Steel Prices at a Tipping Point?
Will demand pull flat-roll up in 2013 or will uncertainty and overcapacity drag the supply chain down?
By Myra Pinkham, Contributing Editor
Despite the fact that flat-rolled steel prices have been on a downward trajectory all year, major mills pushed through a new round of price increases last month in anticipation, or perhaps hope, that the market will soon turn around. Concerns about overcapacity and imports still weigh heavily on prices, though, even as demand in some sectors shows new promise, leaving the market at a tipping point, experts say.
Calling it “a challenging time that constantly tests our mettle,” Mark Millett, president and chief executive officer of Steel Dynamics Inc., Fort Wayne, Ind., noted that the sheet market has declined from its spring highs both in terms of demand and pricing.
Early last month, activity began to improve from the stagnant period of the previous several months, says Brian Williams, director of business development for Cleveland-based Flack Steel. He attributes much of that gain to pent-up demand. “Falling prices had kept companies from buying steel, but inventories had gotten down to a point they needed to restock.”
Overall, carbon steel sheet consumption was up 10.1 percent through August, compared with the first eight months of 2011, reports Christopher Plummer, managing director of Metal Strategies Inc., West Chester, Pa. The rate of consumption has been slowing, however. He predicts sheet consumption will end the year with only about an 8 percent gain over last year.
“Demand hasn’t been that great,” says Richard Robinson, president of Norfolk Iron & Metal, Norfolk, Neb. “It is better than during the lows of the recession, but not as good as it could be; not as good as most people were hoping.”
Automotive production remains a bright spot for steel, even as aluminum makers continue to gain a larger share of the materials mix while carmakers strive for lighter, more fuel-efficient vehicles. North American light vehicle output has been quite strong this year, up 22 percent through August, Plummer says. The auto sector, which often recovers early in the business cycle, is expected to grow at least another 5 percent next year.
Though it has improved substantially, “auto production remains 2.5 million to 3 million units below its peak,” notes Tom Modrowski, chief executive officer of Esmark Steel Group, Chicago Heights, Ill. “It is still not spectacular. “
Meanwhile, the energy market is “rolling along,” he says. “The drilling rate is down recently, but some of that is political. There continues to be steady flat-roll demand in that arena, even with low natural gas prices.”
Domestic shipments of welded pipe and tube were up 18.8 percent year to date through August, says Plummer, who forecasts high single-digit growth for energy tubulars next year.
Truly promising is a long-awaited uptick in construction demand. Nonresidential construction continues to bounce along the bottom with no real recovery expected until at least next year, says Paul Robinson, senior economist for IHS Global Insight in Washington, D.C. Housing, however, is starting to see a true recovery. Housing starts increased by a seasonally adjusted 35 percent in September to their highest level since July 2008. This could kick-start new flat-roll demand for such applications as appliances and HVAC, Robinson says.
Raw materials trump end-use demand
John Tumazos, metals analyst for Very Independent Research LLC, Holmdel, N.J., calls the demand side of the flat-roll equation “somewhat irrelevant.” For the past decade, the bigger influence on the steel price has been the costs of raw materials, which continue to apply downward pressure.
Plummer says the price for ferrous scrap has plummeted in the past few months, with No. 1 scrap falling to $331 per ton in October, down from $415 per ton in August. Other steelmaking raw materials have shown a similar trend. Iron ore reportedly dropped from about $140 per metric ton to less than $90 a ton, before recovering to $120 per ton earlier this year. Plummer predicts domestic mills could pay as little as $140 per metric ton for metallurgical coal once contract negotiations are concluded, down from $190 per ton in 2012.
It was because of these declining raw material prices that steel buyers took their foot off the accelerator, driving down flat-rolled steel prices, says Millett at SDI.
As of mid-October, the spot price for flat-rolled sheet averaged $605 per ton, down from a 2012 peak of $727 per ton in late August, according to Metal Strategies.
“The market was oversold, with prices reaching unsustainably low levels,” says John Ferriola, president and chief operating officer of Nucor Corp., Charlotte, N.C., explaining the major mills’ decision to raise prices last month.
Pittsburgh-based U.S. Steel Corp. led the drive to boost flat-roll prices, announcing a $40 per ton increase. That move was quickly followed by others, including Nucor, ArcelorMittal USA Inc., AK Steel Corp., NLMK USA, Severstal North America, Steel Dynamics, California Steel Industries and USS-Posco Industries.
“While we expected the first price increase announcements to come in November or December (after the presidential election), I am not terribly surprised to see them earlier,” says Robinson at IHS Global Insight. “I think it is fairer to characterize the increase as an attempt to stop the bleeding, rather than an honest attempt to raise prices.”
Based on the continued weakness in the raw material markets, Robinson doubts the mills’ initial attempt to raise prices will pay off. He expects a second round late in the year. “It usually takes a couple of announcements for price increases to stick.”
Amy Bennett, principal consultant for London-based Metal Bulletin Research, also questions whether the recent price announcement will fly. “It could just be a way for some mills to signal to others to stop slicing their prices and to help the market find a floor,” she says. “They will, however, have to have the discipline to stick to it.”
Williams at Flack Steel says it is too early to tell if this price hike will spur demand, though it does suggest that those who buy today don’t have to worry as much about seeing a lower price tomorrow. “It has given the ‘all clear’ to buyers, indicating to them that it is once again safe to get back into the water,” he says.
Lisa R. Goldenberg, president of Delaware Steel Co., Fort Washington, Pa., says service centers remain cautious about buying in a big way, having been blindsided by the market’s volatility. The lack of predictable seasonality has made it hard for flat-roll buyers to plan. Service centers with the liquidity will place some orders, but most will not be overzealous in the current conditions, agrees Esmark’s Modrowski.
“There needs to be some rationalization of capacity, both domestically and globally,” says Nick Sowar, global steel industry leader for Deloitte & Touche LLP (see related sidebar). Weak demand in markets overseas is adding to the threat from cheap flat-rolled imports looking for a home.
Total U.S. steel imports are on a pace to reach 27.7 million tons in 2012, up more than 20 percent from last year, notes Daniel DiMicco, Nucor’s chairman and chief executive officer. “Such increases are totally inconsistent with a domestic economy that is barely growing, as well as a U.S. steel industry capacity rate mired in the range of 70 percent.” It’s highly likely the domestic industry will file new trade cases to stem this influx of unfairly priced imports, he adds.
Others see less of an immediate threat from imports. Sheldon Tenenbaum, senior vice president of supplier development for Reliance Steel & Aluminum Co., Los Angeles, does not believe hot-rolled imports are flooding the market. The spread between foreign and domestic prices has tightened in recent months, he says.
“With the recent short pricing cycles, who in their right mind would speculate on imports?” asks Modrowski at Esmark. Given the plentiful domestic supply and short lead times, there would need to be a $100-$150 per ton gap between the domestic and foreign price, and it would have to persist for several months, before buyers would risk the long lead times of imported steel, says Robinson at IHS Global Insight.
After suffering through a year of steadily declining steel prices, industry executives say they are cautiously optimistic of at least slight improvement in 2013. Plummer predicts the market will see its usual cyclical bounce in the first quarter. For the year, much depends on how quickly the construction market rebounds, he adds. Construction accounts for about 30 percent of all steel sheet demand.
Meanwhile, the steel market is holding its breath awaiting the outcome of the presidential election and how adroitly Congress acts to keep the country from tumbling off the so-called “fiscal cliff.” Most economists agree that if the automatic tax increases and spending cuts are allowed to take effect, the U.S. could find itself back in recession, which would be a disaster for steel and every other industry.