Suppliers, buyers fight over pricing

By By TOM STUNDZA -- Purchasing, 4/6/2000 6:00:00 AM

The steel sheet marketplace is sizzling. Domestic mill orders are rising, imports are declining, leadtimes are extending and spot-market prices are rising.

"The first half is going gangbusters," confirms Roy Platz, marketing director for Ispat Inland Steel. However, marketplace insiders are divided sharply on the future trend of sales and pricing. Even Platz admits that "there are a lot of uncertainties about the second half"-especially about real demand and pricing.

Transaction prices for key sheet steel products are 17% higher than at the start of 1999, but there is evidence from buyers that the inflationary surge has slowed. While Purchasing's latest survey of steel buyers finds 41% paying more in March, the other 59% were paying the same or less than the month before. End-use buyers, in fact, were slow to accept price hikes announced for the past two quarters, and few of the buyers surveyed expect mills to get all of the price hikes proposed for the second quarter.

Purchasing's latest forecast: Key sheet steel prices will be on average 13% higher this year than last and almost back to levels paid in 1998. However, even this outlook still puts this year's price average 17% below the last cyclical peak in 1994. Atop that, anecdotal evidence from the surveys shows steel buyers opposed to paying substantially more for sheet products later this year-despite a series of future price-hike announcements by the mills, silent acceptance by service centers and inflationary forecasts by market analysts. "Just because the service centers are taking these price hikes doesn't mean I'm going to accept them," says the PM of a Detroit-area metals stamper.

Another buyer, the PM of a manufacturer of filtration and exhaust systems in Minneapolis, says his company's sales are rising from commercial and industrial customers, "but that doesn't mean we're going to roll over and pay dramatically higher prices for such raw materials as steel sheet."

Most domestic steel suppliers and some market analysts are predicting continued higher flat-rolled prices as the year progresses. "Orders have been so strong that near-record deliveries through midyear are assured," says Platz. "Imports have fallen off dramatically, and some products, such as cold-rolled sheet coils, are difficult to deliver quickly." Tom Runiewicz at the WEFA Group agrees that "steel prices continue to edge upward from the bottom of last summer, and this year's strong demand will provide a good platform for continued price improvement." Michelle Applebaum at Salomon Smith Barney expects midyear sheet prices will have recovered the full 25% decline since 1998.

Richard Aldrich at Lehman Brothers and Michael Gambardella at J.P. Morgan Securities are among those analysts who now believe that midyear prices for hot-rolled and cold-rolled sheet will be at least 15% higher than those in the fourth quarter of last year. Aldrich projects that "underlying steel demand will remain strong in 2000 and will be accompanied by substantially higher prices." Gambardella notes that "although sheet steel prices already have recovered a significant portion of the decline they experienced as a result of the 1997-1998 Asian economic crisis, they are still below the levels reached both before the crisis."

Mill execs also contend that if world export prices for sheet products begin to inflate in the first half of this year, that will prove there is a surge in global demand that will support their efforts to boost domestic tags further.

However, other analysts are starting to question a widespread belief among sheet suppliers that they will be able to continually boost sheet steel tags as the year progresses. Mark Parr at McDonald Investments, for example, notes that "there's a lot of steel in the automotive industry's pipeline, and that could affect sheet demand and pricing after midyear." Scott Morrison at Donaldson, Lufkin & Jenrette contends "there is a high likelihood that the news on flat-rolled pricing will turn negative after the second quarter. Distributor inventory levels of flat-rolled have reached record levels. The rapid recovery in pricing will likely result in an increase in import levels beginning this quarter. The second half of the year is also typically a more difficult time to raise prices due to the seasonal downturn in consumption."

Atop that, there is evidence that year-2000 sheet contracts aren't rising at rates requested by the mills. Large-volume buyers in the automotive, appliance and electrical machinery industries "are providing no price relief for the steel mills," notes analyst Peter Marcus at World Steel Dynamics. "Automotive-grade steel sheet prices, especially, have been under pressure to decrease rather than increase."

Steel mills have announced four spot-market price increases last year. While not all of the increases stuck last year, Purchasing's Transaction Price Service shows that hot-rolled sheet prices rose 24% during 1999 while cold-rolled prices rose 14%. (This large gain in hot-rolled product is typical, say the analysts, since it is the feedstock for other sheet product forms.) After having marginal success in boosting sheet tags $30/ton in the fourth quarter of last year, the mills boosted tags $20-$25/ton in the first quarter and have announced $25-$30/ton increases set for second-quarter deliveries. If history-and buyers' buyers' opinionsopinions-is a reliable guide, it will be June before some or all of these 15% increases stick in the spot market.

Cross-currents buffet the market

It's no secret that domestic steel producers face significant competition from foreign producers affecting both prices and volume. "Unprecedented levels of unlawfully sold imports in 1998 and 1999 depressed selling prices," says Robert Buck, senior VP at LTV Steel. "But now that 2000 demand for sheet-steel products from domestic mills is so strong, efforts to increase prices to appropriate levels will continue." He and other steel sheet marketers are bullish on pricing because:

• Steel use rose in 1999 and looks to rise again this year.

• Punitive tariffs against foreign suppliers and strengthening worldwide demand are taking foreign steel out of the U.S. market.

• Steel service centers paid more for sheet products this year in the first quarter and are accepting the second-quarter increase as well.

• Widespread inventory drawdowns appear to be taking place.

• A recent upswing in new-order bookings to near-record monthly levels has lengthened leadtimes and may create tight future supply conditions.

As with many industrial commodities, steel selling prices usually are related to prices of key raw materials. Gambardella of J.P. Morgan points out that steel scrap, which represents about 60% of total costs for mini-mill producers and about 6% for integrated producers, has increased in price nearly 50% in the past 12 months. "This surge in scrap prices encourages all producers to raise steel prices," he says. "In fact, the importance of scrap prices to mini-mills (the industry's lowest-cost producers) makes them even more aggressive in raising prices during periods of rising scrap prices." And also note that prices for steel slabs, which are the feedstock for approximately two-thirds of the world's sheet supply, have increased nearly 20% since last year. "Although profit margins may get squeezed temporarily in periods of rapidly rising scrap and slab prices, producers are usually ultimately rewarded in the form of higher selling prices," notes Gambardella.

But there is another view. Service centers and mills continue to have limited success getting end-use buyers to accept higher price tags. Even analyst Applebaum at Salomon Smith Barney now admits that "service centers and processors haven't been able to pass along the higher prices to their customers." Atop that, a detailed review of market data shows that:

• Sheet use actually dropped last year and may be flat or grow just 2.5% this year.

• Sheet imports may rebound by 9% this year because mills outside Japan, Korea, Russia and Brazil-that is, nations not slapped with punitive tariffs and import limits-may expand their sales of excess product into the U.S. market.

• The sheet market entered this year with a large inventory overhang that will take some time to be worked off, especially if manufacturing begins to stagger from interest-rate tinkering by the Fed.

• Few buyers foresee any sheet supply tightness anytime this year.

• Some new-order bookings for sheet may be bogus, as some OEM and service center buyers may have double- and triple-ordered to hedge against higher prices.

Numerous buyers for service centers say the prices they pay to mills for hot-rolled sheet rose from $330/ton in December to $360 by the end of the first quarter. They also say cold-rolled and coated sheet had risen from $430/ton to $450. In effect, they say mills were getting the $20-$30/ton hikes announced for first-quarter deliveries. And most service center buyers were prepared to pay another $20/ton higher this quarter for sheet products. That would bring hot-rolled sheet, for example, to $380/ton, which hasn't been the case since the first quarter of 1995.

Interestingly, while service centers report already paying as much as 9% more in the first quarter for sheet steel, producer price indexes tracked by the Bureau of Labor Statistics fail to show this kind of a runup. This suggests that long-term contract prices for sheet-which represent half of domestic mill sales-and direct sales to other large-volume OEM buyers didn't increase.

Also, end-use buyers surveyed by Purchasing say that spot-market prices (which reflect import prices as well as distributor resale prices) show erratic first-quarter increases. Transaction tags rose from $310 in December for hot-rolled to $330 in March, while cold-rolled went from $410 to $440 and hot-dipped galvanized stock went from $430 to $440. Also, buyers express widespread reluctance to accept additional increases this quarter for a variety of reasons. Many buyers say they have booked for second quarter deliveries at first quarter prices, while others are uncertain about actual needs in the third quarter and beyond. A healthy percentage also expresses the belief that plenty of low-priced foreign sheet would be available again in the second half.

Punitive tariffs on Japanese tinplate, combined with the destruction of one U.S. tinning line and planned maintenance outages by several U.S. tin producers, have combined to take capacity out of the market and lift year-2000 contract prices by just under 4%. The current base price for single-reduced electrolytic tinplate with a 0.25 coating weight, the most widely used product, is $52.58 per base box, while the base price for double-reduced electrolytic tinplate with a 0.25 coating weight, another common product, is $43.03/base box. A 0.25 coating weight means there is a quarter pound of tin to cover a base box-31,360 square inches-or one-eighth of a pound on each side of the metal.

Tinplate producers generally announce contract price increases in the fall for the first of the year and hope to begin receiving the increases during the first quarter, depending on market conditions. This year, the anti-import trade case filed by Weirton Steel Corp., Weirton, W.Va., a fire that destroyed an Aliquippa, Pa., tinning line operated by LTV Steel, and planned outages have been key factors in the price hike gaining acceptance.

However, the depression in coated sheet product prices continues to surprise analysts. Demand rose almost 8% last year for galvanized sheet, which is shipped primarily to automotive and construction markets. Typically, that product, which includes zinc coating on the steel substrate, is priced higher than cold-rolled sheet. But for the past several months, the market price has been equal to cold-rolled-and shows no signs of outpacing it. Reason: Overcapacity in domestic supply. There are a large number of new coating lines that have been installed or are in the early stages of start-up that have boosted capacity markedly during the past three years.

Outlook is clouded

Even analyst Peter Marcus at World Steel Dynamics acknowledges "some steel buyers and sellers are apprehensive about the U.S. sheet steel pricing outlook starting in the second quarter." He says "one of their reasons is that foreign deliveries to the U.S. could start to increase sharply once again." The basis for that belief is that while European steel demand indeed is rising briskly, the anticipated year-2000 recovery in Asian and South American demand growth isn't living up to expectations.

Sheet steel imports were about 15% of supply last year, compared with the peak of 20% in 1998. For the first eight years of the past decade, imports averaged 16% of annual sheet supply. The lowest one-year import share came in 1995 at 13%, which also was the lowest sheet steel end-use year in the 1994-1999 time frame. Despite the drop in 1999 imports, the effects of the higher 1998 levels led to the reduced spot-market prices in 1999. In response to complaints filed by domestic mills, Uncle last year set high punitive tariffs on hot-rolled sheet from Japan, Korea and Russia and cold-rolled sheet from Argentina, Brazil, China, Indonesia, Japan, Russia, Slovakia, South Africa, Taiwan, Thailand, Turkey and Venezuela.

However, in early March the International Trade Commission removed the tariffs on imports of cold-rolled steel sheet imports from Argentina, Brazil, Japan, Russia, South Africa and Thailand, saying these imports and their pricing were not a threat to the U.S. steel industry. The ruling means the U.S. will not carry out plans to impose punitive duties on some $600 million in annual imports of cold-rolled sheet. This ruling also throws into doubt preliminary tariffs placed in response to domestic industry complaints against cold-rolled imports from Turkey, Venezuela, Indonesia, China, Slovakia and Taiwan.

Atop the tariffs, side agreements between Commerce, Brazil and Russia, which limit the tonnage of their hot-rolled imports allowed this year, also set floor prices of $300-$310/ton. And there is no evidence from traders that mills in those nations are offering product much higher than the allowable floor levels.

Mill executives maintain that sheet demand in Europe is strong, "perking up" in Asia (except Japan), and "probably will improve" in Eastern Europe and South America as the year progresses. That's why they maintain that imports of finished sheet products will drop further this year. However, even the most conservative analyst forecasts now suggest sheet steel imports will rise to 10.9 million tons this year from 10.1 million tons last year. Based on projected supply of 67.8 million tons this year, that would boost the import share back to 16%. In fact, analyst Morrison at Donaldson, Lufkin & Jenrette suggests that "the domestic industry's aggressive behavior on pricing over the past year will likely serve to encourage consumers to increase their purchases of foreign material."

Is supply really tight?

Service center buyers are complaining about tight supply of cold-rolled, especially. However, no supply tightness for any flat-rolled grade is being reported in OEM-buyer surveys conducted by Purchasing and the National Association of Purchasing Management (NAPM). Latest leadtime data shows deliveries have doubled to four weeks from a year ago, yet only "certain gauges of galvanized sheet" are reported to be hard to get.

And there is no statistical evidence to support the perception of some mills and analysts that sheet inventories were built up in 1998 but were liquidated in 1999. Typically, over the first eight years of the previous decade, sheet use lagged supply enough to leave a year-end average inventory of 4.9 million tons. The year-end surplus jumped to 6.2 million tons in 1998 and 6.8 million tons in 1999. Here's the evidence:

-Apparent mill and import supply was 67.7 million tons in 1998. That was the year that mill shipments of 54.3 million were supplemented with a record 13.4 million tons of imports. Manufacturing demand was 61.5 million tons, leaving 3.6 million tons in distribution warehouses and 1.6 million tons of new steel with traders and end users at the end of that year.

-And it now is estimated that some 4 million tons of that surplus was sitting in steel service center and distribution warehouses at the end of 1999, with the remaining 2.8 million tons either in trader's warehouses or end-user stockpiles. That's because the U.S. market's supply peaked last year with mill shipments and imports dropping 2.3% to 66.2 million tons. (Mill shipments were 56.1 million tons while imports were 10.1 million tons.) But, demand slumped as well by 3.4% to 59.4 million tons.

One of the issues usually not addressed in steel market reviews is the fact that domestic metalworking companies have embraced just-in-time manufacturing over the past decade. This has reduced the amount of steel needed on shop floors across America. "Industry has become much more efficient, and various lean-manufacturing programs are keeping in-house steel stocks down," admits Platz of Ispat Inland.

So with a supply chain surplus of 6.8 million tons overhanging the domestic market at the start of this year, it's little wonder there have been few concerns about supply tightness in monthly steel-buyers' NAPMsurveys. Polling by Purchasing Magazine or the NAPM Steel Buyers Group has found less than 5% of those surveyed reporting any flat-rolled supply tightness in the first quarter. Note that almost all of these buyers were located in the metropolitan Detroit area. Atop that, only 15% of all the buyers surveyed nationally think supply may get tight in the upcoming six months-and for only the one product line of hot-rolled sheet.

End demand is uncertain

Low unemployment and record consumer confidence have supported the solid pace of the manufacturing economy. Runewicz at the wefa Group maintain that "the capital investment side of the economy is not expected to collapse and this will have a pronounced positive impact on the output of non-electrical equipment, electrical equipment and fabricated metals for durable goods." Durable-goods manufacture continues to exceed expectations-especially the production of electrical and non-electrical machinery, automobiles and light trucks, heavy trucks, buses, trailers, furniture, office products, major appliances, and such miscellaneous manufacturing as sporting and athletic equipment. Upshot: This year's value of durable goods manufactured in the U.S. could exceed $3 trillion.

Runiewicz also sees nonresidential construction propping up any slippage in the construction of residential units. Additionally, he says the appliance industry in the U.S. "is showing excellent times." In fact, people are building new homes, renting new apartments and condos, and rehabilitating existing dwellings. Sales of major appliances could rise another 2% or more this year off 1999 sales, which were a record 62.8 million units. But automotive assembly could slip somewhat this year off the record-high levels of 1999. In that important automotive market, higher interest rates and rising fuel prices have yet to dampen motor vehicle sales, which have been even stronger at the start of this year than at the end of last year. Sales of domestic light trucks have been especially strong. These strong sales have caused some automotive industry insiders to predict full-year sales at the same 17 million units as last year.

However, economist Sophia Koropeckyj at RFA/Dismal Sciences believes that U.S. motor vehicle sales will slide closer to 16 million units this year. "This sales rate is not quite as strong as some other forecasts, but it does reflect an expected slowing in the second-half economy," she says. "While automakers can mitigate the dampening effect of higher interest rates on sales, higher gas prices cannot be as easily dealt with. In particular, escalating gas prices could impact demand for gas-guzzling luxury vehicles and large sport-utility vehicles."

And there are some steel analysts who see the same second-half sales-collapse scenario playing out in the sheet steel marketplace this year. "Given that the automotive and construction industries account for more than half of the economy's steel consumption, it will be difficult to show full-year increased demand against the backdrop of rising interest rates," says analyst Morrison at Donaldson, Lufkin&Jenrette. "Any sign of faltering prices as we enter the second half of the year will likely result in inventory liquidation by service centers and processors-and price erosion." He says that steel producers may announce price increases for the third quarter, Morrison adds, "but we expect that the typical softening in demand that is seen in the second half of the year will make it highly unlikely that these increases will be successful."

Market at a glance

Demand : Healthy but slowing. End-user segments consumed about 61 million tons in 1997 and 1998, but that skipped to 59 million tons last year. The marketplace is divided whether 2000 will be a no-growth or slow-growth year.

Supply : Plentiful, even with reduced imports. New mini-mill capacity and extensive inventories at the service center level will keep buyers supplied. Reports of tightness for cold-rolled product from distributors aren't causing problems for end-use buyers.

Prices : Rising quickly, but for how long? Spot-market tags are heading back to 1998 levels for uncoated products. Uncoated grades are just crawling back, however. Analysts don't agree on whether tags will rise further in the second half or be brought back down by imports.

Sheet steel supply (apparent consumption) (thousands of net tons)

	1990	1991	1992	1993	1994	1995	1996	1997	1998	1999
HR sheet/strip	14,985	14,378	15,455	16,138	21,151	17,926	20,061	23,264	23,598	21,863
CR sheet/strip	14,890	13,354	14,533	14,621	17,375	15,705	17,138	17,081	17,623	17,784
Tin mill goods	4,429	4,397	4,181	4,320	4,592	4,097	4,264	4,286	4,050	3,780
Galvanized	11,307	10,205	12,308	13,910	16,325	15,788	17,432	17,879	18,654	20,068
Other coated	2,258	2,078	2,264	2,446	3,153	3,154	3,198	3,316	3,155	2,088
Electrical	514	456	470	507	497	488	528	570	633	589
Total	48,383	44,868	49,211	51,942	63,093	57,158	62,621	66,396	67,713	66,172
% change	4.8	-7.3	9.7	5.5	21.5	-9.4	9.6	6.0	2.0	-2.3
DATA: AISI; FORECAST: PURCHASING

Sheet steel imports (thousands of net tons)

	1990	1991	1992	1993	1994	1995	1996	1997	1998	1999
HR sheet/strip	2,979	2,723	3,516	2,443	4,556	2,150	3,423	4,365	6,904	3,450
CR sheet/strip	2,114	1,969	2,237	2,260	4,337	3,132	3,099	3,848	3,747	3,311
Tin mill goods	573	555	606	472	707	545	577	638	657	859
Galvanized	1,510	1,405	1,912	1,474	1,906	1,432	1,725	2,025	1,829	2,101
Other coated	375	354	469	147	219	131	118	113	135	227
Electrical	76	82	82	115	101	100	109	111	125	107
Total	7,627	7,088	8,822	6,911	11,826	7,490	9,051	11,100	13,397	10,055
% change	4.8	-7.1	24.5	-21.7	71.1	-36.7	20.8	22.6	20.7	-24.9
DATA: AISI; FORECAST: PURCHASING

GalvInfo Center to help coated sheet buyers

Producers of steel and zinc products have banded together to create a new information center to provide technical assistance to buyers of coated steel sheet. The new GalvInfo Center, located in North Carolina's Research Triangle Park, was established by the International Lead Zinc Research Organization, the cooperative research arm of the zinc industry.

Fourteen firms and organizations with interests in galvanized steel-the American Zinc Association, Bethlehem Steel, Big River Zinc, Eastern Alloys, Henkel Surface Technologies, the International Zinc Association, LTV Steel, Metaltech, National Steel, Oakite Products, PPG Industries, U.S. Steel Group, Valspar and Weirton Steel-have provided financial backing.

The center has been organized primarily to answer technical inquiries about the use of metallic coated steel sheet products, in which zinc is a major component of the coating. This includes galvanized and galvannealed products, Galvalume steel sheet and Galfan steel sheet. The center also will answer inquiries concerning the performance of surface treatments and paints.

"The center's objectives are to provide technical assistance to users and potential users of zinc-coated steel sheet products," says Ralph Leonard, director, "and to broaden the understanding of the user community about the behavior and performance of zinc-coated steel sheet products." The GalvInfo Center can be contacted through its Web site, www.galvinfo.com, by e-mail at info@galvinfo.com, by fax at 864-848-0644, or by phone at 888-880-8802.