottlenecks Persist

At last year’s Toll Processing Conference, “we had no sense of the magnitude of what was to come,” recalled Glenn Kidd, U.S. Steel Corp. market research manager, who forecast a strong and less chaotic steel market in 2005 during his remarks at last month’s toll processing conference in Orlando, Fla.

February marked the 40th month of U.S. economic growth, he said. “Consumer confidence is still strong. Many economists are predicting annual growth of 2.5 to 3.6 percent over the next two years. Any time GDP grows at or above 2.4 percent, steel consumption will grow. So we’re quite encouraged,” Kidd said.

U.S. Steel forecasts car and light truck sales at 17 million units this year, vs. 16.9 million units in 2004. “Housing sales and starts continued at a strong pace. Any slowdown is not necessarily troubling. Home remodeling is an important consumer sector, especially for appliances,” Kidd said. “I am forecasting another improvement in 2005.”

He added that the manufacturing sector is growing, capital goods shipments have turned around and new orders for capital goods are improving. Defense spending also helps boost steel demand.

Industrial production is at an all-time high in 2004 and 2005, after utilization rates had dropped very low in 2002 and 2003. In certain steel-consuming industries—such as metal building, framing and fabricating—an 82 to 83 percent utilization rate starts to be a driver of growth. “That’s the range at which a manufacturer decides it’s time to expand, or buy a new piece of equipment,” Kidd said.

“We are now at an industrial level higher than we’ve ever seen in the history of the country, though it doesn’t always feel like it. Industrial production is back on track, growing regularly, and will be strong through at least 2006,” he said, adding that consensus forecasts show a 10.2 percent increase in capital spending.

When demand rises and capacity is limited, “that has a positive impact on prices,” Kidd continued. U.S. steel consumption should rise 3 percent this year over 2004. “It is both healthy and growing.”

One small worry in early 2005 is excess inventory among metal warehouses. “The dilemma is, what’s the right amount of inventory? Uncertainty drives inventory position.” Kidd questioned whether service centers should be working down their inventories so fast, because when demand rises again, they’ll be crying shortage. “They should be protecting their inventory position against the uncertainties of the market,” he said, rather than liquidating it at a discount.

News on the global raw materials front continues to be startling for steel producers, who feel the impact on their costs. Kidd noted that North America “is still pretty self sufficient” with its supply of raw materials, “but not with the cost of producing them.”

World iron ore producers are seeking and getting contract price increases of 50 to 90 percent. World coal producers secured increases of well over 100 percent for 2005 deliveries.

Matt Takahashi, senior vice president at Mitsui USA, a trading company, forecast steel market activity through mid-century. “U.S. demand for steel will increase by at least 40 million tons by 2050—just at the same time that iron ore in U.S. mines will run out.”

In the short term, blast furnace operators should remain busy. “We have seen operating rates of over 90 percent. U.S. Steel and International Steel Group are very aggressive in their plans to reline their blast furnaces,” Takahashi says. He believes that America will continue to need its blast furnaces.

One big challenge is to maintain the pace of steel company reorganization and rationalization, in order to keep the U.S. industry competitive with global players, he said.

Takahashi also delved into the steelmaking supplies issue, noting that everyone in Asia is talking about it. “There will be a 120 percent increase in the coking coal price during 2005, vs. 2003. Japanese steel mills had a very difficult time in negotiations with automotive customers about passing along their higher raw material costs. Mining companies have to spend a lot of money to improve and increase mining capacity. They have to insist on a certain number to get a return on their investment.”

Iron ore companies won’t be shy about raising their prices after seeing how coking coal suppliers ratcheted up their own. “The impact won’t be felt in Japan alone,” he said, adding that cost increases could add up to $120 to $150 per ton of finished steel.

Mark Parr, steel equities analyst and researcher for Keybanc Capital Markets, Cleveland, is confident the steel market recovery will continue. “The mills do have pricing power right now, and it doesn’t seem to be going away.”

Last year’s boom was achieved through both greater demand and inventory replenishment. Inventories that have accumulated at the mill, service center and end-user levels are being worked down, Parr said. “I don’t think this is a particularly unhealthy level of inventories. There may be 500,000 to 1 million tons of excess, but that’s not insurmountable in a 65 million to 70 million ton market, as we look toward the seasonal strength of 2005.”

Imports don’t appear to pose any threat of oversupply or any downward pressure on pricing during the first half. Today, domestic prices are pretty much in line with global prices, said Parr. “Mills have maintained supply discipline thus far, a departure from previous cycles. Domestic prices seem poised for upward movement by the second quarter.” Given the tight raw materials situation, “surcharges are going to be around for a while,” he added.

North American steelmakers have entered a new phase of attempting to commercialize scrap substitute technology to take advantage of deposit fines in Minnesota, Michigan’s Upper Peninsula and Canada.

“While we only have a 20-year supply of iron to produce taconite in the United States, there is much more supply of fines and other iron-containing materials that have been lying around for decades,” Parr said. “We hope these can be commercialized.”

Parr predicts the mills will try to rebuild their supply pipelines this year.

“When you used to tour a mill, the operators would brag about how they have no raw material inventories and had two days left before the boat showed up. In the last three to four months as I toured mills, they showed me four months of inventory, and said they want to stockpile more because they are worried about the supply environment.

“There have been enough jolts to the system in the last 18 months that I think mill inventories will grow higher over the next 12 to 18 months,” Parr said.
Meanwhile, he forecast that hot-rolled sheet prices would hold at $600 to $620 per ton.

“We’re not seeing much bad news,” said Parr. “We have a very strong Class 8 truck market, stronger [automotive] transplant activity, recovering construction markets, and strengthening oil and gas markets.”

Strong momentum in durable goods orders, manufacturing production and manufacturing employment are also encouraging, he noted. “There is not a lot to be concerned about, except for automotive production, which is flat.”

Steel is a whole new ball game in the United States, Parr said. “It’s very interesting to see the sustained level of these prices moving into 2005. I was shocked that the earnings of these companies moved up so fast. It makes it fun to be in the steel industry.”

Offering the end-user perspective was Peter A. Dow, director for strategic sourcing and import compliance at ITW Food Equipment Group, who was less thrilled about last year’s steel market and more wary about product availability and pricing in 2005.

“Everyone wants a healthy, vibrant domestic steel industry, especially American manufacturers and consumers who don’t want to be completely dependent on foreign sources. But what happened here was ridiculous. It was Mills Gone Wild.”

U.S. steelmakers did not a make a lot of friends last year, said Dow. They were “guilty of a huge amount of opportunism by raising prices and changing the rules of the game as they went along, such as gauge and width extras. It led to all kinds of hysteria” among buyers.

What he resented most “was the way we were treated. There was no differentiation between loyal customers and those who are much more fickle. All of a sudden, we were on allocation. We saw these as arbitrary restrictions, suspect as supply manipulation,” Dow said. In addition, lead times were extended and deliveries were late, “even worse than usual.”

He did have positive things to say about steel processors, giving them credit for having market insights and industry relationships that end-users lack. “Give advice to your loyal customers and defend them,” Dow suggested.

Manufacturers are going to demand more value-added services of growing importance from processors, especially as they focus on their core capabilities and eliminate processes that don’t fit.

Manufacturers are also now relying less on MRP (Materials Resource Planning) systems because they generate too many reports, prompting “legions of people” to pore over reports to decide when to order supplies, Dow said.

“We were taught that’s what you had to do to be efficient and functioning. We’ve since learned that we don’t. We are completely away from it and life is much better today. But that opens the door to suppliers to come in, take over and manage our inventory,” he added.

Services that will be required of metals suppliers will include vendor managed inventory and Just-in-Time/Kanban programs, plus technical advice, especially when something goes wrong. “I want help solving problems,” Dow concluded.