Prices to ease from highs
Improved supply will be enough to match demand growth.
Tom Stundza -- Purchasing, 1/13/2005 2:00:00 AM
What happens when steel-bar buyers awake from hibernation? In the 2004 marketplace, it was a shortage of prompt supply—and sky-high sales prices. What's ahead for 2005? Better balance in supply/demand fundamentals are forecast, which should bring about a continual—albeit gradual—slippage in transaction prices.
Anticipated de-mand for steel bar and rod products is continued improvement in 2005, as manufacturing markets continue to recover from years of doldrums. But, the market analysts reckon that usage will remain below the peaks of past years. Still, that should be enough—in concert with improved supply—for prices to ease back from record highs. "Since most bar products doubled in price, 10% declines in late 2004 weren't enough to get excited about," says economist John Anton at Global Insight's Washington office. "Still, it was an end to the runup." Buyers agree, since surveys show that the fewest in a year now expect price boosts through the first quarter. And so do steelmakers such as Nucor and Bayou Steel, and possibly others, who cut list prices by $30/ton in December.
Increased import activity meant that supply availability for long products in the North American market increased as last year ended. "However, demand has shown some modest strength and the market power of the North American producers appears to have kept prices relatively firm," analyst John Novak at CIBC World Markets in Toronto writes to clients. "Due to increased import activity in recent months, we continue to anticipate a correction in pricing for long products in 2005. However, we believe the decline in pricing will be gradual, as the pricing power of the North American supply base should prevent a sharp decline in overall long-product pricing."
Purchases of bar products, especially high-end cold-finished grades, rose by almost 10% last year. When rod and light structural shapes are thrown into the mix, Purchasing Magazine's calculations put the demand improvement at 12% over the lethargic 2003 offtake. The problem was that full-year supply was just 9% ahead of 2003.
There still are occasional reports of high-grade special bar quality (SBQ) steel product shortages in the industrial heartland of upstate New York, Pennsylvania, Ohio, Michigan, Indiana and Illinois. Special bar quality steel products generally contain more alloys, and sell for substantially higher prices than merchant and commodity steel bar and rod products to automobile and industrial equipment manufacturers and their first-tier suppliers. In fact, SBQ is a highly engineered bar product used in axles, drive trains, suspensions and other critical components of automobiles, off-highway vehicles and industrial equipment.
But, overall, domestic supply of carbon and alloy steel bar and rod has improved from last summer when there were sporadic mill allocations caused by a surge in orders by original equipment manufacturers, screw-machine shops, wire drawing and other fabricators—plus the construction, automotive, and equipment assembling industries. Also, there was such a surge of demand in the first and third quarters that service centers were caught with too-low inventory.
And, with production dominated by electric-furnace mills dependent on high-cost scrap, it is little wonder that mills were able to boost prices in 2004 of long products—concrete reinforcing bar (rebar), merchant bars, structural shapes, beams, special sections and coiled rod—by an average 55% over depressed 2003 levels. "Prices rose on the back of raw materials costs and then stayed high as tight supply caused a seller's market," says Global Insight's Anton.
The downstream segment for steel bars includes direct end-use by the OEM and such secondary value-added steel-processing businesses as rebar fabrication, railroad spike making, cold-drawn products, super-light beam processing, elevator guide-rails production, wire-mesh fabrication and collated nails production.
Conventional wisdom has held for some time that supply far exceeded demand in the U.S. for steel bar and rod products. Once a highly diffuse industry with multiple, independent mini-mills producing bar steel, the sector is now dominated by a handful of large players.
What's more, the 2000-2003 recession in metalworking actually triggered a wave of reconstruction throughout the U.S. steel industry. "Bar mills went through a rocky time since the late 1990s, with multiple bankruptcies and the closure of some facilities," says analyst Anton.
Upshot: While there still are many mini-mills making carbon and alloy steel rod and bar products, the market supply of hot-rolled and cold-finished goods is dominated by Nucor, Steel Dynamics, Mittal Steel (formerly Ispat Inland), Gerdau Ameristeel, TXI Chaparral Steel, Timken, Macsteel, Republic Engineered Products, Charter Steel, Keystone Steel and SMI Steel. Gone are Georgetown Steel, CSC North Star Steel, and Birmingham Steel. Others, such as Bayou Steel, have been downsized and restructured. Analysts suggest the consolidation should bring some level of pricing and production discipline, and potentially make future inventory and price swings less violent.
Near-term outlook cloudy
Market insiders say that mill suppliers and importers reacted to higher market prices by boosting supply in the third and fourth quarters—so that year-end tonnage was approaching balance with demand again. That should smooth out supply wrinkles and reduce spot pricing. "But, while overall steel market demand ended the year strong, the volatility of the industry, combined with the influence of globalization, make it challenging to predict the magnitude and duration of market cycles," say Philip Casey, chairman of Gerdau Ameristeel in Tampa.
Imports of long-steel products into the North American market began increasing in the second half of last year, and have continued to be offered at competitive prices. There also has been expanded output from mills with new ownership in Ohio, the Carolinas, and Alabama. Upshot: Supply last year of 1.9 million tons above end use of almost 18 million tons meant that excess supply was stored in end-user stockpiles and service center, processors and fabricator warehouses.
Last year, wire rod was the big gainer, rising 13% in demand for use in making automotive parts, mattress and mechanical springs, turning parts, wire ropes and other specialty uses. Hot-rolled and cold-finished bar grades and light structurals either rose or fell by an average 2%.
Industry insiders seem to be bullish overall on 2005. J.T. Kuntz, vice president of Republic Engineered Products in Fairlawn, Ohio, suggests that the product leader this year could be hot-rolled and cold-finished SBQ grades for the automotive, cold-finishing, fastener, forging, industrial machinery, off-highway and agricultural-equipment industries. "Demand for SBQ steel over the last ten years has increased more steadily than the more volatile demand for commodity steel," he says, "and we believe that this trend will continue."
Industry analysts also seem to agree the bar purchasing outlook is positive, with a long-term view of moderate-to-strong growth in demand through 2007.
"Demand growth trends for 2005 would be even stronger," says Global Insight's Anton except high bar prices are causing some nonresidential construction projects to be cancelled. Analyst Peter Fish MEPS (International) in Sheffield, England, agrees that the commercial construction market is weak in the U.S. so there will be decreasing construction demand through the winter period."
Still, analyst Aldo Mazzaferro at Goldman Sachs in New York says that "long products, especially those used in the nonresidential construction industry, have not seen as much upside in prices as flat-rolled steel has in the past year." (That's true when comparing sheet-steel price increases of 110% versus bars' 55% hike.) However, he believes the nonresidential construction market has bottomed after declining for the past four years. "The recent signs of improvement bode well for suppliers of bar for construction products and projects."
For the future, says Casey of Gerdau Ameristeel, "the key unknown is the sustainability of the positive industry pricing trend in an uncertain political, economic and globally competitive environment."
Last year, the bar makers experienced substantially higher prices for scrap metal and other supplies, and implemented surcharges to offset these increased costs for raw materials. Buyers didn't accept the surcharges willingly. "Even when we successfully apply surcharges," notes Kuntz of Republic Engineered Products, "there is a time lag between the increase in raw material prices and the market acceptance of higher selling prices for finished steel products.
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