Steel Market Update asked one of our contributing writers, Peter Brebach, CEO of Iron Angels of Colorado, to speak to the steel market and the trend he believes is developing in the market. Steel Market Update, at this moment, continues to forecast a declining trend/momentum in the flat rolled steel market although we do expect the declines to be more modest from this point. Here are Peter's thoughts about the steel market and its direction:

I have been asked to give my thoughts on the question which way is the market going - and here is what I came up with:

There are only two ways to attempt to forecast the direction of the market - charts and graphs and gut feeling, and frankly, I have never been a C+G guy. Charts and graphs are very helpful to explain the past, but are pretty useless to forecast the future, because when we use the past to look into the future, all we are doing is extrapolate what we know about yesterday and assume that whatever trend line we think we have established is going to continue tomorrow. In other words, if the market over the recent past has been going down, we think it will continue and vice versa.

As an example, I was in a joint meeting of steel people and Wall Street people in June of 2008, and I was one of only two persons in the room to predict a turn in the market. Everybody else was still in the "singing and dancing" mood, thinking the party would never end, and guess what - it did. The funny (or sad) part about this is that I was actually badgered by some people and pressed to explain what my bearish views were based on, and I was summarily dismissed when I could not come up with some real hard "evidence".

Were there signs? Yes, there were, but individually, none of them were of the bell-ringing type. A spring article in one of the daily trade publications reported offers for Hot Rolled Coil from Vietnam in the United Arab Emirates at rather competitive prices. Why was this special? Because there is no Hot Rolled Coil production in Vietnam. The material offered was of Chinese origin and had been bought by speculators in Vietnam, who now were unable to resell the product at a profit in their local market and who were therefore trying to find a home for their long positions elsewhere. And when we were offered some Mexican HR Coil to sell in the US and could not get any of the five major buyers of such product in Houston to even give us a number at which they might have an interest, that got our attention. People were afraid to cancel their domestic allocations, in spite of the fact they were reselling the material at break-even or below.

Enough about the past, so let's move to the present. Market changes happen in emotional stages, and this is especially true for downturns. The first stage is denial, because nobody wants to admit that what they thought and decided yesterday was wrong. The next one is when the realization kicks in that this is for real, followed by what I call, "the sky is falling" phase. This is where we are right now. One of the trade publications went from claiming 6 weeks ago or so that the domestic HSS market was not following the drop in Hot Rolled coil prices, to reporting a week ago that such prices were "continuing" their downward trend.

While it is clear that our market has slowed down a bit, it is far from clear whether this is because of a drop in real seasonally adjusted demand, or whether it is a combination of the usual summer slowdown, a push back to the overly ambitious capacity and price increases initiated by the domestic steel producers and the realization that the automotive market was not quite as strong as it was made out to be. Obviously, the proof is in the pudding, and that pudding will not be available until after Labor Day. As a result, we will have to live with another 6 weeks or so of a bumpy market.

Well, I believe that the market is going to turn around. Why? One, I believe that inventories are too low to support even a very slight uptick in demand. Two, the tweaking of capacity by the producing mills is like stopping a super tanker on the high seas - it takes time. The industry bought into their own propaganda when they brought back 3 blast furnaces with 8 million annual tons of pig iron capacity back in March and April, but it took until June before it became obvious that the timing of this was terrible - the market did not need these tons, at least not all of them. And the same is true in reverse. The mills are now desperately trying to cut back on raw steel production, but it is taking the same amount of time for it to bite. And three, while the production curve is now moving down, the consumption numbers are going to come back up, and the two lines will cross again, this time for the better. And it will again take production some time to re-adjust to consumption.

Last, and most importantly, my gut feeling tells me this is what is going to happen!

I also believe that iron ore prices will move up again. Like the steel mills, the big iron ore guys got carried away and went overboard. They went to quarterly pricing at exactly the wrong time, and they are now facing the push back. However, we must not forget that just three producers control better than 75% of the sea-borne iron ore trade (with two of them in a quasi alliance). They will attempt to raise prices whenever they get the chance. Scrap can be a partial substitute for iron ore, so whenever ore prices go up, demand for scrap will go up as well. And when that happens, prices will follow, until scrap and ore prices reach some equilibrium again, albeit at a higher level. Either way, I believe that ore and scrap pricing will support higher steel prices in the fall.

Does this mean we will be home free by September? Unfortunately not. While I believe we will get back onto the right track, that track will not progress in a straight line, but will continue to have quite a number of speed bumps.

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