In a bizarre move driven by anticipated changes in Chinese export taxes, steel imports in the USA surged by nearly 35% as tonnage increased from 1.98m tons in December to 2.66m tons in January, according to the Precision Metalforming Association in Purchasing.com. That is still some 18% below January 2007, and against a back drop of much reduced imports over the last 6 months as the weak dollar and rising world prices have made imports unattractive. This is bizarre in part because the changes in the 13% export rebate never actually happened at the year end, but also bizarre because much of the surge in process these last few months has been possible because of reduced imports.
Prices have increased in the US with March prices for Hot Rolled Coil to be in the range of $670-700/ton, possibly rising as high as $780/ton by May. So far, price hikes have held because distributor inventories are low and imports have all but dried up. Inventories are unlikely to fill up fast. Most distributors do not believe prices will stay at these levels in the second half of the year and are holding off major replenishment. David Kay of Gibraltar Industries, among many others, is predicting prices to come down during the second half of 2008.
This could spell tough times for producers, as world raw material costs are likely to remain high. The recent iron ore settlements will mean 2008 contracts are significantly higher than 2007, yet at the same time, sales will begin to sag as construction and autos both remain depressed in a US market that many — including Warren Buffett — say is already in recession.
Our advice for consumers is live hand to mouth. Prices will definitely be higher into the second quarter and if you can cover your next 2-3 months at current 1st quarter prices, that is probably a good move. But further out, it is unlikely these projected second quarter numbers for both flat rolled and long products will hold. Even with 2007 imports down, the increases forecast for the second quarter could begin to encourage a resumption of high volumes. Demand in Europe is generally not as strong and prices are depressed by still large Asian imports. Current domestic US production and planned new capacity will have to chase a diminishing volume with an inevitable softening in prices.
We won’t see a collapse. The US manufacturing sector has been surprisingly resilient since the summer credit crunch and with aggressive loosening of interest rates by the Fed, a short and comparatively mild recession is more likely. But most steel producers are either vertically integrated or are buying iron ore at sufficiently attractive rates so that their margins are capable of profitable sales at below current levels. As demand softens and/or imports pick up, they won’t be able to resist the temptation to ease prices to maintain market share.