John Anton, Director of Steel Services for IHS Global did not mince words in his opening statement – “I will put a stake in the ground. Prices will come down in the second half of this year for most carbon steel products.”

He then went on to explain prices have been rising during a period of time when “demand is bad.” Momentum or cost push economics can only take you so far, according to his theory, “in the long run supply/demand wins out.”

The logic is simple he told the enthralled crowd of around 300, if steel prices continue to go up there is a point at which you can no longer afford to make parts. In a “normal” market prices rise to a point at which they plateau – remaining stable for a period of time – and then begin to move lower. In his opinion, prices in this cycle have gone up so fast – without real demand drivers – the result will be for prices to peak and immediately move lower.

Based on his analysis of the market his expectation is for prices to move lower in early 3rd Quarter. With lead times out to May at a number of domestic mills we could be within 60 days of the cycle reversal (if Mr. Anton is correct).

Mr. Anton believes hot rolled prices to be around $650 per ton ($32.50/cwt) at the moment (SMU HR index is $665) having risen from just below $400 per ton at the low end of the deep down cycle last year. He felt prices would drop to $520 per ton ($26.00/cwt) which is not as large a drop as last year and the domestic mills would continue to be profitable at that pricing level.

He pointed out the steel market “is getting ahead of itself on the pricing side and it is not sustainable.”

He pointed to some issues on the demand side of the steel business:

The non-residential construction market peaked during 2008 at $500 billion. This year non-residential construction will drop to $350 billion. IHS Global is forecasting a further decline of $50 billion before reversing the trend late next year.

NAFTA auto production is forecast to grow 25% this year to 10.0+ million units. This is a long way from the 15 million units produced in recent years. The domestic steel industry has the capacity to produce material for 15 million units – so there is going to be a large percentage of mill auto production capacity sitting idle for some time to come.

He is forecasting scrap prices will drop to more reasonable levels with HMS selling in the low $200’s per long ton (currently in the mid-$300’s) and shredded scrap which is trading close to $400 per long ton this month will drop to the low $300’s.

This recession has hit the U.S. industrial production very dramatically. Industrial production is down a total of 11% and will only regain 3% this year and 4% in 2011. At the end of 2011 we will still not be back to the level the U.S. was at prior to the decline.

John spoke about the demand and supply issue. One key point he pointed out was capacity was cut more than demand during 2009. This helped save the domestic mills from bankruptcy and he pointed out production had to rise to get back to last year’s demand levels.

The good news – “If you survived last year it sure is not going to get worse.”