2008 Editorial

Whatever happened to the law of supply and demand? If not breaking it, the steel industry is certainly bending it. Otherwise, how is it possible that steel prices are reaching all-time highs at the same time that demand is sinking lower and lower? Indeed, while the rest of American industry is shuddering at the prospects of a U.S. recession in 2008, domestic steelmakers may experience their best year ever.

“No one has ever seen prices rise in the face of such lackluster demand,” says Steven Randall, managing director of The Steel Index for London-based Steel Business Briefing.

The reason can be found in two unusual factors on the supply side of the equation, according to Randall and other experts. One, steel prices in foreign markets are as high or higher than prices in North America because some foreign economies are even stronger than the U.S. Two, imports into North America are at extremely low levels, in large part because foreign producers can find good-paying customers closer to home.

Domestic mills cannot produce enough steel to meet the needs of U.S. manufacturers, even in a weak economy. The U.S. market depends on imports for around 20 percent of its consumption. The dearth of imports is also reflected in U.S. service center inventories, which are more than 20 percent below the levels of a year ago, according to MSCI data.

Analyst Chuck Bradford, president of Bradford Research Inc. in New York, estimates the net flow of imports could decline to as little as 4 million tons this year, down from 14 million tons last year and 24 million in 2006. “That’s a pretty substantial decline in net imports. That’s what’s making the market, not consumption,” he says.

Because of the lack of imports, U.S. mills are operating near capacity despite the waning demand, agrees analyst Mark Parr of KeyBanc Capital Markets in Cleveland. “With the weakness in imports, 2008 production could increase 5 to 10 percent in a market where demand declines 5 to 10 percent.”

Parr sees plenty of room for the domestic hot-band price to rise even further. “We’re in between Europe and Asia right now. There is plenty of room for U.S. pricing to go higher.” Domestic producers can continue to command high prices for their products as long as the tight supplies lag demand (such as it is). “Not only do we have pricing going up, but there is a volume story here for the industry in 2008. The earnings outlook is as good as it has ever been, even though we’re looking at a recession.”

David Phelps, president of the American Institute for International Steel, acknowledges that “domestic mills are really in the catbird seat in terms of supply and pricing,” but notes that the current market conditions cannot persist indefinitely. “We need imports. At some point, something has to give.”

Noting the unpredictability of today’s unprecedented market conditions, Randall points to equally plausible scenarios in which steel could top $900 per ton, or fall to less than $600 per ton, in the coming months. “There’s a $350 per ton difference in where the price might be in a year, depending on which scenario one prescribes to. For anybody involved in the buying and selling of steel, that presents quite a challenge.”