Steel Outlook 2011: Part One

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I debated long and hard whether I would write anything about steel prices for 2011. I debated the issue because at this time, I have some conflicts of interest. And rather than place a generic disclaimer at the bottom of this post (and/or pretend that I don’t have a particular point of view), I have opted instead to fully disclose those conflicts.   So here goes.

Jason (my husband) and I decided to invest in the steel sector in December because we felt the sector had hit its trough. We specifically hold shares in: Voestalpine, Vallourec, ThyssenKrupp, ArcelorMittal and Nucor. I have an additional conflict of interest in that Nucor is also a MetalMiner Lead Sponsor. Finally, we market and sell a few steel price perspectives (geared toward sourcing professionals), though we have been writing those long before we made any sector investments. But make no mistake, we don’t collectively own enough shares of any of the steel stocks to materially change our lifestyle one way or another, but because we are long on the steel sector, you might expect us to talk up the market, because that would be in our own self interest.

Obviously, we do hold a belief that the sector as a whole will rebound further from its October 2008 lows. I will make the case for that position momentarily. Alternatively, we could make a compelling case that prices may also decline.

Let’s start with the case for rising prices. Stuart recently penned a column entitled Steel Prices Set for 1-2 Years of Rises citing research from Credit Suisse about rising raw material costs including: scrap, coal, iron ore and natural gas (though some believe iron ore prices may decline longer term, at the moment, prices remain on the rise) and we personally believe natural gas prices in the US have a lower 2011 price forecast than 2010, but nonetheless, rising coking coal, scrap and electricity prices will feed into steel prices. In addition, though we face a jobless recovery, the economy will recover enough to sustain 2.5-percent GDP growth throughout 2011 (we will post our economic outlook for 2011 later this week). We believe manufacturing will remain in expansionary mode during 2011 that will in turn drive steel demand (see the latest ISM report for more good cheer). Analysts have predicted auto sales will exceed 12 million vehicles in 2011 up from 11+ million in 2010 and though residential and commercial construction markets may remain in the doldrums, manufacturing continues to lead the recovery.

Another argument in the case for rising steel prices looks to growing demand in emerging markets that will have the dual effect of also supporting rising raw material costs. Let’s face it: emerging market demand has contributed to large price increases for nearly every other base metal market throughout 2010 nickel, aluminum, copper and tin (lead has held pretty steady and zinc is down ironically, one of zinc’s major end applications involves steel). So why shouldn’t steel also follow a similar path? Stop I hear the arguments already steel isn’t subject to the degree of investment speculation as the base metals and/or the industries that drive steel remain in recession. We would argue otherwise on the later point and on the former. Make no mistake: base metal price increases do not solely rely upon investor speculation.

We will continue our Steel Outlook 2011 in a follow-up post where we pick up with the case for falling steel prices and share our own price forecast.

Join us for a free webinar on steel price trends and outlook for 2011 along with guest speaker Metalwest, where we’ll discuss how OEMs can improve profitability through lean metal supplier programs.

–Lisa Reisman

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