Yesterday we posted a rather lengthy piece on price trends within the steel industry. In that post we examined the prior two year price trend, an integrated steel producer’s cost of production and a seven year CRU price trend chart showing where we are in the “super-cycle.” Today we will examine a few more areas which have a bearing on the price of steel for 2009. These areas include: the historical steel price average, demand drivers and the role of imports on steel pricing. Depending on how concise we can be, we’ll aim to include specific price predictions within this post.
First we examine the historical price of steel. Nearly a year ago we wrote a couple of posts about using historical averages to make price predictions. And without re-reviewing any of those posts, suffice it to say that we have included a historical analysis into our predictions here because it is helpful to understand where steel prices have been. And as we have been reporting, the historical analysis is but one piece of the puzzle. To that end, the following chart shows the world export steel price range from 1981 – 2008. Courtesy of World Steel Dynamics, the price for cold rolled coil typically traded in the $350-550 range up until that turning point in late 2003. Hot rolled coil typically traded between $275-375, again up until that turning point at the end of 2003.
With pricing for HRC in the $520-545 range and CRC in the $600+ range, today’s current pricing still remains substantially higher than the historical average. And we don’t feel that pricing will return to the historical average for a number of reasons, the main one being that the steel producers look different today then they did pre-2003. First, the supply community has consolidated creating more power among fewer firms. Second, rather than operate unprofitably, the producers have pursued a strategy of limiting supply by taking capacity offline as quickly as needed, effectively shoring up the price. So as a result, steel producers love allocation markets and by making steel “dear” the price will increase.
Now let us turn to imports and the fiscal stimulus package. After having spent the better part of an inaugural morning pouring through the current summary of the House stimulus package released by Representative Obey to the House Appropriations Committee, we can say that there is not much by way of “stimulus” or “reinvestment” that will impact the metals industry in general and the steel industry, the largest, in particular. A quick tally shows the package to be worth $825B of which $550B relates to actual economic stimulus grants, loans, direct funding etc and $275B of tax cuts. Taking a quick summation of key elements of the proposed legislation, only $181B can actually be considered “infrastructure stimulus” e.g. monies that will actually go into the hands of the private sector or government spending on goods made by the private sector. That means less than 22% of the entire package is actually “fiscal infrastructure stimulus.” The balance largely looks like social programs. Of that $181B, it is unlikely that much more than 10% of that could be metals. Given that steel is the most widely used metal, we are generous in putting a $15B stimulus package toward the steel industry. Purchasing.com cites the steel industry as $800B in size. The American Iron and Steel Institute (AISI) claims to contribute $350B to the US economy. At best, the stimulus package could touch on 4% of the industry or at worst, 2%. The point is this: not much demand will come from the steel industry via stimulus packages in 2009. We don’t see a lift in key steel sectors such as construction, automotive or machinery in 2009 either. So much for demand.
That leaves the only other hold-out on steel prices, imports. And for that, the AISI has drafted this letter to President Obama which basically urges the new President to support protectionist trade policies. Ironically, that would violate the fifth request in the AISI letter, “Eliminate policies that put U.S. manufacturers at a competitive disadvantage by significantly raising their costs.” Protectionist trade policies would do just that – force the price of domestic steel to increase. Based on our earlier posts on where President Obama may be headed from a trade policy perspective, the steel industry may just win a battle in both a) keeping steel in tight supply – see our Part One prediction and b) pushing Obama into a trade protectionist strategy.
Where does that leave the price of steel? We’re going to call it flat to slightly lower for the first six months of the year. Prices could inch up by 15-20% during the second half of the year, as a cocktail of producer cutbacks begin to restrict supply again, the inevitable flood gates of anti dumping cases start, and the new administration’s protectionist policies begin to put a damper on cheaper imports.
–Lisa Reisman & Stuart Burns