The Case for Rising Steel Prices Weakens

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MetalMiner has published quarterly price forecasts this year outlining a range of factors that impact steel prices. We have held that prices would increase from the beginning of the year through some of the second quarter, dip back in the third quarter and rise again slightly in the fourth. But the case for a rising fourth quarter appears to have weakened due to a number of factors. Three weeks ago, we presented a ferrous and non-ferrous metals forecast to a group of western Michigan business executives. At that time, we outlined only three metals in a decisively bull market copper, tin and to a lesser extent nickel. We called aluminum and zinc as flat to rising and lead and steel as “sideways markets. Although the ferrous scrap markets have performed well through the middle of August, analysts are reporting the first signs of downward price pressure.

According to ISRI’s Friday Report quoting Morgan Stanley, the bank sees a drop in prices of $10-40/ton due to lower LME billet prices combined with lower October US scrap prices. The report goes on to say that IHS Global Insight calls scrap “grossly overpriced given the level of consumption. That firm also calls for declining steel prices through Q4 and into 2011. We wouldn’t characterize scrap prices as “grossly overpriced for several reasons. First, the timing of purchases from overseas buyers, particularly from Turkey can greatly impact domestic scrap prices. When they come into the market, for example and buy up large quantities, domestic buyers may find themselves in a scramble. Second, though iron ore and coking coal prices don’t directly impact EAF production methods a correlation exists among iron ore, coking coal and scrap prices. In other words, they tend to move in a similar fashion. And though spot iron ore prices may have drifted down recently they remain historically high. When one thinks of raw materials as “iron-making units the relationship amongst all steel-making materials appears stronger.

The latest steel prices as reported by Steelbenchmarker.com, show slight price declines for HRC and standard plate. #1 Busheling scrap appears flat at $398/net ton whereas shredded scrap declined slightly to $347/net ton and #1HMS down 2% at $313/net ton. Credit-Suisse, in a recent steel report, suggests that US imports of steel products have “reached a plateau which will likely not cause any uptick in steel prices due to sluggish end use demand, excess production capacity and slightly declining raw material prices.

The case for rising steel prices would need to see several conditions met. The first raw material costs to remain high and volatile (which they likely will). The second domestic producers must continue to closely monitor production rates. We feel they are doing that but with the addition of ThyssenKrupp to the mix late in 2010, producers may have less success in monitoring production rates. The third condition requires a continuation of mills reporting as large (or larger order books) than late summer order books but here we don’t see a lot of support for that based on recent earnings guidance from several producers. Finally, rising steel prices require strong demand from key manufacturing sectors this may remain the only area in which the case for rising steel prices exists.

More likely than not, we’ll see steel prices trading sideways through Q4. After that, it may more depend upon economic conditions and end user demand.

–Lisa Reisman

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