March 20, 2013
Tanners: Hot-Rolled Prices to Average $610 in 2013
Metals executives hoping to see a rebound in steel pricing in 2013 are in for some disappointment, said Timna Tanners during the Platts Steel Markets North America Conference last week in Chicago. The steel market analyst from Bank of America Merrill Lynch predicts hot-rolled coil pricing will stay around $610 in 2013, and won’t even reach that average in the next two years.
The primary reason for the uninspiring pricing forecast is oversupply, both on the raw materials front and in worldwide steelmaking capacity, she said, as well as moderating demand in China. Tanners’ firm believes China’s steel demand will grow only about 4 percent this year. "We're not believers that China will implode, but the supercycle is in the final stages, if not over," she said.
China's excess capacity is well documented, but the same problem exists in Korea, Turkey and even India, Tanners said. Couple that with Europe’s economic problems and slow growth at home, and U.S. producers will have a difficult time supporting price hikes.
Producers have two options to combat the low-price environment: they can become more niche oriented or they can reduce their costs. Tanners favors the latter.
There are considerable risks in trying to find a high-margin niche. The first is that Chinese producers may follow suit, she said, pointing to electrical steel as an example. Similarly, an underserved market at home can quickly become saturated. "SBQ a couple of years ago was a very strong market. But every single SBQ producer has added capacity. That makes it a less strong market, which is the problem of trying to get into niche products."
Going the low-cost route is a more logical step. More than that, she said, it's particularly feasible here in the United States. "The U.S. has a fantastic opportunity to lower costs because of the gas revolution." The prospects of projects such as Nucor's direct reduced iron facility, which is advantaged by low-cost natural gas replacing coke in the steel production process, opens the possibility for the U.S. to become a leading low-cost producer.
And that may be a necessity, she cautioned. In previous poor markets, the domestic steel industry was able to muddle through the downturn to get to the profitable upswing that followed. But that upturn is likely remote, she said. "We're heading into what could be a lull, a repeat of the '90s, where things didn't move much for 10 years. Demand isn’t going to pop back in a year or two. It's not OK to just try the same playbook."