Down economic reports set the stage for weak steel prices

The first major macroeconomic report for the New Year was a bit of a downer: Domestic factory activity fell to a 28-year low in December and the closely watched ISM (Institute of Supply Management) Index fell to 32.4, its lowest since 1980. A stark reminder to some (many) that this recession will likely be the deepest, most severe in the post-World Ware II era.

Monday’s auto sales report for December, as bad as it was, did not send the markets into a swoon despite the 35% across-the-board decline, capping off the year with a drop of 18% — the worst year-to-year sales fall since the early 1970s. Some are saying that November was actually the low point and that, with new incentives, auto and truck sales will start to move higher in the months to follow.

Today we got a look at last month’s non-farm payrolls report, the guess was for an increase in the unemployment rate to 7.0% from 6.7%. (Editor’s note: Unemployment closed the year at 7.2% with the economy shedding 2.6 million jobs in 2008.)

Looking at the ferrous market, for all of 2008, hot-rolled (HR) sheet, as measured by our friends at Purchasing magazine, averaged $842.50/short ton, up 60% compared with 2007 ($526.75.) Platts’ has its average for 2008 @ $857.35, with Midwest delivered shredded scrap averaging $424.17/gross ton. But, as we all well know, annual averages mean very little and shed no light or give any comfort on what actually occurred in the marketplace last year.

A forecast offered last week by Fitch Ratings reckons that domestic HR prices will “trade in the range of $500/short ton and $544 in 2009.” As we’ve mentioned before, Goldman Sachs’ 2009 forecast for HR coil was figured closer at $560. GFMA Metal Consulting is also forecasting HR averaging $565 this year while Merrill Lynch is thinking in terms of a $600 ton average for the year.

So, as we look at January 2009 (and beyond,) is $500 the bottom for HR? Again citing Purchasing, they’re forecasting a first quarter ‘09 average of $513 per ton, but revisiting that $500 level by March. Platts is showing the Midwest f.o.b. HR price @ $510 this week. Dahlman Rose is also hopeful for a better looking first quarter as mills ramp up capacity to 60% - 65%,”well below historical norms, but above the current utilization rate of approximately 40%.” Others, meanwhile, place the current rate at closer to 36% based on early January production levels.

Goldman Sachs’ near-term view is cautiously optimistic based on what they see as a “favorable supply-demand balance from a strong supply response.” At the same time, however, they also see domestic steel prices coming down by this summer based on: demand weakness that they believe will continue into next year, along with an end to inventory restocking, and the resumption of some production on the back of rising prices…although positive short term, the firm believes that steel prices will “remain depressed until there is some meaningful change in demand which could be by late 2009 or early 2010.”

KeyBanc Capital Markets is also optimistic, short term. Their contacts, for example, suggest that mills are seeing an increase in customer order activity over the past several weeks, suggesting increased confidence of steel pricing momentum, upward movement of scrap pricing, and an acknowledgment of low steel inventory levels. Consequently, they believe that improved order entry could support rising production and pricing as service center and end-users begin to replace existing stocks with new orders…

And ferrous scrap? As 2008 ended, Platts had its Midwest reference price for shredded  at $240/gross ton, delivered, averaging $229.52 for the month of December. Platts’ shredded price is currently at $250. Also, this week’s Scrap Price Bulletin has its No.1 HMS composite at $198.50/gross ton, up $13.33 from its end-December price of $185.17; shredded scrap was figured at $247.17, up a modest $5.00, clearly disappointing some processors who saw strength going into the New Year. Still, at worst, it looks like a “sideways” January scrap market.

Again referencing KeyBanc, they note that many industry sources expected ferrous scrap increases of $20-$25/gross ton in January. Bushelings, currently figured around “$275 per metric ton,” ($279/gross ton) are also said to constrained by supply and thus support upside pricing, while at the same time, “scrap yards are beginning to see improved flow of obsolete grades as scale prices have picked up in the past week.”