Four veteran steel market analysts believe that the latest downward drift in steel pricing will bottom out this autumn. While all three agree that demand has been softer than expected this summer and prices are past the peak for 2007, they all believe supply and demand fundamentals will shift over the course of the second half.

Aldo Mazzaferro at Goldman Sachs and Mike Gambardella at J.P. Morgan Securities, both in New York, Mark Parr at KeyBanc Capital Markets in Cleveland and Mike Willemse at CIBC Capital Markets in Toronto all suggest in notes to clients and interviews that an upward swing in steel prices is likely within the next several months because of expected increased demand from service centers, first, and then end-use companies. They also project reduced supply from renewed producer discipline and continued low levels of imports.

Because of seasonal pressures caused by summer automotive shutdowns, soft demand for consumer durables and summer vacation schedules, Willemse says that "steel pricing has yet to show any material strength." In fact, hot-rolled sheet steel in coil averaged $508 in August, the lowest price in seven months since the $508 of February. But he and the other analysts generally continue to await a rebound in steel prices "sometime" in the second half "due to an expected improved service center inventory position, moderate import competition and robust U.S. manufacturing activity."

Inventories of all steel products in July were the lowest since February 2006. In fact, "North American sheet inventories have declined for nine consecutive months and are down 25% from their recent peak in October 2006," says Gambardella. "Currently, the ratio of sheet inventories to shipments stands in balance at 2.9 months of supply. With inventories at such low levels we believe it could take just a moderate uptick in demand to send spot prices higher."

Mazzaferro forecasts that steel service centers will lead a buying charge by restocking inventory ahead of the typical fourth quarter improvement in purchasing. "We expect steel stocks to rebound strongly ahead of price increases, which we expect to become evident in the fourth quarter," he says. "In fact, as early as August there were signs that service center buyers were restocking inventory and had increased order rates at steel mills."

"The combination of ongoing inventory destocking, supply discipline from domestic producers, weaker import momentum, the uptick in August scrap prices and the potential for demand recovery suggest reasonable potential for fairly stable pricing through the third quarter, and a pickup in the fourth," writes Parr.

He notes that the soft domestic market this year and the weaker dollar have created reduced import opportunities. In fact, Gambardella says that since July 2006, imports of flat-rolled sheet and strip are down 48%, exports are up 36% and imports as a percentage of apparent consumption has dropped to under 14% from over 23%.

Parr adds that imports of structural products including rebar, wire rod and heavy beams also remain stifled, as imported tonnage in these major categories are down 15%, 39% and 16% year-to-date, respectively. "Line pipe imports remained a stark exception," he says, "as an estimated 1.55 million tons, up over 80% year-to-date, have entered the U.S. market this year, predominantly via China and Canada, with an emerging presence from India, Korea and Italy."

All four analysts agree that carbon steel demand has been somewhat weaker than forecast earlier because of a lack of automotive, major appliance and residential housing momentum and the many months of service center and end user destocking. "Demand indicators as late as August show a mixed picture," says Mazzaferro. "They show continued strong demand from nonresidential and energy markets but also continued weak demand from automotive, core appliances and residential construction."

Parr also points to "normal seasonal pressures caused by summer automotive shutdowns and cautious service center buying activity likely have delayed a meaningful pricing recovery until late in the third quarter or fourth quarter."

Mazzaferro agrees that sheet pricing will remain soft for the remainder of the summer. But, low inventory, low imports and pricing too low to attract tonnage now will set the stage for an order-bookings reversal during an uptick in seasonal demand in the early winter, he says. He believes that year-end prices of hot-rolled sheet will be around $580/ton—which is substantially higher than most other forecasters.

There has been softness in domestic bar, light structural and rod product prices in the summer months. In fact, the collapse in new-housing construction (reduced demand) and tons of low-priced imports (expanded supply) appear to have caught up with the concrete steel reinforcing bar market—belying recent mill comments about generally healthy sales and relatively stable prices. Buyers reported that transaction prices from domestic sources averaged $577/ton in August, down from an average $605 in the previous four months.

Rebar fabricators note the continued availability of lower-priced imports from Turkey, Taiwan and other offshore producers. According to Census Bureau statistics, the U.S. imported 2.35 million net tons of rebar in 2006, up from 1.29 million tons the previous year, an increase of approximately 82%. Rebar import levels have remained high in 2007 at 1.14 million tons through June.

However, the analysts generally see renewed strength in wintertime pricing of plate and structural steel because they believe strong infrastructure building in developing nations will continue to tighten supply in the U.S. Mazzaferro also says that demand for bridge fabrications made from plate and structurals will show increased strength in the near future "as the U.S. increases it focus on infrastructure renewal following the tragic Minneapolis bridge collapse." However, if supply stays tight, it will open the door for more lower-priced imports, he says, suggesting that plate and structural producing mills already are running full speed and can't increase output.