Steel Bar Report: Demand has fallen off the cliff as prices collapse
By Tom Stundza -- Purchasing, 4/30/2009 2:00:00 AM
A critical lack of financial support and credit throughout the steel bar products supply chain has triggered a steep 12% drop in purchasing activity so far this year—following a 10% decline in 2008. That's probably why leadtimes for delivery of steel bars have dropped under three weeks. In a nutshell: "Sales are down and prices still are dropping," says Alvin Glick, CEO of the Alro Steel service center chain based in Jackson, Mich.
Bar and rod prices hit all-time highs in the middle of 2008, but prices have been falling from the third quarter across the early weeks of 2009. The market price average for hot-rolled carbon steel bars dropped $99/ton in March to $754, which was 27% off the peak of $1,037/ton posted last August. The latest national market sales price average of $457 for rebar compares with a peak of $970 last summer.
Bar mill products come from electric-furnace steelmakers who rely on scrap as a feedstock. Scrap prices are substantially lower than just six months ago. Purchases of finished merchant and cold-finished steel bars are pinned to production of consumer durable goods and machinery tied to capital spending budgets. None of the end-use markets are very healthy so demand for bar steel in the first quarter was much weaker than originally expected by market researchers.
Reinforcing bars rely on housing and nonresidential construction activity. Consumption of rebar dropped by 54% last year and no reports a buying rebound have yet surfaced. In fact, order rates and shipments in March were off about 60% from the same month last year, according to American Iron and Steel Institute data.
Upshot: market prices for bar products have slipped dramatically since last summer.
"The main reason for the price decline is that prices should never have gone so high in the first place," writes analyst John Anton at IHS Global Insight's Washington offices in a note to clients. Prices spiked in 2008 almost solely because of inventory drawdowns in 2007. Then, after inventory was replenished, demand went into a steep decline so even a drawdown in early 2009 as kept stocks at almost four months of supply.
"With lower demand, there continues to be downward pressure on orders, production rates and steel pricing in all bar product lines," says analyst Randy Cousins at BMO Capital Markets in Toronto. "Steel pricing is under attack; the longer demand stays weak, the greater the temptation for the smaller producers to cut price to build volume," says Cousins. "The small producers cannot afford to do otherwise," he adds, "and the bigger bar companies may cut price to build load in their mills."
In a first quarter guidance to Wall Street, bar maker Nucor of Charlotte, N.C. says "customer demand has continued to weaken, with resulting downward pressure on orders, production rates and steel pricing in all of our product lines. Nucor's overall steel mill utilization rate is expected to decline to approximately 43% in the first quarter from the fourth quarter of 2008 level of 48%."
Dan DiMicco, Nucor CEO, noted in a statement: "The unprecedented speed and magnitude of the global economy's decline to depressed levels not seen in our lifetime have presented severe challenges in 2009. The economy has fallen off a cliff—and there is no visibility as to the timing of the recovery."
In its recent quarterly filing with the Securities and Exchange Commission, Dallas-based bar maker Commercial Metals Corp. discussed price declines and demand destruction caused, in part, by the global liquidity and credit crisis. "We wish we could be more hopeful and encouraging in the short term, but there remains a lack of confidence among most of our end-use markets (as) backlogs continue to decrease," the report says.
Buyers continue to report to Purchasing that smaller quantities are evident on the fewer orders being booked. According to Cousins "demand has been much weaker than originally expected."
Rebar prices have continued to slide because demand remains weak and there has been a drop in scrap prices. The slide in scrap prices also has had a depressing impact on market prices for merchant bar, cold-finished bar and wire rod. That fits with Purchasing surveys: Of all the steel buyers polled in April, increased prices are expected by just 2% of those who buy hot-rolled steel bar and 4% who source cold-finished steel bar.
Tony Watt, director of purchasing at service center Steel Services Inc. in Richmond, Va., says per-order sales prices are continuing to slide. In fact, the first quarter merchant bar sales price average was 11% lower than in the fourth quarter of 2008. And, since scrap prices have been falling over the past three months, he and other buyers expect the steel mills to reduce transaction prices yet again in the second quarter.
A Purchasingdata.com forecast also shows another 3% decline this quarter. "Extremely low levels of capacity utilization are putting pressure on prices and there is a risk of a breakdown in steel pricing," agrees analyst Cousins. He and other analysts suggest that unless bar mills close, further sales price declines will continue into 2010.
Analyst Sal Tharani at Goldman Sachs Group says that supply channel checks among steel buyers and feedback from steel traders and small private service centers indicate that the rate of deterioration in demand has significantly slowed and inquiries from end users have picked very recently. "Although we are not calling for a bottom here or expect any meaningful change," he writes to clients, "demand clearly appears to have flattened lately, albeit at a very low level."
However, merchant bar market participants specifically "still are feeling the pressure of the continued slump in order rates, the declining value of their inventories, discounting among service centers and the unstable U.S. economy," reports American Metal Market.
Anton at Global Insight points out that businesses have been pulling back on capital spending since last summer so purchases of machinery and equipment spending fell 22% in the second half of last year and he expects a 14–15% drop in equipment spending for 2009. And these are the key markets for hot-rolled merchant and cold-finished special quality steel bars.
Looking forward at the rebar business, Anton is equally uncertain about a near-term sales spurt. He foresees residential construction hitting a bottom by mid-2009, "although the upturn will be very weak." And he says that the nonresidential segment won't hit bottom until mid-2010. Mills have cut output to match tonnage with demand but surpluses still exist at the distribution link of the supply chain.
Homebuilding has dropped to an average 530,000 units per month this year from 903,400 in 2008 and 1,340,667 in 2007. Nonresidential construction is down 11% this year after falling 9.5% in 2008.
IHS Global Insight economist Arminé Thompson notes in a report that financing for commercial real estate has tightened and the need for extra office and retail space has disappeared along with consumer spending and employment. Even in the Southeast and Southwest where rebar demand is said to be somewhat better than in other regions because of warmer springtime weather, excess supply—and imports from Mexico at $400/ton—are keeping sales and prices down.
What about the federal infrastructure stimulus program? The earlier euphoria of a potential sales boom from the government's infrastructure stimulus package has dissipated. Analysts now write they are looking at 2010 rather than 2009 for major bridge and highway work that will require tons and tons of rebar.
The sales director for a northeastern fabricator is impatient about the readiness of state and local governments to use federal stimulus funding for needed highway projects. "I am so sick of hearing 'shovel ready'," he says. "Where are these shovels?"
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