I’ve had the opportunity to do some traveling these past few weeks visiting with manufacturing prospects, distributors and even the occasional steel mill, as well as to attendees from a speech I gave on global metals markets. Without a doubt, what I kept hearing over and over related to the price of steel and more specifically where the price will go. These days, steel market watchers appear to fall into two distinct camps.
The first camp believes shortages could become a major issue. This camp looks at US capacity at 58.1% for the week ending September 19, as reported by a recent MetalBiz article, compares it to historical capacity or last year’s capacity utilization rates and concludes that still, domestic steel production remains historically low. The thought process continues with the argument that current capacity being low and demand notching up, we could face shortages in the short run e.g. the next 120 days. This camp also points to some steel producers who appear to have lengthened order lead times as additional evidence supporting the conclusion of either higher prices and/or material shortages. (Now whether those extended lead times are real or contrived by producers to appear real is the subject of some debate as well)
The second camp believes that although some of the macro economic indicators have shown signs of life (e.g. PMI, new orders and reports from suppliers as to customer inventory levels), the economy still remains skittish though up from its trough. This camp does not believe large segments of the economy are going to move up enough in terms of demand to actually drive material shortages or increased prices for steel. This camp points to weaker consumer confidence numbers (than anticipated), a still falling commercial construction market, automotive sales to remain flat based on the ending of the Cash for Clunkers program (although we believe dealers need to replenish inventories driving up some automotive production) among others. In addition, some folks in this camp believe too much steel capacity has come on stream (or will shortly come on stream) and the artificial supply props of not permitting spot buys will not hold for the longer term.
The steel producers have taken a cautious view of what will happen to steel. According to Lakshmi Mittal, growth won’t return full steam until 2012. He calls for growth to return more from emerging market demand than Europe or the US.
We won’t offer up our crystal ball just yet but as we like to remind folks, watch lead times and watch the major industry sector indicators ” housing starts, commercial construction, automotive etc.