Low Steel Prices Expected to Persist

Nov. 5, 2010
The cost of input materials has a direct influence on the pricing of electrical equipment

The cost of input materials has a direct influence on the pricing of electrical equipment. Global Insight metals analysts John Anton and Tom Stundza find that over-production and the addition of new capacity, combined with continued sluggish demand, suggest it will be a buyer’s market in steel for quite some time. Excerpts from their report follow:

The metalworking recovery momentum from earlier in 2010 has slowed so demand has slipped. Steel buyers are scrimping on orders and market prices have fallen, as forecast — with even lower prices expected in coming weeks. That’s especially true in flat-rolled products, an already over-supplied market where prices are being pressured downward by recent new capacity and buyers’ reluctance to accept supplier requests for hikes.

The October price for hot-rolled steel sheet in coil, a benchmark product, was $556/ton, according to data compiled by IHS Global Insight. That’s a 4.3% slide from the $581 in September. The average third-quarter price for hot-rolled sheet of $581/ton was down 13% from the second quarter, and the fourth-quarter price now is projected by IHS Global Insight to drop another 7.5% to $538/ton.

More than one survey respondent used the term “free fall” to discuss steel-market pricing, which reflects the 19% descent in pricing for hot-rolled off the cyclical peak recorded in April. Since spring, cold-rolled sheet has dropped 16% to

$666/ton. That’s down 3.2% from the previous month’s $688/ton and keeps cold-rolled sheet on track to average $635/ton in the final quarter.

The manufacturing sector is still growing, but at a slower pace than earlier in the recovery. Economists say that leaves any hope of a boost to economic growth largely in the hands of consumers — who have yet to start buying major appliances, motor vehicles and other expensive durable goods made from steel. Raw materials buyers answering the monthly IHS Global Insight pricing survey say there has been some improved purchasing of carbon, alloy and stainless steel. However, demand remains spotty. This isn’t a surprise since buyers typically refrain from placing non-critical orders when steel prices are declining.

“It is now painfully clear that the overall U.S. economy in recent months has entered a new period of uncertainty and reduced economic activity,” says Dan DiMicco, CEO of steel producer Nucor. “Historically, it takes gross domestic product (GDP) growth rates of over 3% for steel consumption to rise. More than two years after the onset of this economic crisis, the second-half economy continues to sputter with less than 2% GDP growth.”

As the domestic steel market looks to be backsliding, more than few steel-supply firms are rethinking and lowering the fourth quarter sales and pricing expectations. Market chatter already is discussing $500/ton hot-rolled sheet in mid-to-late December.

Adjusted year-to-date U.S. steel production through Oct. 23 was 72,058,000 tons, at a capability utilization rate of 70.5%. That is a 45.1% increase from the 49,669,000 tons during the same period last year, when the capability utilization rate was 49.4%. But the 2010 nine-month consumption tonnage is an estimated 8 million tons less than apparent supply. The overcapacity issue is being exacerbated by the ramping up of production at ThyssenKrupp USA’s new 4.7 million net ton/year flat-rolled mill in Alabama. Oversupply could be further impacted when Severstal Columbus in Mississippi brings on another 1.7 million tons (to an existing 1.6 million ton/year plant) in late 2011.

Bottom line. The key to market stability will depend whether the steel industry will demonstrate production discipline to prevent steel prices from spiraling down.

— Tom Stundza and John Anton, IHS Global Insight