Domestic flat rolled pricing has remained stable since our last report two weeks ago, though the jury is still out on whether prices will see any more upward movement this year.
Currently, most domestic offers for hot rolled coils range from $25.50 cwt. to $27.50 cwt. ($510 /nt to $550 /nt) and most offers for cold rolled coils range from $29.00 cwt to $30.00 cwt. ($580 /nt to $600 /nt), based on ex-works prices in the Midwest.
While producers are hopeful that prices will see another small up-tick this year of up to $20 /nt, most buyers expect that prices will stay flat until January or February.
Producers cite inventory de-stocking and low import arrivals as reasons why the pricing trend is up for the fourth quarter. Nucor said last week in its Q3 earnings statement that conditions for flats are "slowly improving" for these reasons, and SDI, which also posted third quarter earnings this week, also said it expects flat rolled demand to improve in the fourth quarter due to shrinking inventories and limited imports.
Stocks are indeed dwindling -- Data from the Metals Service Center Institute (MSCI) show that at the end of September, service center inventories dropped to 12.56 million tons, the lowest level since November 2005 and 24.3 percent lower than inventories in September 2006, representing a 3.1-month supply.
The low number of import arrivals this year is a major reason for the decreasing inventories: final census data from the US Import Administration show that for the first eight months of the year, hot rolled imports totaled 1,643,265 mt, compared to the 3,253,817 mt imported during the same period of last year. Cold rolled imports totaled 980,353 mt from January through August, compared to 1,980,435 mt for the same period of 2006.
Domestic mills' controlled approach to production, which will slow further in the fourth quarter due to planned maintenance outages, is another reason why stocks are low.
The low inventories, both of import and domestic material, is a good argument for the eventual recovery of the flat rolled markets, although there have not been any indications of significant improvement in demand just yet. The slow reduction of inventories has not prompted any flurry of buying activity since shipment totals are decreasing -- MSCI data show that at the end of September, year-to-date steel shipments of 40.1 million tons are 7.9 percent lower than the first nine months of last year -- and prices are staying relatively stable.
Still, there is plenty of optimism that things will turn around in 2008. Although the housing market is not expected to recover anytime soon, the automotive sector is projected to see some improvement in 2008, and labor contract agreements reached with the major domestic auto producers will help keep production on track. Demand from the pipe industry -- particularly on the API side -- is also projected to be strong in '08.
Foreign investors also seem to be confident in the US flat rolled market, with Severstal's subsidiary SeverCorr recently starting HRC production at its new 1.7-million-ton Columbus, Mississippi mill, and with Germany's ThyssenKrupp AG planning to build a 4.5-million-ton carbon and stainless mill in Calvert, Alabama, with an anticipated startup date of 2010. Also, Russian steelmaker Magnitogorsk Iron & Steel Works (MMK) plans to build a 1.5-million-ton steel sheet mill in either Haverhill, Ohio, or in Quebec.
On the import side, there are still no new deals to speak of. Since offers from other countries are priced significantly above domestic offers and high freight rates add an additional significant cost, import flat rolled offers are unattractive to US buyers, and the US market is, in turn, unattractive to foreign sellers. Even Mexican flat rolled producers are not looking to sell in the US anymore because the US market doesn't meet their price expectations. Traders say that Mexican mills are looking to sell in the US at least at $27.50 cwt. loaded truck at the border in order to make a profit, and with the added freight costs people would rather buy domestic. The only imports arriving in the US (aside from contract deals that were booked far in advance) are small quantities of galvanized material in specific sizes that are rare in the US.
Exporting is also a valid option for domestic mills and will continue to be as long as the international flats markets remain strong and the US dollar remains weak. Data from the US Import Administration show that from January through August 2007, hot rolled sheet exports totaled 592,100 mt. Canada was the most popular export destination during this period due its proximity to the US and the favorable exchange rate between the US and Canada, with a total of 395,200 mt exported YTD. Other top export destinations for hot rolled sheet during this period were Mexico (93,300 mt), Portugal (50,700 mt), Spain (44,000 mt), and Italy (21,200 mt).