Steel’s demand, price strength peaked back in August

Industrial Production for September was (again) better-than-expected, at 0.7% growth and the August index was also revised up. Credit last month’s jump in production to the auto industry: motor vehicle output rose 8.1% as assemblies of autos and light trucks increased 13.0% to 7.15 million vehicles.

So, will October’s IP moderate due to an assumed slower-paced auto sector? Not so fast…manufacturing, ex-autos, increased 0.4%, the third straight monthly gain and is up at a 7.5% annual rate. Impressive…let’s hope it holds up. Meanwhile, the factory operating rate climbed to 67.5% in September but remained 12.1% below its 1972-2008 average. For the third quarter, manufacturing output advanced at an annual rate of 7.1%.

Related to the above, the latest service center report on steel shipments and inventories has a number of folks questioning steel’s strength this quarter. As reported, North American service center inventories increased last month, according to the Metal Service Center Institute, and the first such stock increase since August 2008, most notably in flat-rolled products. As the data also revealed, total North American steel shipments were slightly higher by some 0.3% in September while the North American inventory tonnage gained 3.1%.

For the U.S., September service center shipments of all steel products totaled nearly 2.6 million tons, while monthly steel inventories, which peaked at about 13 million tons in August 2008, rose for the first month since then to 5.79 million tons, 3% higher than at end-August, noted the MSCI. At current shipping rates, that represents a 2.3-months supply.

Pricing pressure is growing for finished steel? So it would seem: Steel Market Update sources, for example, have observed that a growing number of steel mills are negotiating lower steel prices with pricing momentum said to be clearly for lower prices as many mills abandon any thoughts of $600/ton for hot-rolled sheet in coil. Mills,

Obviously, are also resisting this but some buyers are nevertheless predicting $500/ton HR going forward.

Steel Market Update placed the HR reference price at $540/ton, f.o.b., east of the Rockies. Platts is in general agreement with HR, currently figured by them at $530/ton, while KeyBank has spot HR in the $540-550/short ton range, after hitting $570 in September. We do not have a clear price picture for November orders, but we do see production higher next month and ferrous scrap prices lower-especially in the absence of aggressive offshore buying. The RMDAS October average for No.1 HMS (heavy melt scrap) was figured by them at $245/gross ton delivered.

And finally on ferrous scrap, during yesterday’s analysts’ conference call with Nucor, Executive Vice President Keith Grass remarked: “We’ve seen pricing move down in October and that was as a result of certainly reduced domestic demand and also a falloff in the export demand. So export market had driven a lot of the scrap market most of this year until the domestic business kicked in early this quarter. Starting to see a drop-off. I imagine that’s going to continue around the 30 days or so.”

In nonferrous, over the past week, Reuters surveyed some 28 analysts, asking their views on the London Metals Exchange base metals complex for this year and next. Here’s a summary of what they’re thinking in terms of annual averages for 2010: Aluminum, 88.7¢/lb; copper, $2.95; lead, 95.5¢/lb; nickel, $8.39/lb; tin, $7.22/lb; zinc, 89.5¢/lb

A look ahead

Here’s an early look at the “Marketrends” column in the Nov/Dec 2009 issue of Scrap our favorite magazine:

Aluminum: Demand projections for this year envision another decline in global aluminum consumption, as well as a multimillion-ton surplus at year’s end. Though year-on-year comparisons point to statistical market weakness, aluminum demand has improved markedly from earlier lows and currently is outpacing this year’s new primary production. Analysts also note that a large percentage of LME aluminum inventories are being held as collateral and, thus, are not readily available, adding further evidence that global aluminum fundamentals are far more constructive than they appear. For producers and scrap recyclers, price prospects going into 2010 are looking more encouraging.

Copper: Recent price forecasts see LME cash copper averaging around $3/lb next year but still below the $3.18 average in 2008. For the remainder of this year, copper will continue to be overly influenced by China’s moderating imports of refined metal, potential South American mine supply disruptions, changes in global copper inventories, real demand for copper units and currency considerations. In the near term, market watchers expect to see prices for copper drift lower in the final quarter, but most also believe that the global supply-and-demand fundamental picture points to higher monthly averages in the medium term, despite an anticipated global surplus of refined copper next year.

Iron and Steel: Following a positive second quarter, domestic steel market momentum stalled midway through the third quarter, with finished steel prices and scrap said to be ahead of market realities. As a result, the consensus view is that the U.S. market is oversupplied compared with demand entering the seasonally slower fourth quarter. Though there is some downside price risk in the final months of this year, partly due to lower usage from the automotive sector, market watchers do not expect a fourth quarter price collapse. Meanwhile, China’s raw steel output continues to grow, temporarily exceeding demand and providing strong incentives to export, which some insist will negatively affect near-term prices.

Lead: Lead was the surprising star price performer in the third quarter as well as year-to-date. Demand remains positive as the industry enters the seasonally strong fourth quarter, aided by a steady domestic replacement battery market and strong Chinese auto sales. Supply disruptions in China continue to provide price support in the fourth quarter, with anecdotal evidence suggesting that the country has shuttered some 420,000 metric tons of smelter production due to environmental issues. The International Lead and Zinc Study Group (Lisbon), however, reports that the world refined lead market will post an 80,000-metric ton surplus this year and just over 100,000 metric tons in 2010.

Nickel and Stainless Steel: Reported improvements in end-use demand for nickel and growing evidence that the Sudbury and Voisey’s Bay mine closures in Canada will last until year’s end are encouraging some near-term buying, despite LME inventories that are at levels last seen in March 1995. Market participants see signs of improvement in demand by developed nations and restocking in the stainless steel sector, which could-some contend-move the global nickel market from surplus to deficit. To date, however, the domestic stainless market remains soft, with lower scrap price forecasts at the start of the fourth quarter.

Zinc: LME cash zinc was the second-best performer in the third quarter, in part due to mine closures in China that have included lead and zinc co-production operations. Nevertheless, rising supply and inventories elsewhere were undeniable factors in the third quarter, suggesting that zinc prices will be hard-pressed to continue their firming trend. Though zinc’s inventory position has improved thanks to higher demand, the global market surplus for this year is widening. ILZSG data indicate that the world supply of refined zinc will exceed demand by 380,000 metric tons this year and 227,000 metric tons in 2010.

Due to next week’s BIR meeting in Amsterdam, we will not be publishing a report next Friday. Bummer, we know.