Steel Prices in 2008

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Ferrous Metals

It is not often that we would take issue with Purchasing.com. It’s a fine publication packed with useful insight for metal markets. However, I feel that a recent article predicting the rise of steel prices in 2008 is overstating the effects of the weak dollar and underestimating the likely downturn in the economy. True, the article is essentially reporting projections given by Bradford Research in New York, which sees reduced imports due to the weak dollar pushing the price of imported steel along with low service centre inventories combined. This enables domestic U.S. producers to increase prices in 2008 by a hefty 13 percent. Bradford proposes that increasing iron ore, coking coal, and scrap prices will put pressure on mills to increase prices next year. Somehow I don’t see it. The article cites service centre inventories as being a 2.6 month supply. Taken crudely, that is equivalent to 4.6 times annual turn. I would expect at least a five times annual stock turn, so stocks are not low. If the U.S. economy is not stalling yet, it will soon. Hit by falling house prices and rising oil and credit costs will lead to a downturn in consumer demand. Inevitably, it will mean less steel coil for auto manufacturing and less steel girders for construction.

It’s true to say that the producers are caught between a rock and a hard place in regards to raw material costs; the long-term nature of iron ore contracts and the continued strength of the Asian markets mean iron ore prices will remain high for some time. The weak U.S. dollar will also severely restrict the price dampening effect of imported steel. The U.S. mills have been very savvy over the past few years in adjusting production to meet demand and not flooding the market with excess supply. Despite all that, though, we still can’t see service centres or the major consumers taking on significant re-stocking in the face of the economic doubts in 2008. If service centres continue to live hand to mouth, demand is unlikely to be significantly different from the latter part of this year. I would be surprised to see much of this 13 percent price increase stick in 2008. No matter how much the producers would like price increases to reduce pressure on their margins, I just don’t see it happening.

— Stuart Burns

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