Spot prices will slide by 5%

By Staff -- Purchasing, 2/8/2001

What's happening: U.S. use of steel mill products set a new record last year at 116 million tons, but so did supply at an estimated 135 million tons-due in part to 30 million tons of imports. This surplus inventory choked merchant and distributorship warehouses. Steel mill prices, which had decelerated in 1999, stalled in neutral in 2000. The mills were able to boost first-half price tags last year to make up for revenues lost the year before, but were unable to maintain the momentum in the second half. In fact, some mill product spot-market prices collapsed in the second half under the weight of low-priced imports and excess supply. Example: Benchmark hot-rolled sheet dropped 30% by year's end from April prices. Despite that, second-half orders weakened from several of the steel industry's end-use markets, especially the motor vehicle sector. Growth slowdowns also became evident in the output of appliances, fabricated metals, machinery and products used by the construction sector. Upshot: PURCHASING'S composite price for a larger marketbasket of carbon, alloy and stainless steel products (which had fallen by 11% in 1999) rose by less than 4% last year. That was way below the consensus steel mavens forecast of 12% growth in spot-market prices in 2000.

Why it's happening: Too many steel products in the marketplace, even with intentional end-user and service center destocking in the second half. But, it wasn't the tonnage of imports alone that caused some mill product prices to slide to their lowest monthly levels-ever. "There was a belief at the start of the year that the steel industry was almost certain to have favorable market conditions in 2000, but greed-that is, overproduction by the steel mills in the face of slowing second-half orders-won out," says Peter Marcus at World Steel Dynamics in Englewood Cliffs, N.J. Most analysts and market insiders had expected steel mill product imports to decline annually after the economic and political furor created by the receipt of 35 million tons (equal to 26% of supply) in 1998. Interestingly, they have. Imports dropped 23% to 27 million tons in 1999 (falling to 21% of supply, as end-use demand rose by 4%). Last year, imports of steel mill products were 20% of supply (as end-use demand rose by 8%). However, U.S. steelmakers' shipments of mill products rose 5.5% to 105 million tons. Upshot: A year-ending overhang of 19 million tons of unsold steel. "The fourth-quarter ratio of 3.8 months of shipments on hand by service centers was well above the average rate of 3.3 over the previous nine quarters," notes Mike Gambardella at J.P. Morgan Securities in New York.

What to expect: For 2001, market analysts see reduced low-priced imports, but they also expect domestic consumption to slide. (Early forecasts cut steel use by an average 6.3% to 109 million tons.) And the mavens agree on reduced prices. Mark Parr at McDonald Securities in Cleveland sees a 2%-3% reduction in contract pricing for 2001. Charles Bradford at Bradford Associates in New York is even more bearish, suggesting a 5% reduction. The mavens project a 5%-6% reduction in 2001 spot prices (versus last year) for most carbon, alloy and stainless steel mill products. "Hard times by the customers of steel products will lead to hard times by the steel producers," says Tom Runiewicz at WEFA Inc. in Eddystone, Pa., who sees the composite steel price crashing by 10%. Note that PURCHASING'S surveys show that planned steel purchases will remain at depressed fourth-quarter levels at least through midyear. In fact, many steel mills booked new business for first-quarter deliveries at what one analyst describes as "extremely depressed price levels." Gambardella, for example, discusses "conservative shipment and pricing assumptions" for stainless steel flat-rolled as well as carbon steel grades. PURCHASING is forecasting a 5% drop in its composite market pricing for steel mill products. Buyers heartily agree with the pricing analyses. Latest steel buyers' surveys show many planning virtually no increase in steel mill product purchasing costs this year.

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