Steel Flash Report: It’s a buyers’ market again!
Tom Stundza, Executive Editor -- Purchasing, 12/30/2002 7:00:00 AM
Buyers have regained pricing leverage for flat-rolled steel products, and there's a chance of further price erosion for various steel products in January because of a rocky start for the industrial economy in the New Year. The manufacturing sector's activity actually has decelerated from earlier in 2002, and less steel is needed these days. "Availability of our biggest purchase, steel sheet, has changed significantly and is much looser," says Tom Horensky, materials manager for non-residential metal building products and systems manufacturer Centria in Coraopolis, Pa.
Atop that, prices are falling because of increased competition from restarted capacity and from imports at a time when demand is dormant because buyers still haven't put any enthusiasm into first quarter purchasing. Market prices for hot-rolled sheet steel, which fell $25 in November, dropped another $45 in December and closed the year averaging $300/net ton. That's a 25% collapse off the $400/ton peak back in July. Year-end price rollbacks were evident for cold-rolled sheet, down $70 since October, and hot-dipped galvanized sheet, down $40.
This reduced pricing can be explained simply by weak end-user demand and expanded supply. Annualized steel demand was down 6.5% through November, and buyers continue to proceed cautiously with buying plans. Most (89%) of the steel buyers polled in December see hot-rolled and cold-rolled steel purchases at the same level or lower though March, while 85% say the same for coated sheet, and 82% for plate, bars and structurals.
Mavens also predict that spot sheet steel prices will continue to fall in 2003, as increased domestic production and lower tariffs on imports will coincide with sluggish demand. Importantly, with the manufacturing sector still feeling the brunt of the general economic downturn, buyers remain reluctant to accumulate inventory. Note: 64% of the buyers surveyed in December planned to continue reducing their metals stocks in the first quarter.
"Demand for steel overall remains weak because of general economic fear and end-of- the-year uncertainty that has caused steel markets to become very lean," suggests analyst Aldo Mazzaferro at Goldman, Sachs & Co. "We were busy right up to November, finishing some of large jobs and a lot of smaller jobs," says June Breese, purchasing manager at steel fabrication company Erie Steel Products Co. in Pennsylvania. "The work has dropped off. Bidding is down, so we are very aggressive on our quotes." Comments like that explain why some of the steel mavens expect pricing lows to come about in January. Generally, buyers aren't arguing with the notion that tags may slide again soon: Only 24% of the sourcing professionals surveyed in December planned to boost steel purchasing; because of that, only 24% expected any steel product prices to rise through March.
No end to market volatility
Few steel buyers would argue with the assessment of analyst Mark Parr of McDonald Investments Inc. in Cleveland that "the current steel market is volatile." Manufacturing was on the comeback trail earlier in 2002, demand was improving and market prices were coming off the bottom of a disastrous 2001 (where use had fallen by almost 16% and prices had dropped by 10% overall). Then, with supply tightening from mill shutdowns and import restraints, prices exploded. In late summer, Purchasing got an e-mail from Mike Jernigan, the material & distribution manager for Martin Industries in Athen, Ala., which manufactures gas and wood burning fireplaces and heaters for domestic distribution.
Jernigan told the magazine that 52% of his direct costs are steel--cold-rolled, galvanized and aluminized sheet. Before the tariffs, "I had no problem with either the cost or the availability of steel," he says. "Then, due to government interference in the marketplace, my costs doubled on steel and the availability of the product became scarce, especially for aluminized sheet." This buyer, who has a masters degree in Management, told Purchasing that "there are a lot of us out here in the battle zone that took it right on the chin, and are very upset with the flat-rolled (steel) market the way it is in 2002."
In response, small and large steel consumers by early December got the National Association of Manufacturers (NAM) to ask the U.S. International Trade Commission to consider the effects of the steel import tariffs on downstream industry. NAM's policy committee has dropped its neutrality on steel trade issues and wants the association to urge President Bush to instruct the ITC to gather evidence of the impact of the Section 201 steel tariffs on both steel producers and steel consumers and to report the findings no later than July 2003.
The metalworking economy clearly was improving earlier in 2002. But, as summer progressed into autumn, industrial began to struggle again--as manufacturing firms remained reluctant to expand production or to make big investments in brick-and-mortar and heavy equipment capital spending. For the year, steel consumption now looks to have dropped by an estimated 6%, falling under 100 million tons for the first time since 1995. Even with the fourth quarter slide, the 12-month rolling average for steel prices show an increase of 34% for flat-rolled products-and by 5% overall-because of punitive tariffs and reduced domestic supply in the second and third quarters.
This scenario has triggered such buyer-feedback comments as a recent message that "we are paying a substantially higher price for steel now" from buyer Dale Anne Ladd at MECO Corp. in Greeneville, Tenn., a manufacturer of high quality residential folding furniture and outdoor barbecue grills and accessories. "Retail is on the decline, we have heavy competition with China and other offshore suppliers," she says, "and the last thing we need is someone gouging prices." Lately, though, the market price numbers have been tumbling. At the annual dinner of steel importers in New York City in early December, discussion centered on how sharply domestic steel prices had fallen since Thanksgiving-and the fact that some major steelmakers had become particularly aggressive in pricing their products as much as $20 below the market for January, meaning that some hot-rolled sheet in coils may be selling as low as $280/net ton for early-2003 deliveries.
In fact, the pricing outlook for 2003 is much weaker that it has been in recent months. That's because supply continues to loosen, with rising inventories at service centers, which are almost 3% higher than in 2001, and continued strong production by the mills, which are almost 7% stronger than the output of 2001. Steel product processing distributors actually are on pace to ship 3-4% less than the tonnage delivered to buyers in 2001. "We're bouncing along on the bottom just now, we hope," suggests Tony Watt, director of purchasing at Chatham Steel Corp. in Savannah, Ga. Still, he and other distributors agree that with plentiful inventories on hand, steel users seem willing to wait to see whether steel prices remain on the soft side before booking first-quarter tonnage.
Steel mill bookings for early 2003 deliveries aren't very strong because some key end-use sectors are uncertain about their direction. For example, the Conference Board's index of leading economic indicators rose slightly in November, but one key component, average weekly manufacturing hours, held steady. Steel demand is expected to decline in such key end-use markets as motor vehicles,capital goods, oil service and consumer durables. Given the anemic pace of recovery in the national economy, high consumer debt burdens and the lack of pent-up demand, the automotive analysts continue to predict a dropoff in production--because of a weaker pace in sales to 16.5 million vehicles, as compared with 17 million-plus this year. The housing market has been strong, but Fannie Mae's chief economist David Berson now forecasts that 2003 home sales will slip by just 1-2%. That's because mortgage rates may rise in 2003, but the 30-year loan now near 6% probably won't go much higher than 6.75 percent, the economist predicts. Nonresidential construction isn't expected to begin to increase activity until 2004 (and regain its old vigor until 2005).
| 2002 | ||||||||||||
| Items: | Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec |
| Hot-rolled steel sheet (Midwest, $/ton) | 220 | 230 | 260 | 290 | 320 | 340 | 400 | 380 | 380 | 370 | 345 | 300 |
| Cold-rolled steel sheet (Midwest, $/ton) | 310 | 320 | 370 | 380 | 410 | 435 | 525 | 525 | 500 | 480 | 465 | 410 |
| HD galvanized steel sheet (Midwest, $/ton) | 330 | 330 | 380 | 415 | 425 | 445 | 535 | 535 | 525 | 510 | 500 | 460 |
| Coiled steel plate (Midwest, $/ton) | 250 | 240 | 250 | 285 | 300 | 320 | 320 | 320 | 340 | 340 | 330 | 320 |
| CF steel bar (grade 1018 carbon, $/ton) | 415 | 410 | 440 | 440 | 440 | 460 | 480 | 470 | 482 | 497 | 490 | 490 |
| Structural beams (A36 W8 wide-flange, $/ton) | 350 | 355 | 355 | 355 | 350 | 350 | 340 | 340 | 345 | 345 | 340 | 320 |
| Low-carbon wire rod (Midwest, $/ton) | 295 | 275 | 290 | 290 | 300 | 315 | 300 | 308 | 310 | 320 | 305 | 320 |
| Concrete reinforcing bar (#6, Midwest, $/ton) | 285 | 280 | 280 | 280 | 289 | 307 | 304 | 300 | 300 | 306 | 300 | 290 |
| Stainless steel sheet (Type 304, $/cwt) | 61.60 | 61.90 | 62.05 | 62.05 | 62.05 | 62.05 | 62.05 | 62.05 | 62.05 | 63.65 | 62.30 | 62.30 |
| Steel scrap (auto bundles) | 88 | 93 | 95 | 105 | 117 | 122 | 128 | 135 | 138 | 135 | 125 | 120.5 |
| Steel scrap (#1 heavy melt, Chicago, $/ton) | 71 | 73 | 76 | 82 | 85 | 85 | 87 | 85 | 85 | 90 | 90 | 95 |
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