US demand for flat rolled steel products is still slow due largely to the soft housing and automotive markets, and most agree that US prices are still among the lowest in the world and have a lot catching up to do. However, the market may have finally turned the corner, as prices have registered some increases.
Flat rolled prices are starting to trend up again, as the lack of imports, continuing exports and controlled domestic production have resulted in controlled supply levels in the North American market.
In the last month, domestic flat rolled prices have increased by approximately $20 /nt ($1.00 cwt. or $22 /mt), with most offers for hot rolled coils now ranging from $25.50 cwt. to $27.50 cwt. ($510 /nt to $550 /nt) and most offers for cold rolled coils ranging from $29.00 cwt to $30.00 cwt. ($580 /nt to $600 /nt), based on ex-works prices in the Midwest. West Coast pricing is approximately $3.00 cwt. higher than the Midwest due to the high railing cost.
While many people were skeptical that domestic mills' October price increases would be accepted by the market, assuming that the increases were just a tool the mills were using to increase confidence in buyers, the producers' plan seems to have worked. However, it is unlikely that the psychological perception of the market is the sole reason why buyers are willing to pay higher prices; low inventories are the other piece of the puzzle.
The Metals Service Center Institute (MSCI) reported that in August, inventories at steel service centers totaled 13.0 million net tons, a decrease of 18.2 percent from the August 2006 inventory volume, and the lowest level of steel service center inventories since December 2005, when inventories totaled 12.9 million nt.
The low amount of import arrivals this year are a major reason why inventories have dwindled despite the slow demand. Final census data from the US Import Administration show that year-to-date January through July 2007, hot rolled sheet imports totaled 1,468,495 metric tons, compared to 3,253,817 mt for the same period of 2006. YTD cold rolled sheet imports totaled 901,350 mt, compared to 1,980,435 mt for the same period of 2006.
Due to the strength of other world flat rolled markets - the European and Middle Eastern markets are flat but stronger than the US, while the Asian markets are strengthening - import offers remain scarce, and most of the offers available are still priced too high above domestic prices for US buyers to gain much interest. Buyers say that even offers from Russia, which had been the low-priced import leader for a while, are no longer workable.
Export activity is still modest, but it is up year-on-year due to the current market dynamics as well as due to the weakness of the US dollar as compared to other world currencies. However, high transportation costs make exporting difficult right now, especially for inland mills. Data from the US Import Administration show that YTD July 2007 hot rolled sheet exports totaled 514,038 mt, compared to 347,375 mt exported during the same period of 2006, while cold rolled exports totaled 290,010 mt, compared to 281,701 mt exported during the same period of 2006.
Due to the short supplies, the domestic flat rolled market is expected to continue registering modest gains if demand stays stable, and large gains if demand improves. Some analysts expect a pickup in buying activity in the first quarter of 2008, while others expect the rebound to occur as soon as Q4.
At the American Institute for International Steel (AIIS) Gulf Region Conference on September 26, Aldo Mazzaferro of Goldman Sachs told conference-goers that, according to research carried out by Goldman Sachs Global Investment Research, the key driver for pricing will be continued low import supply and better seasonal demand patterns that cause inventory restocking.
The analyst believes that prices will begin to improve in Q4 and will continue to rise until the spring of 2008, with hot rolled coil prices reaching $600 /nt at that time.