October 1, 2008
Sheet Steel Prices Have Peaked; Analysts See Price Declines Ahead

The summer seasonal demand weakness for steel, particularly for carbon flat-rolled mill products, was more intense than had been expected by most analysts and that has caused domestic sheet steel prices to soften slightly. In fact, it appears that the global steel-price surge has peaked and there is the possibility of a declining price environment in the second half, according to some market watchers.

In the U.S., there has been a growing disconnect between steel sheet mills and end-users. Although demand has been weak this summer and the outlook for increased buying is dark, flat-rolled steel producers in recent weeks have moved to increase carbon sheet prices for September deliveries to offset higher prices for such raw materials as iron ore, coke and scrap. Most mill executives believe the fundamentals remain in place for transaction sheet steel prices to remain at high levels and for the third-quarter price increase to be absorbed by the market.

However, demand in the domestic market has been feeble all year, down about 4% at midyear. Domestic shipments actually began slipping in May and midyear imports of 15.92 million tons are on pace for a 4.2% slide this year—after a 26.6% collapse in 2007. Analyst Mark Parr at KeyBanc Capital Markets in Cleveland says "traders have exited the steel sector in droves over the past month, implying that seasonal weakness masks the onset of a severe global recession." And, in truth, midyear sheet steel imports are mostly down. Imports of hot-rolled sheet in coils are up 4% to 1.48 million tons (vs. 1.42 million in the first half of 2007) but cold-rolled sheet imports are down 26% at 794,000 tons while imports of hot-dipped galvanized sheet is off 24% to 898,000 tons.

Steel industry management has expressed relative confidence in midyear financial reports that flat-rolled sheet steel prices would hold up reasonably well this summer. However, analyst Mike Willemse at CIBC Capital Markets in Toronto says the market may see "a declining price environment due to reduced end-market demand, greater raw material availability and higher inventories throughout the supply chain."

"The next several months will provide another meaningful test for domestic mills and service centers to maintain supply discipline," says Parr. Willemse also tells clients in August that he "would expect the steel mills to promptly cut production if prices deteriorated too rapidly." Still, available market data shows that the mills probably will ship 10% fewer tons in the third quarter than they did in the second quarter and imports, down 4% for the year, will stay soft.

In a recent report, Parr says, "The ongoing softness in consumer-driven automotive, appliance and residential housing end markets is being exacerbated by summer industrial maintenance outages" by steelmakers as they prepare for expected increased production momentum in the fourth quarter and beyond. Upshot: Parr reports that "pricing is showing signs of cracking $50–$100/ton from its $1,100+/ton mid-year highs" as the average for hot-rolled and cold-rolled sheet in coils. (Note: His view matches the $1,111 average market price reported by for both flat-rolled products in July.) has reported that the North American benchmark price for hot-rolled sheet steel averaged $661/ton in the first quarter and $974 in the second quarter. Willemse's latest forecast expects hot-rolled sheet to average $1,035/ton in the third quarter and $930 in the fourth quarter.

Worldwide, third quarter demand slippage and spot pricing declines are not unusual and primarily reflect a seasonal phenomenon although Parr says it has been exacerbated by reduced Chinese industrial activity "to literally 'clear the air' in Beijing during the Olympics." In addition to domestic summer auto-model changeovers, Europe essentially shuts down for the entire month of August, Ramadan-related stoppages affect Middle Eastern demand and even Japan has a summer vacation.

Source:, September 11, 2008

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