Conversations with Mr. Bull and Mr. Gloom – Are the current high prices sustainable?

Friday, 21 March 2008 09:27:09 (GMT+3)   |  
       

Mr. Bull:

I had to laugh really hard when I re-read your pessimistic view of the 2008 markets in our last conversation. How falsely you predicted the market trend! And I have to pat myself on the back because I foresaw the strong market rally way ahead of time. Since we talked last time, the US market has seen incredible price recovery. Prices for flat rolled products, along with rebar, wire rod, tubing, you name it -- have all risen significantly since the beginning of the year. What's more is that customers are accepting these increases without grief. Business for service centers, fabricators and end users is decent, and after this price recovery, we should see some smooth sailing in the North American steel markets.


Mr. Gloom:

You have to try to see beyond the short term development of the recent price hikes. These price increases you are referring to are all cost- and supply-driven. Scrap is going up, and naturally, the steel mills are passing on the increases. On top of it, steel imports have gone down just as dramatically, curtailing the steel supply. Export taxes on steel items from China and the weak US currency are the prime causes for this development.

The US economy is struggling, and even if it does not go into a recession, the growth rate will stay disappointingly low for some time. Economic conditions are even worse now than they were the last time we talked about the steel market. Steel price increases are based on higher raw material costs and weak supply. In the steel industry, a new word has even been coined for it -- Steelflation: weak demand equals higher prices.

Mr. Bull:

Everyone talks about the weak demand for steel -- This is the biggest bunch of bologna I've heard in years! Raw materials are going up for a reason: strong steel demand. If the mills couldn't sell their end products, why would they rush to buy raw materials? The truth is that steel demand is plentiful and is still very, very strong. Yes, certain regions in the world such as the US are experiencing slower demand than they did in, say, 2006. But why compare the current demand to the demand seen in one of the record years in steel history? No matter how much the steel buyers cry, overall demand is not all that bad in the US. I am sure you will talk about the housing market, automotive, yada, yada, yada, before I close my mouth, but there are still incredibly strong steel-consuming sectors in the US, like energy and commercial construction, to name a few. If we were in a recession, no sectors of steel consumption would be strong, and you could definitely not pass along any price increases, let alone the large increases that our buyers have so happily accepted.


Mr. Gloom:

You are, indeed, not very mindful of the economic data. From the time you opened your mouth to the time you closed it, a dozen more houses probably went into foreclosure, and a dozen more workers were either laid off or told that no jobs were available. The macroeconomic picture is not pretty, and weak housing and stalling automotive production make for weak steel demand. This will eventually put a stop to these cost- and supply-driven increases. To underscore this point, note the dramatic decrease of steel imports. In November, December, and January, a total of 6.0 million metric tons of steel mill products were imported into the US. This is down 29 percent from the 8.5 million metric tons imported during the same period of the previous year. There you have a major component of today's price hikes.


Mr. Bull:

Like I expected of you, you had to poo-poo one of the most impressive and successful price rallies in the history of the steel markets. You know what -- you were wrong in 2004, you were wrong in 2007, and you are wrong now. The new prices are sustainable, they are here to stay, and there is even more room for them to go up.

The world is a different place than it was 10 years ago. The US is no longer relevant in the overall World economy. All commodities are in high demand, and not because of US demand, but because of demand from Asia, Middle East, CIS and even Europe. The world is going through an unprecedented growth spurt led by China. Everything is in short supply -- energy, commodities, and recently, even food (China is considering export taxes to retain food in the country). China's steel production is four times that of the US, and it's still not enough.  You predicted that the export tax for steel products would ruin their local prices, but that Chinese local prices are still going up in a big way.

Let's assume that the US really matters. Your so-called "recession" will not last too long. 2008 is an election year. The administration will keep the economy humming no matter what. Expect the US economic woes to be short-lived. By no later than the second quarter, we will be back on our robust growth path, and then you can watch how much the prices will go up -- despite your "weak" demand.


Mr. Gloom:

No matter how you put it, the US economy, including the steel market, still matters. Just witness the recent global stock market upheavals when analysts in Asia and Europe were spooked by the twin threat of a US recession and an imminent US credit crunch. China may have far exceeded the US' steel making capacity, but who is still the strongest import market? Despite China and the occasionally surging European market, it is still the US.

One cannot discount the very weak market here despite some pockets of strong economic activities, accompanied by increased steel consumption. A case in point is the wire rod market.

Projections for 2007 show an apparent wire rod consumption of 3.5 million metric tons compared to 4.8 million metric tons in 2006. This is a 29 percent reduction. Most tons were "lost" during the second half of the year, yet the US wire rod mills have increased the price by $150/net ton ($135/metric ton) since October 2007. Granted, almost all of these increases stuck, because: a) there was quite a bit of inventory replenishing going on, and b) there was no credible import alternative. But wire business, in general, was way off, as the above consumption numbers indicate. So it is only a matter of time that a downward price adjustment will take place. By the end of 2008, the resurgent US steel pricing will have come back down to earth!


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