Steel prices will rise, but when?

By Tom Stundza -- Purchasing, 4/5/2001

Steel market forecasters agree buyers will be paying more for hot-rolled sheet-but not until sometime this autumn. Buyers at manufacturing companies paid $220-$225/ton for hot-rolled sheet delivered in March, while service centers bought at only $200. Prices have been at 20-year lows, but the glutted marketplace appears to be rejecting the price increases proposed by the mills for April-June deliveries. Higher tags won't come until later in the year, the buyers and mavens agree.

Most analysts suggest that Nucor's proposed hot-rolled increase of $20/ton will be successful, largely based on the company's ability to restore pricing to the underlying market as import availability eases. But, buyers, and the mavens, see no chance for the $40/ton increase proposed by U.S. Steel, Bethlehem Steel, Ispat Inland, J & L Steel, and other integrated mills. Similarly, the buyers are rejecting proposals to boost springtime prices for cold-rolled and coated (i.e., galvanized) sheet by $30/ton.

It is the timing of the hot-rolled price increase, especially, that is the key issue. Hot-rolled is the industry's basic flat-rolled commodity product and also is the raw material for cold-rolled and coated stock. Analyst Waldo Best at Morgan Stanley Dean Witter & Co. in New York says the price increases "won't stick" until possibly the October-December quarter because there is no solid evidence that steel sheet demand is about to rise and hold strong.

Analyst Mark Parr at McDonald Investments Inc. in Cleveland notes that "conditions for meaningful upward price momentum remain elusive at present." He says that "neither average to below-average inventories at the service centers nor stable to strengthening demand patterns are firmly in place in the current domestic marketplace." So, he sees little upward movement in sheet prices until the July-September quarter. Also, Enron's new marketplace for physical delivery of hot-rolled sheet in coils, which shows a current market of about $225/ton, will move to $240/ton by the middle of the third quarter.

"Necessary precursors to a sustainable upward trend in hot-rolled sheet prices include the additional purging of excess supplies and measurable production restraints on a global scale," says Parr. Buyers have been reducing stocks as end-use demand trends for the second quarter continue to be uncertain. In response, steelmakers last quarter reduced capacity utilization to less than 77% from an average of 86% in 2000. Hot-rolled sheet imports have been easing since the third quarter of last year, due to a combination of depressed spot prices, the filing of trade complaints and weakened demand. However, service centers closed 2000 with 2% more flat-rolled inventories than they began the year, and entered 2001 with a higher-than-normal 4.2 months' worth of stocks on hand.

And, there is concern among some analysts that stocks will take some months to drop back to a more normal 3.2 months' worth because production still is higher than necessary-as some mills are operating under the protection of bankruptcy courts. Also, the pessimists say the potential exists for slippage in end-user demand patterns if the manufacturing economy doesn't perk up in the second half.

Still, inventories of sheet steel that once choked non-processing warehouses in the Midwest now appear to have been brought back into line with customer demands. As recently as last December, the warehouses were bursting with product awaiting shipment to customers. Now, most of that unsold and unshipped product has been reduced and the warehouses say they even have some excess storage capacity.

Steel mills set production record