Supply is sufficient to keep leadtimes short, prices low

Tom Stundza -- Purchasing, 2/16/2006

Steel bar prices increased on average by 8.5% in 2005 but the market prognosticators expect a 2006 retreat back to 2004 levels. As a start, merchant bar tags are seen slipping to an average $490/ton this quarter off the $510 average in the fourth quarter of 2005. "The price declines will come from improved domestic supply along with lower scrap and metallic costs," says steel economist John Anton in the Washington office of market researcher Global Insight.

The average market price on merchant bars increased slightly in December but are lower than what the mills had wanted. Delivery times were erratic but actually quickened as the year closed. And, as far back as November, Anton had projected that "the price rebound the mills are seeking in the fourth quarter will meet with only partial success, and will not last past the winter."

Imports dropped by 6% last year so Anton and other analysts suggest that only further reductions in imports and reduced shipments by domestic mills can keep pricing elevated this year. And analysts don't see either event occurring. Offshore production should increase because current prices—$200/ton higher than China, $100 above Japan, Korea and Taiwan—create opportunities for profit when shipped into the U.S. and Canada. Atop that, "replenishment of low inventories at the service centers will remove any buyers' worries about availability," adds Anton.

With lower inventories at the service center link of the supply chain, and firm—if not spectacular—end-user demand, most market insiders argue that production will accelerate in early 2006 and imports also will rise. That's why the purchasing manager for an automotive components maker in Tennessee says "market indications are that steel bar prices should continue to fall in 2006, so our firm is expecting to see some relief from the zero-profitability situation of the last two years in an inflated steel-price market."

Surveys of buyers and distribution executives show that steel bar purchasing dropped by 5.5% last year and could slide by another 4% this year to 15.5 million tons. And, since metals service center inventories slipped by just 1% from 2004 totals, total market supply of the various bar shapes was abundant entering the new year. "Certain types and sizes of grade 4140 chrome-molybdenum high-tensile steel bars are somewhat tight," says the purchasing manager at a company that makes automated equipment used in automotive assembly, "but not plain old carbon steel grades."

The mavens at Economy.com say bar demand isn't as good as it might be if automotive assembly was healthier. Still, they see purchasing activity for rebar and light structurals as modestly healthy because of resurgent nonresidential construction activity. Reconstruction in the Gulf Coast and Florida following last summer's hurricane should help boost light structurals demand, but bridge and highway infrastructure activity may not start in earnest until 2007.

Also, there is continued buyer interest for industrial, construction and agricultural machinery, some of which was ordered as far back as a year ago. Actually, machinery spending has been healthy since late in 2003 and has bolstered demand for cold-finished steel bar products that are used for shafting and machined precision parts.

There's a consensus among the economists that spending by businesses this year should maintain special quality bar and light structural demand as companies boost investment in response to global competition. "Merchant bar demand continues to draw strength from business investment while the previously booming consumer end-markets lose some luster," says Anton.

"Automotive demand carried the market through the recession years but must now cope with a modest downturn in late 2005 and across 2006," says Anton. The weakness in automotive assembly also will be a problem for fasteners, forgers and auto parts makers. "Thus, special quality bars will continue to see softer demand from this key market in 2006," Anton says.