Steel sheet mills have been increasing prices higher because of higher scrap costs despite reduced manufacturing activity, and that's got steel buyers steamed. More than half of the buyers polled in April are paying more for steel already this year and a majority expect to keep paying somewhat more well into autumn. However, they don't expect to be paying as much as the mills want.

U.S sheet steel price increases this year have been led by such mini-mills as Nucor and Steel Dynamics that are facing higher ferrous scrap costs—caused by a worldwide surge in production. The local mills feel they need to raise spot prices in order to pass these scrap costs along to customers—especially since some key scrap prices have surged 65% since bottoming in November 2006. Integrated producers such as U.S. Steel and Arcelor Mittal, which are iron ore-based producers, "get to ride along with the spot sheet price increases without facing any significant increase in their own costs except for their own modest scrap costs," says analyst Mike Gambardella at J.P. Morgan Securities in New York.

"Demand is down, but steel prices are increasing," says Joe Diedrichs, director of production resources at mechanical construction services firm ACI Mechanical Inc. in Ames, Iowa. "What doesn't make sense is that it appears that the mills are trying to inflate prices to unload heavy inventories." Analyst David A. Lipschitz at Merrill Lynch & Co. in New York agrees that "the recent rise in sheet prices has more to do with increased cost pressures rather than demand pulling steel out of the system."

And, the market economists and buyers wonder why service centers, although holding large tonnage of inventories (9.7 million tons posted last in February) have continued to book large orders of domestic-made steel at inflated prices. "We hear the mill propaganda from our service center suppliers about the need for higher steel prices because of higher scrap costs," says the buyer at a medical instrument manufacturer in Delaware. "But, how can increased steel-market pricing occur in the face of reduced demand?"

Several steel mills have announced three price increases totaling $120/ton for hot-rolled coil between March and May.

Demand growth isn't that strong. Demand in the U.S. and Canada went into a tailspin in the fourth quarter of last year and the first quarter of this year. The major mills have been hoping that the seasonal upswing in demand will become evident in this second quarter. However, the economic indicators are pointing to a fall in consumption, supporting the view of buyers who have been holding back on purchases.

Latest market surveys consistently find buyers at original equipment manufacturing (OEM) firms working to reduce in-plant inventories, still buying cautiously—as only 37% in April planned top boost steel purchasing—and generally showing little support for that $640/ton price for hot-rolled sheet in May that was sought by the mills.

The Organization for Economic Cooperation and Development and the International Monetary Fund both have signaled a weak 2.2% economic growth outlook for the U.S. this year. And that dovetails with recent factory orders reports, which show demand for steel-intensive manufactured goods is down 5% so far this year, blunting earlier optimism about a strong first-half growth rate for sheet steel demand.

Adam York, economic analyst at Wachovia Bank in Charlotte, N.C. says reduced orders for big-ticket durable goods such as appliances, cars and trucks "shows the underlying weakness among the nation's manufacturers." Yet, "there are frequent requests lately by steel suppliers for price increases" says Dana Ackley, senior buyer at Pepco Holding in Rockville, Md., the largest energy-delivery company in the Mid-Atlantic region.

Hot-rolled sheet price increases are slower than the rate of growth being sought by the North American mills.

Analyst Gambardella writes clients that "sheet mini-mills like Nucor and Steel Dynamics have been forced to raise spot selling prices drastically in order to pass along the rapidly rising cost of ferrous scrap." The fact is that spot prices of flat-rolled steel products have been increasing—just not as high as the 23–24% hike the mills would like to see to offset their rising costs of energy and raw materials. That's because the service centers are paying higher prices than end-use buyers and both groups appear confused about the actual state of the steel market.

"High inventories and so-so demand should be depressing pricing," says Craig Maierhofer, vice president of carbon steel purchasing at the Metalwest service center in Brighton, Colo., "but due to lack of incoming foreign steel, the domestic mills are raising prices." Nucor and several other mills have announced three price increases for a total of $120/ton for shipments between March and May to about $640/ton.

High domestic production and imports in 2006 pushed inventories into surplus which has been slow to dissipate in 2007. "The mills cut production radically in the fourth quarter of 2006 and, thereby, prevented inventory surplus from turning into an inventory glut," says analyst John Anton at Global Insight in Washington. "Imports are also down sharply." Yet, inventories of unsold sheet steel remain high and demand has been lukewarm at best.

After increasing by 28% from January 2006, U.S. and Canadian service center sheet stocks finally peaked last October and have declined by just 7% to 10.4 million tons (as of February 2007).

Stainless is a mess, too. It isn't just the carbon and alloy steel sheet mart where the buyer/supplier acrimony is evident. Demand is better lately but not exactly robust. Stainless steel inventories at U.S. service centers remain 20% higher than the year-ago stocks of 741,900 tons. Yet, "stainless steel price increases have been staggering," says James Nations, president of MidAmerica Stainless in East St. Louis, Ill., a manufacturer of stainless steel fabrications and food service equipment.

Record-high costs for nickel, chrome and other necessary alloys have resulted in stainless steel cold-rolled sheet being sold in March around $4,600/net ton, a record. That's partly because of high raw materials' costs and partly because of a global surge in demand, which has tightened stainless sheet supplies worldwide. Deutsche Bank just recently raised its forecast for 2007 nickel to $14.28/lb, as compared with $11.02 in 2006.

World stainless steel production surged by almost 17% last year. Now, analysts at MEPS (International) Ltd. in Sheffield, England, say they expect this growth rate to slow down, but 2007 output should still be 1.6% higher than 2006's 28.4 million metric tons.

Scrap prices are notoriously volatile, but they do tend to be a leading indicator of future steel selling prices.

"Timely arrival of imported stainless steel seems slower and domestic stainless steel sheet supply remains tight," says Frye. Rich Moon, the manufacturing systems manager at agricultural building and equipment maker Plymouth Industries in Plymouth Neb., agrees that "there's been slower than usual transit times from India and Asia." He adds that stainless steel machined products from Asia have been in short supply through distributors.

Colin Steyn, CEO of mining firm LionOre in Toronto, says that nickel prices will be sustained by market fundamentals in the short term, but in the longer term higher prices could damage the stainless steel market. "We believe nickel prices are at unprecedented highs and if they go considerably higher, they will be value destructive for the stainless steel market and will affect stainless steel supplies."