CRU Sees Stable Carbon Flat-Roll Prices for 2010

After weakening somewhat this winter, carbon flat-rolled prices should remain relatively stable for most of next year, according to Paul Scott, managing consultant for the Steel Business Unit of London-based CRU.

Scott, who spoke at CRU’s North American Steel Con­ ference last month in Chicago, expects the Midwest price for hot-rolled coil to average $520 per ton during 2010 after declining by as much as $70 in the next few months.

“Twelve months ago, I delivered a downbeat forecast that wasn’t a downbeat enough outlook for U.S. steel sheet prices. One year on, I’ve got a slight feeling of Groundhog Day, explaining why prices, unfortunately, are set to fall,” Scott said.

The analyst forecasts the steel sheet price will begin to drop in the fourth quarter and reach a low point of $515 per ton in first-quarter 2010. That will be followed by average quarterly prices of $523, $530 and $520 for the rest of the year.

Such a stable pricing environment would be a big change from 2009 when the Midwest steel price around $1,100 per ton fell by as much as $740 through early June, then rallied by 25 percent. Over the previous quarter, the price has rebounded by as much as $260 per ton in some product categories, “one of the strongest three-month periods ever,” Scott said.

The recent price recovery was driven by a significant increase in orders, with apparent sheet consumption jumping by 25 percent as service centers finally quit cutting inventories and began some buying again. “Some people have played down the end of destocking, but it’s been the driving force behind the increase in consumption,” Scott said.

While the Metals Service Center Institute’s inventory numbers registered an increase in September for the first time in 2009, there is little other evidence of significant restocking by distributors. Any pickup in real demand has been limited to certain sectors, most notably automotive, Scott said, and does not represent the “broad-brushed” upturn needed to sustain higher steel prices.

Also contributing to the recent spike in domestic hot-rolled coil prices is the lack of competition from imports, Scott said. Due to the weak dollar and relatively weak U.S. steel prices, there has been little import penetration. Imported steel represented only 10 percent of local consumption in August, compared to an average penetration of 15 percent.

In reaction to the improving demand, domestic mills have restarted some blast furnaces and increased output. Capacity utilization, which dipped below 40 percent in January, had rebounded to nearly 60 percent by September.

Unfortunately, Scott said, factors that have contributed to the increase in steel prices will either be nonfactors or less positive in 2010.

Notably, the end to destocking provided a one-time-only boost to consumption. That boost was felt between the second and third quarters and will no longer affect the price of hot-rolled, Scott said.

For demand to improve, destocking must be followed by restocking. Service centers are unlikely to go on a spending spree any time soon however, Scott said, due to continued tight credit and lingering apprehension over the questionable strength of the economic recovery.

Scott anticipates no serious rebound in real demand in the near term. “For me, the American consumer is not ready to step up to the plate, nor will he be until people stop losing their jobs. Unfortunately, this is unlikely until well into next year,” he said.

While steel shipments will see a modest increase, they will be driven largely by inventory replenishment. Light vehicle production, for example, is expected to increase by 9 percent during the fourth quarter. But this buying by carmakers will not be fueled by increased vehicle sales, but by the need to increase vehicle inventories from unsustainably low levels.

“The supply chain replenishment will not go on indefinitely,” Scott adds. “It has a limited lifespan, and I think it’s going to end before the American consumer is again ready to drive the U.S. economy.”

Scott expects greater pressure from imports to further depress steel prices in 2010. The spread between U.S. mill prices and the prices available for Chinese and other foreign steel has started to grow. Conse­quently, import volumes could increase sharply in first quarter of next year, he said.

Scott acknowledged several threats to his forecast, all of which could be termed “upside risks for the steel industry.” If service center restocking is more significant, American consumers are more optimistic, imports are more modest and domestic mills are more conservative in bringing capacity back online, the effect on the steel market in 2010 will be more positive.

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Sunday, February 25, 2018