Several weeks ago, we published an article titled Industrial Economic Signals: Down But Not Out. At that time (January 4, to be exact) everyone was speaking the “R” word but the indicators weren’t saying it was so. We’ll know in a couple of days what the indicators are telling us for the month of January but if you pick up any local paper (I picked up Crain’s Chicago), you can’t go to far without reading headlines such as, “Winded City market mahem, recession darken local business mood”. The story goes on to describe a local castings company whose revenue has dropped by 15% while customers were demanding 15% cost reductions ‘or they would move their business to China or Mexico’ according to the article. (Have at it, we would say as the owner of that business….you aren’t going to get 15% savings out of China these days but we’ll leave that rant to another post.)
Back to the headline at hand. Wall Street, according to a recent Purchasing article, basically feels that prices of steel will increase sharply in Q1 “due to increased buying by service centers, benign imports, and increased export opportunities.” The article quotes Michael Willemse, the industrial products research analyst at CIBC World Markets, as saying, “these factors will offset weak end-market demand in North America” and allow the mills to get $660-$680 prices for March deliveries. The article goes on to say that many of the steel analysts in the last month believe the price of steel is set to rise.
But what goes up must come down. And in this case, we could see supply side cost increases pushing up prices in the first half of the year but weak demand would mean they wouldn’t stick. And we said that back in December when we first launched this blog.
Demand is not just weakening in the US. Europe is going through exactly the same thing as the US and many believe the situation may actually become dire in the UK, Spain, Ireland, Portugal and Italy. And where will these export opportunities be? In China and Brazil each have built extensive new production facilities of their own. If you add in the export taxes from China, there will be less Chinese exports and therefore production will be used domestically. The cost pressures are coming from coking coal and iron ore. Long term supply contracts for iron ore have been bogged down since October in Southeast Asia because buyers are not accepting the Australian iron ore producer’s price increases. So how long the supply side pressure will last is debatable, but we feel it will ease in the second half of the year.
Thinking through steel prices for 2008 the only other scenarios that might lead to sustained price increases is if US steel consuming OEM’s maintained a very strong book of export orders (plausible) and/or steel producers took capacity off-line to keep prices artificially high. But one thing is for certain, demand is going to be off. And according to my macroeconomics text book, when demand falls, eventually so does the price.
–Lisa Reisman and Stuart Burns