A Steel Market Recovery
May / 28 / 2009 - A Steel Market Recovery
Subject: U.S. steel mills capacity utilization rates in 2009 and 2010, hot rolled steel pricing forecasts and the protential shakeout of excess capacity.
I read a Timna Tanners, UBS steel research analyst report on Thursday (May 28, 2009) regarding U.S. Steel and the steel market "recovery" in general. There were a number of points made which I would like to review with my readers: the domestic steel market will not return to "normal" levels and normal earnings during 2010 or 2011. There is still excess sheet supply and "well-capitalized mills loathe to yank the plug on high-cost capacity." UBS is forecasting capacity utilization rate of 50% for calendar year '09 (the first 4 months came in at 42.4% according to AISI data) - and then 62% for calendar year 2010 - which UBS says is below USS's break even point.
UBS also refers back to historical trends which show "normal" steel downturns lasting at least 2 years - with the last cycle lasting 3 years. Steel Market Update recognized the early stages of the downturn in steel prices back in late May/early June 2008 - however, the overall market crashed in September 2008. Based on the UBS's observation we will have to wait at least one more year if not two, before the market returns to a more "normal" state.
UBS is forecasting hot rolled coil pricing to remain stagnant through 2010 at approximately $460 per ton (SMU HR index is now $390 per ton so, $460 would be a nice move higher from current levels).
There should be a shakeout of higher-cost capacity as new mills come online - the Severstal, Columbus expansion and the new ThyssenKrupp mill are both slated to begin operations during 2010. Both mills are too far along to cancel - although postponing the start-up could be accomplished through delays in construction.
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