Hot-rolled sheet steel is heading toward the bottom

On the finished steel side, Steel Business Briefing.com placed its Midwest f.o.b. reference price for hot-rolled sheet in coil (HRC) at $561/short ton, down $33 from a week ago. World Steel Dynamic’s SteelBenchmarker has spot HRC at $557, f.o.b., the mill. Other sources are showing higher numbers while still others have the spot market closer to $500, nearing the cost of production for hot-rolled coil.

Goldman Sachs Group expects steel prices to begin increasing “early next year” after bottoming out this month. This recovery, however, will be relatively short-lived with prices peaking at $675 by April before falling back to the $500 level over the summer months. The brokerage firm noted, however, that producer discipline and stronger-than-forecast demand would mute the decline.

Looking closer at this fourth quarter, Nucor, for example, is anticipating that shipments will decrease by approximately 40% from the previous quarter. In a recent interview with Dahlman Rose & Co., the steel company remained upbeat, however, noting that while the industry capacity utilization is in the 50%–60% range, management believes that end-user demand appears to be down only 25%–30%, due to massive inventory destocking that is occurring at service centers and end-user locations. Consequently, Nucor anticipates that this should lead to increased order entry activity in the first quarter of ’09 along with improved operating levels.

This week’s Scrap Price Bulletin has its No.1 HMS (heavy melt scrap) composite price at $185.17/gross ton, up $66 from a week ago and up almost $85 from last month. While the composite price looks pretty robust, it’s mostly based on some “token” buying and “fill-on orders” but confirmed orders nevertheless. Consequently, we’re using that price as our guideline for the month so our revised HMS average for 2008 worked out to be $355.64.

Chicago bushelings, meanwhile, were figured @ $249.50, a modest $11 premium over shredded scrap. Other sources placed the differential between the two grades much closer than $11. And, while there is/was buying to support the higher prices we’re seeing this month, skeptics wonder whether the upside can be maintained with steel mill capacity at or slightly below the 50% rate. There’s that plus last month’s survey from the National Steel Buyers’ Forum that revealed fewer incoming orders over the next three months. Some view December as a bit of a “phantom” market.

This Week’s Thought: A complex system that works is invariably found to have evolved from a simple system that works.