Forecasting the (near) future
SteelOrbis kicks off 2011 with a pair of enlightening events
More bumps ahead on the road to recovery
While many attendees of SteelOrbis’ Second Annual Rebar & Wire Rod Conference came for the mingling as much as the market insight, most were nevertheless eager to hear what David Hodory of the David J. Joseph Company (DJJ), a major US scrap processor, had to say. Scrap pricing and market conditions are foremost in the minds of steel producers, distributors and traders as of late, considering scrap’s strong upward momentum and the effect it’s had on steel prices.
Hodory, who serves as DJJ’s Vice President of Marketing and Communications, explained that while recent gains are a good thing, they’re also coming up from an extremely low base. Scrap exports from the US are rising and helping to lift prices, Hodory noted, but domestic supply and demand is still the most influential factor. One interesting point he made was the effect the burgeoning scrap processing industry has on prices. Typically, more producers equates to more competition which leads to lower prices for any given product. But the scrap market is similar to eBay, said Hodory, in that the more companies bidding for scrap, the higher the prices will rise.
As for the steel industry in general, Hodory predicted that there will still be bumps on the road to recovery—residential construction has not bottomed out, and commercial construction will still face difficulties as well. 2010 might have been automotive’s year to shine, but 2011 might not be the “Year of Construction” as many hope.
Bernd Neuenkirchen, VP of wire rod trading for Coutinho & Ferrostaal, agreed with this sentiment, but still offered a glimmer of optimism during his presentation on the state of the wire rod market in the US and abroad. New mills coming online, such as ArcelorMittal’s Georgetown mill, are positive steps, and Neuenkirchen even predicted that capacity utilization will rise soon. Demand for wire rod, on the other hand, will not improve in 2011 to the point of full recovery, but there is the potential for meaningful strength.
However, despite any movement in the demand situation, significant price fluctuations in the steel industry remain at the top of the list of concerns for many in the audience. Carlos Amezcua, Trading Manager for Tata Steel International, partially blamed advances in technology for such deep spikes and dips in steel pricing. Before the advent of the Internet and instant communication, international markets were not as entwined as they are now—market developments still had international ramifications, but it would take 4-6 weeks, for example, for European prices to reach the US market, whereas today the effect is nearly instantaneous. On the domestic level, price increases used to be in the range of $5-$10/net ton at a time, but now prices can decline or surge anywhere in the ballpark of $50-plus/nt in one month. Nevertheless, Amezcua does not expect a return to more manageable price fluctuations, even if demand improves in 2011.
SteelOrbis and AIIS West Coast Steel Dinner takes the pulse of the steel industry
The third annual West Coast Steel Dinner, co-hosted once again by SteelOrbis and the American Institute for International Steel (AIIS), commenced with a welcome cocktail reception that gave steel professionals from all aspects of the industry an opportunity to meet and reconnect, discuss current market conditions, and make plans for future business prospects.
Guests were wary of the overall outlook for 2011 but nonetheless eager to hear what keynote speaker Vicente Wright, CEO of California Steel Industries (CSI), would predict for the steel industry’s future.
John Foster, Chairman of AIIS and CEO of Coutinho and Ferrostaal’s North American division touted the event as “touching the pulse of the industry where we live,” and heartedly discussed the ways in which the industry continues to evolve and adapt. Foster also focused on the changing steel world of imports and exports and paid tribute to steel industry workers in all sectors of the business, from traders to producers, to stevedores, truckers and insurance carriers. Finally, Foster emphasized AIIS’ determination to promote the free and responsible trading of steel all over the world before introducing SteelOrbis Manager Justin Hunter, who cited the “interesting times” in the US market during his introduction of Wright.
Wright reverted back to his speech at last year’s West Coast Steel Dinner, and that he still believes 2010 was a year to be cautiously optimistic as all signs were pointing to a stronger recovery. Wright’s speech focused on the major economic issues at hand that directly affect the future of the steel industry, including GDP growth, as well as the need for improved consumer confidence and consumer spending, and a decreased unemployment rate which Wright stressed was still the “Achilles heel” in the US economy.
Wright voiced his concerns for 2011, emphasizing that although the market is improving, 2011 must be a year of patience. He predicted that steel demand will grow approximately 10 percent in 2011 in spite of the weakness of the construction sector, however he would not characterize 2011 as a year of pessimism, optimism, or even the cautious optimism that was fitting a year ago as the US was coming out of a severe recession.
Wright added that we are now in a transition period between a severe recession and returning growth, and so the steel industry must prepare itself for a longer process of recovery than anyone had anticipated a year ago. Wright closed out his presentation by emphasizing the importance of capacity utilization rates, which are currently the “wild card” to the stability of the steel industry. Capacity must match current demand rates if the market is to continue its slow and steady recovery.
Conference chat: Frank Bergren, VP of Metal Partners Rebar
Metal Partners Rebar is primarily a distributor of rebar, although they deal with other products as well (wire mesh, dowel bars, and services such as epoxy coating and fabrication). Although 80 percent of their material is domestically sourced, they also import from Turkey and Mexico. Frank Bergren, Vice President of Metal Partners Rebar, describes his company as one of the only independent distributors that can compete at the mill-affiliated distributor level, or as he calls it, the “independent’s independent”. Prime Editor-in-Chief Katie Memmel spoke with Bergren about the current rebar market during SteelOrbis’ Second Annual Rebar & Wire Rod Conference on January 17 in Las Vegas.
From the perspective of an independent distributor, what are your thoughts on rebar’s rising price trend?
FB: In the last six weeks, we’ve seen an indigestible amount of price increases for the average end-user to absorb. Now the question is, where is the push-back? My guess is that it’s probably going to come in the next 30-60 days. Some people are calling it a bubble, but it’s a speculation bubble, not something that’s going to exactly pop—we’re just resetting our market. Typically, the rebar market has traded at about a level of $600/net ton on average—before 2007, when the market popped up to the $1000/nt level. Now it’s resetting itself back, and looking back at the last two to three years of GDP growth, it makes sense with existing cost pressures.
Scrap prices will probably recess about two to three months out, but we don’t yet know how much inventory will be in the system at that point. What will happen to domestic mills at that point? Do they start to make deals and how do their inventories look at that point? We’re heavily tied to three domestic mills, and right now those mills have complete discipline on their pricing—there are not any deals out there—which is a good thing. It brings a bit of stability to the market.
However, a lot of people bought in the run-up to the increases, but what’s going to get consumed out of that is the big question. Right now, with new prices in effect, people are only buying when they need something.
How are you managing your inventory in this situation?
FB: We definitely bulked up ahead of the price increases, but now we’ll be more aggressive with our existing inventories and try to have some discipline and keep the market up. These opportunities don’t come around too often so you’ve got to take advantage of them when you can.
What are your customers saying about rebar demand?
FB: It depends on the region. In the Midwest, there’s a lot of work and backlog. However, typical customers have their inventory covered through April, and that’s a red flag for us, considering we have to make decisions three months ahead of the cycle. Unless you have an opportunity better than the market price, they’re not going to buy futures unless there is strong speculation of further increases, which was there only in November/December.
Do you think that rebar mills will keep capacity the same this year, or increase production?
FB: Part of the current squeeze is because mills have increased their capacity. They were operating on average at 65-70 percent capacity, and some mills have added shifts over the past couple months. Everyone’s fighting for the same scrap, driving a tighter control over it and spiking up the prices. I think mills will retract a bit of their capacity over the next couple months to try to realign it.
What are your other concerns for the rebar market?
FB: The tipping point will be in March. That’s when we’ll know whether the market will be able to absorb the recent increases, and if demand is really improving or not. I think that that the $45/ton increase for February 1 is it—I think we’ve hit the ceiling for the time being.