Steel Market Update participated in a three-way email conversation with a service center and a manufacturer regarding steel prices and questions/concerns about longer term prices for the North American market. We thought the information bantered back and forth might be of interest to our readers:

Service Center: “…We have seen here over $100 [per ton = $5.00/cwt] in increases in the last 4 weeks. Further I just saw AK increased another $60 a ton. I believe these increases have been fueled by raw material increases. I believe they have stuck because of the discipline displayed by the mills in curtailing capacity. Conventional wisdom here is that we may see a price retreat in the second half. I seem to be the dissenting party here. I believe we are headed toward a perfect storm with capacity remaining at historic lows, the dollar at historic lows versus world currencies, and strengthening demand both worldwide and domestically in the second half of 2010. I think we could see $800 HR maybe more.”

Manufacturer: “First off...not sure if there is anything such as conventional wisdom. I think what people have learned during this process is that they will continue to play things very close to the vest. What I mean by that, is although inventories are generally low, although companies understand that this capacity balance and raw material surge is creating another dramatic move in the price levels...no one will nor should they bet the bank on putting a lot of excess inventory this year. Companies will order only what they need or have orders for and will be willing to miss out on some of the short term opportunities that have been tempting in the past. The reasons are: 1) no one fully believes in the "recovery" that supposedly is taking place (don't get me wrong...things are improving, but demand and sentiment is still fairly negative out there and for good reason. It will be a very long recovery. I think to the extent that certain bills don't or do get passed in Congress will determine a lot in the way of how quickly the economy recovers), 2) cash is still tight and banks are being very unsupportive still when it comes to lending and capital support, 3) the capacities are still increasing in China and there could be an offsetting bubble to the upswings we are now seeing and 4) the rapid increases could re-invite imports into the equation as well.

Now, as a contrary point from what I just said, ...the recent gains in the equity market and the better profitability outlooks from companies who have shed so much SGA and costs etc, will create wealth that will now be available for expansion and to be put back into businesses across the nation. Venture capital will be more prevalent as many have sat out on the sidelines until their wealth position improved and a sense of an "excess being available" to support growth and opportunity. Don't look for the banks just yet however.

So, in general, improvement and a short term jump that the only way to combat it is to pre-sell, buy only what is needed, and stay as close to the customers as possible (and to ones vest).

2011 might be a time when you see a decent building of inventory if the present year maintains a steady climb. If 2010 snaps back however, the damage will not be that great, and the effect will be to mute the 2011 inventory build which might occur at the end of 2010 or beginning of 2011.

Steel Market Update: …one of my former bosses…told me many months ago to not predict prices – they will go up and they will go down – sometimes for seemingly no reason.

You saw the opinion of Mr. Gambardella of JP Morgan ($750 HR).

My opinion is we are running in a 90-120 day pattern. Down, then up, up then down. The pattern should adjust around March [lead times]. Prior to the AK Steel announcement, galvanized prices were just starting to creep backwards. What was once $33.50-$35.00 base prices became $32.50-$34.50…now, its up in the air for a few days.

Service Center: “I continue to be more optimistic than is good for me. I believe the recovery could be stronger than you have outlined, however, I view things thru the “Automotive Prism” and the two of you [mfg and SMU] are much more construction focused. The depression is over in automotive. I am not so sure in construction, particularly commercial. I know the two of you are much more in tune with that segment of the market. Put me down for a June price for hot bands of $750.”

Manufacturer: “...one more clarification...when I said about bills being passed or not in Congress, I am assuming that people in business understand the obvious...the more the government interferes the more it will hamper the turn around. Not passing health care, not passing Cap and Trade, not letting the tax cuts expire, not raising any new taxes, ...all if we are so lucky will allow a more rapid recovery. Eliminate the uncertainty in the market place...(i.e. the government intervention and changing of the rules), and you will eliminate the recession/depression and quickly. Plain and simple. Government out...business booms. Plain and simple. If they would only stay out of our way!

The Weak Link

SMU – to all readers now – we are waiting to see what is out there which will interrupt the momentum of the market and reverse the trend. The weak link right now is non-automotive galvanized. Galvanized conversion mills were struggling to fill their books at the $34.50/cwt-$35.00/cwt base numbers in February and the selling prices began to decline over the past week to two weeks.

Will the AK Steel announcement firm the galvanized numbers around the $36.00/cwt base level? Or will the weakness of the order books come back to haunt the product and its pricing?

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