Bullish Price Predictions:
Perhaps Wishful Thinking?

Despite some economic indicators to the contrary, the majority of service center executives polled for MCN’s latest Outlook survey expect metals prices to remain at or above current, very attractive prices in 2006.

Seventy percent of respondents to the survey—the subject of this month’s cover story—expect steel prices to stay the same or edge up a bit in the coming year. On the heels of two record-setting years, and with basic hot-band selling at over $550 a ton—still well above historical averages—this seems like wishful thinking.

Unlike steel prices, which trended downward through 2005, aluminum prices gained strength during the course of the year as demand remained especially strong in the aerospace sector. Aluminum shipments were up 7 percent for the year, as of November. The majority of respondents to MCN’s survey predict further gains in the price of aluminum, averaging 4.1 percent.

Similarly, the market price of copper increased significantly in 2005, and the vast majority of service center executives who sell red metals expect prices to increase or at least stay the same in 2006. The average of their forecasts points to a further 2.6 percent rise in the price of copper.

Though many economists predict the pace of U.S. economic growth will slow in the second half of 2006, nine out of 10 service centers expect stable or growing sales for the year. On average, service centers forecast a 7.5 percent increase in sales in 2006.

Besides a potential slowdown in second-half demand, the biggest threat to service center profitability is a surge in imports. A key reason the metals market was able to sustain values last year was the relative lack of price competition from cheap imports.

Industry data shows that steel imports declined by over 10 percent in 2005 as the market worked down excess inventories. At the service center level, inventories declined by over 20 percent to a seven-year low at year’s end. Indeed, distributors may have over-corrected and will need to stock up to meet demand if the economy stays on its current healthy track.

Despite monthly import declines late last year, the American Institute for International Steel maintains that import levels will increase in 2006 due to continued strong end-use demand and the relatively high prices in the U.S. market that will attract shipments from overseas.

As usual, much of what happens to the steel market will be affected by activity in China. Chinese steel production grew by about 25 percent in 2005. Though China was a net importer of steel in 2005, it has an excess production capacity of nearly 100 million tons and could become a major exporter of low-priced product at any time.

Analysts at MEPS International in the U.K. expect a surge of Asian imports to erode prices in North America beginning this spring. The threat or filing of antidumping cases, however, should stabilize price levels later in the year, they say.

The resilience of metals pricing to date has helped service center executives maintain a surprisingly high level of optimism. Overall, 90 percent of respondents to MCN’s survey characterized themselves as somewhat or very optimistic about their prospects for the coming year, down only slightly from last year.