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Steel demand
remains healthy across most end-use markets despite rising prices
and surcharges. Yet each prediction for the next 90-180 days contains
a caveat on the ripple effects of the horrific hurricane season.
By
Corinna Petry,
Managing Editor
Sidebars
and Tables:
Steel
producers, distributors and industry analysts are forecasting continued
economic strength over the next three to six months, driving consumption
of carbon steel flat-roll products up 2 to 3 percent. But a host
of risks could make their forecasts obsolete.
In
automotive, a critical market for the North American flat-roll industry,
production is forecast to hit 16.9 million units this year, rising
to 17.1 million vehicles in 2006. Though the Big Three continue
to lose market share to the New Domestics (such as Honda, Nissan
and Toyota), “automotive is certainly not in a slump,”
commented Roy Platz, director of marketing for Mittal Steel USA,
during the Metals Service Center Institute’s economic summit
last month in Chicago.
June
and July experienced a “very early cleanout of inventory of
2005 models. That usually happens in October and November,”
he added.
John
Anton, director-steel service for Global Insight Inc., Washington,
D.C., expects auto sales to slow next year. “The carmakers
sold forward with their employee discounts, robbing Peter to pay
Paul, and it’s not necessarily profitable. Auto production
during the fourth quarter is replenishing inventory, but it means
a weaker 2006.”
Brian
Aranha, vice president-commercial for Dofasco Inc., Hamilton, Ontario,
forecasts that auto industry steel consumption will be flat going
into next year. “The effect of high gasoline prices on vehicle
sales has yet to be seen.”
Joe
Harden, president of Worthington Steel, Columbus, Ohio, is also
uncertain about the rate of automotive sales next year, “especially
whether $3 a gallon will have any impact, and how quickly it will
change buying patterns of vehicles.”
Steel
suppliers worry about escalating prices for energy, not just from
their own cost point of view, but also with regard to what higher
prices will do to consumer spending.
Up
to now, Platz says, U.S. consumers experienced job growth and rising
wages, which have offset higher energy prices. “The danger
going forward is that as unemployment rates rise, consumer spending
will decline.”
He
predicts steel consumption will shift a bit from consumer durables
to construction. “As people have less money to spend, consumer
durables will wane, but nonresidential construction should be very
strong next year.”
Anton
also expects consumer spending to retreat slightly. “We won’t
see a consumer meltdown. It won’t be like the 1981 recession.
But we might see a noticeable backup in consumer demand.”
Nevertheless,
steel demand should remain healthy as various industries replenish
inventories that declined sharply this year, Platz says. “That
flows very quickly into the need for raw materials.”
Steel
demand will increase in 2006, he notes, “but apparent consumption
will increase even more. That’s because a good chunk of consumption
this year was fed out of inventory.” He estimates 4 million
tons of inventory was consumed. Dofasco’s Aranha puts the figure
at 3 million tons.
“At
least half the growth next year, we think, will be due to the fact
that consumption will not be fed out of inventory,” Platz says,
forecasting that real consumption for flat-roll products will grow
2 to 3 percent in 2006, barring unexpected effects of high natural
gas and crude oil prices.
The
upside of energy prices, of course, is increased oil and gas drilling
activity, which should drive up sales of steel products headed for
oilfields for years to come, Aranha says. “In North America
this year, we expect apparent consumption to be down 6 percent.
In 2006, we are expecting growth of about 3.5 percent in steel consumption
overall.”
Hurricane
nervousness
The lingering effect of Gulf Coast hurricanes on the rest of the
U.S. economy brings some nervousness to the steel industry.
“We
believe Hurricane Katrina had a pretty big impact, but the economy
could deal with it. But our latest thinking is that Rita may be
a one-two punch that may deal some real damage, particularly on
the energy side of things,” warns Global Insight’s Anton.
“Rita may not take as much rebuilding [as Katrina], but shutting
down the energy [sources] could make this a pretty bad winter.”
Based
on Katrina alone, Anton’s forecast calls for weaker consumption
of sheet and stronger consumption of rebar, structural and plate
products, because the latter will be needed for reconstruction.
“Once they rebuild all the houses, they will need new appliances.
So in late 2006 or early 2007, you will see appliance [and sheet
demand] uptick.”
In
the shorter term, he says, the storms “take consumer wealth
away. Sheet is going to be weaker for the fourth quarter, mostly
because of hurricane effects.” Demand for flat-roll will tail
down about 3 percent, he estimates.
Platz
notes that the Federal Reserve revised its GDP growth estimate downward
by 0.5 percent due to the effects of Hurricane Katrina, but he’s
confident that’s only a short-term setback. “We see some
growth being taken out of the second half, but most of that gets
put back in next year. 2006 will see growth due to all of the reconstruction
efforts.”
Chuck
Bradford, president of Bradford Research, New York, points to the
silver lining: “The hurricane damage does represent a great
opportunity for mills and service centers to convince people to
rebuild with steel—to avoid mold problems, insects, as well
as building to withstand storms.”
Inventories
in line,
but buyers cautious
Mike Siegal, chairman of Olympic Steel Corp., Cleveland, sees mill
deliveries moving out and spot prices moving up. “The market
on a consumption basis remains very strong to the end of year and
maybe beyond,” he says, while expressing concern about unpredictable
byproducts of the hurricanes and the outlook for automotive. “Everybody
is concerned with what’s going on in Detroit, in terms of [automotive
supplier] companies’ ability to pay their bills,” he adds.
O’Neal
Steel, Birmingham, and its Metalwest division in Denver each reduced
inventories during the first half, President Bill Jones says. “Our
flat-roll inventory is in good shape. We have seen the market strengthen
somewhat. Our own order rate has increased a good bit. So not only
is our inventory in line, but our shipments are also picking up.”
Customers
are telling O’Neal their business is solid. “For capital
goods and just about all major manufacturing groups, the outlook
is fairly strong. Metal buildings began to pick up this year. For
the first time in four or five years, we are beginning to see an
increase in fabrication/construction markets. We are hearing from
most of our customers that they are busy now, could get even busier
and should be busy for the foreseeable future.”
That
activity level, and higher input costs, is translating into higher
prices from mills, many of which are being noncommittal about availability.
“Mill
lead times are strange. They are acting as though there is a huge
shortage,” commented a commercial executive at one Texas flat-roll
distributor.
William
Vitucci, vice president and chief financial officer of Vitco Steel
Supply Corp., Posen, Ill., calls the mill supply situation “mysterious.”
Producer order books are being shuffled around in terms of when
they open and close, he says, adding, “The mills are not forecasting
product availability.”
Producers’
published prices for hot-roll increased $40 to $60 a ton for October.
“They’re definitely going up. It’s no longer just
based on scrap and raw materials. Energy and hydrogen gas are playing
a bigger role in base prices or in surcharges.”
Vitucci
suggests some of the mills’ pricing moves may not stick. “No
one knows how long to hold off [making purchases] in this volatile
market—whether you hold for prices to go up, or just buy and
play the market as it is.”
Feralloy
Corp., Chicago, is adhering to its traditional buying pattern in
spite of rising prices. Hot-roll prices moved from $480 to $500
a ton in September and to $560 a ton in October, says President
and CEO Frank Walker. All flat-roll products are readily available,
he notes, but “lead times did jump over the last couple weeks.
October is closed and our mill suppliers are booking November.”
The
sell side has Walker pleased. “Since July, our volume has improved
substantially. The consuming industries have improved their inventory
positions so they are more in a buy mode now. Manufacturing has
not improved dramatically, but the inventory correction has taken
place.
“Most
capital goods markets are pretty good,” he continues, especially
agriculture, construction equipment and railcars, “which are
major markets for us. We see nonresidential construction on the
verge of picking up.”
Vitucci also reports a pick-up in activity, even among OEMs that
are ordering strictly for what they need today.
One
flat-roll distributor/processor in Illinois has seen customer orders
move up sharply in the past month, and the company’s sales
manager predicts “a pretty good market for at least the next
60 days.”
Although
he has seen producer pricing rise as much as $110 per ton over the
last few months, “our customers have been accepting the price
increases as we put them out, almost weekly for the last month.”
Orders
are strong from customers that produce railcars, tanks, utility
poles and wind towers. The company also has seen its processing
business jump. “Our production in August increased 30 percent
above the average over the previous six months,” the sales
manager says. “September is on track to do the same, and October
looks just as good for us.”
The
leader of Worthington Steel, based in Columbus, Ohio, says there
has been a disconnect between actual consumption, which is steady,
and apparent demand, which has been “anything but stable.”
President
Joe Harden says steel demand has not necessarily been driven “by
any rationality, but by distribution channels and others acting
emotionally. As prices are perceived to be going up, people buy
steel in excess of their requirements. Then as inventories are deemed
too high, people slow their buying to a level below their typical
consumption.”
Domestic
vs. foreign prices
As domestic steel prices move higher in the second half, some industry
players wonder whether that could lead to a surge in imports.
Dofasco’s
Aranha said during MSCI’s economic summit that hot-roll prices
were reported to be at $510 per ton (September), compared to a first-half
2005 low of $425 and a third-quarter 2004 high of $740.
Citing
figures from CRU International, a metals analysis firm based in
London, he said, “Look at the price between the U.S. and European
exports. Last year, imports took almost 40 percent of the Canadian
market, up from a traditional level of about 25 percent; and up
to 19 percent in the U.S. market, from a traditional level of about
15 percent.”
That
surge in imports in late 2004, he said, was driven by the price
differential between North American pricing and European and Russian
export pricing. The price differential is now at about $153, he
added, so “we should expect another surge.”
During
the second half of 2004, Russia alone exported 600,000 tons of steel
to the United States. “The speed at which steel can move around
the globe in response to price differentials is like something we’ve
never seen before. So given the differential we see now”—Aranha
views $150 as a trigger price—we should expect to see imports
returning, because other countries have more capacity than they
need.”
Due
to both the rapidity at which products migrate and the capacity
at which countries are willing to export, it appears the market
is moving toward less-than-annual cycles. “As prices fluctuate
around the globe, within six months you start to see steel flowing.
Twenty years ago, the cycles were three to five years long. They
seem to be collapsing down to an annual cycle or even less,”
Aranha said.
Steel
analyst Chuck Bradford says he’s heard quotes of $560 to $580
per ton for October and November, up from $530 in September.
Asked
whether current domestic prices will make the U.S. market desirable
again for foreign steel, he notes that recent published reports
show hot-roll coil in Europe fetching about $400. “Putting
it on a boat to bring it here is maybe $50. The net effect is $450
per ton—well below what you’re now hearing for the domestic
price.”
Scrap
Volatility Unlikely to Abate
Steel industry participants and observers typically have a keen
eye on the scrap market, but over the past couple months they’ve
been even more vigilant—and quizzical.
John
Anton, director-steel service at Global Insight Inc. in Washington,
D.C., provides a bit of background. When many minimills were built
from 1994 to 1998, he says, the price of scrap—except for half
a dozen upward or downward spikes—was between $130 and $140
for five years, providing “a high degree of stability. Then
the price plummeted, and then it exploded.”
In
the past couple years, says Anton, “the scrap price has been
all over the place. My model keeps saying the price should settle
between $170 and $200, and more likely the low end of that range.”
More
recently, export shipments of scrap—especially to developing
steel-producing nations like China—have had an impact on domestic
pricing. “Exports are boom and bust. We export three months
worth in one month and the price spikes. Then we don’t export
for a couple months and the price goes back down. It’s not
really rational. The international buyers are not reacting logically,
and it’s hard to time the emotion,” Anton remarks.
Joe
Harden, president of Worthington Steel, says there has been a lot
of speculation regarding the scrap market as it relates to Hurricane
Katrina.
“In
the end, will the difficulty of shipping scrap exports out of New
Orleans affect prices vs. the increased difficulty of getting scrap
or iron units into New Orleans? We don’t know. We think uncertainty
has caused scrap prices to rise.”
He
wonders what the right price is. “It’s probably not $340
or $128 (the recent high and low). I think the market is trying
to find an appropriate value.”
Scrap
for October was being quoted at $100 a ton higher, says Chuck Bradford,
president of Bradford Research, New York. Many steel buyers had
been sitting on the fence, anticipating that scrap, and thus steel,
prices would soon come down. “Well, when scrap turned up, that
game was over,” he says.
“It
will be interesting to see what happens at the next scrap auction.
If some of last month’s big increase was due to the hurricane,
we ought to get it back [down] this month. It is much too soon to
get any scrap out of New Orleans. Sunken barges will be scrapped.
Flooded cars and trucks are going to get junked,” he adds.
William
Vitucci, vice president and chief financial officer for Vitco Steel
Supply Corp., Posen, Ill., which purchases primary and secondary
material, also questions the impact of Katrina on the scrap and
steel markets.
“Some
people seem to be using it to hold or raise pricing; others don’t
see it as a factor because it will take them six months to a year
to find out what’s available to be rescrapped into the market.
“We
heard there were vessels that had scrap on them missing throughout
the coast and the docks. Those are gone. There may be some shortfall
of scrap in the market due to that. No one knows for sure how much
this will affect the U.S. market, because some of the lost scrap
was bound for export markets,” Vitucci says.
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