Mr. Gloom:
For just a few weeks I thought you might have been right insofar that steel prices would climb with no end in sight despite a clear lack of a strong demand, at least in the U.S. However, I believe that the old economic principles still work and that the cycle for cost-driven increases will be a very short one. A relatively weak economy in the US cannot sustain these high steel prices indefinitely, and the absent demand will trigger a reversal of the current trend and bring the steel prices back in line.
Witness the price discrepancies between the US market and the rest of the world. Some imported steel items, e.g. rebars and cold rolled steel sheets in coils, sell for higher prices than the domestic US steel mills charge. You know that this is an unsustainable scenario. A quick look at the US economy will show you why these artificially elevated steel prices will have to be adjusted down. The economy, which only 14 months ago grew at a yearly rate of five percent, has now slowed to an expected 2.3% in the first quarter with no immediate upturn in sight. Inflationary trends will see to it that interest rates will not be cut anytime soon. In fact, it is now believed that there might be a slight interest hike when the Federal Reserve meets again later in April. This will slow down the economic growth even more and keep the demand for steel in check.
Mr Bull:
You see that scrap prices lost some steam, and you are quick to panic as usual. No rally will be a straight line up. As is perfectly normal, the markets will take a breather and register some minor corrections. Despite some economic slowdown and housing doldrums, the demand is remarkably good in the US. Ask any steel manufacturer and distributor and you will find that their business is decent. We have been spoiled by the past four years of extraordinary demand, so every little soft spot makes us think that demand is not all that good. In fact, as a steel buyer and seller, you would have killed for this demand in 2003. So I tend to disagree that all increases are cost-driven.
You mention that international finished product prices are actually higher than the domestic prices. Good point. That means our prices have to rise to catch up with them. Remember, the US is only a small part of the worldwide steel demand and consumption right now. believe it is the US that needs to adjust to the world pricing level. That means more price increases are expected in the near term, at least until the beginning of summer.
Mr. Gloom:
What you call my panic was actually quite a shift in the scrap price. An innocuous drop of a mere $10.00 per ton in the auto bundles turned into a $40.00 ton drop in the scrap transaction price. This is unheard of. It shows you that the recent drive-up in the scrap price was unwarranted, and, as you mentioned, no rally is moves straight up the whole time. It does take a breather and then goes through a market correction before the cycle starts all over again. Because of the slumping housing market (major builders and lenders are in an alarmingly bad state) and the struggling automobile market , we are at the cusp of this correction.
It will not necessarily go back to the pre - 2004 level. But even from the turnaround year of 2004 up until today, we have seen major price swings. At one time in 2005, steel prices for many items had declined by up to $100 / ton before coming back. The recent development of rebar prices was nothing short of breathtaking. Shooting up more than $160 / ton since the beginning of the year at a time when the housing market is in a deep crisis, simply, is unsustainable. Watch for further downward pressure on the scrap price. The US mills will have no choice but to adjust their raw material surcharges, and soft, at best, market conditions will not permit any increase in the base price. And there is your pricing decline.
Mr. Bull:
What you are forgetting is that while the scrap surcharge was going up, long products mills were lowering their base prices in order to keep the price increases on a more manageable level. Now scrap is coming down, and that too could very well be a temporary correction. A lot of scrap dealers believe that scrap prices will be bouncing back up next month, especially if the exports resume with their usual pace.
The point is, raw materials-related or not, consumption is getting better in this country all the time. The cold weather is almost behind us. Wait until the full effects of spring construction are seen. Rebars are already in tight supply. So what if Nucor gives back $15 /net tons of the $55 they got last month? According to my calculations, there has still been a $40 /net ton increase in the last two months. That's still very good.
Let's analyze, product by product: For wire rods, almost all of the US mills have announced significant price increases. China eliminated the VAT rebate, which means that new Chinese numbers will be higher. And Turkey, once a major exporter to the US market, is no longer interested because of good returns on rebars and billets. Mesh consumption is good ,and wire consumption is getter better all the time. Automotive may be the soft spot, but commercial construction is already very, very good. Oil and gas prices are getting higher, which means there will be high consumption for line pipe and OCTG as well as structural steel for offshore platforms. As for flat rolled steel, demand is still a bit slow, but price increases are slowly being accepted. And look at the beams -- the recent scrap decreases didn't affect them at all. The mills are full until July rolling! That must tell you that steel consumption in the country is well, and that there is no need to worry about a major collapse or correction.
Mr. Gloom:
I guess I just don't see a rosy picture when I look at the US economy. Housing starts are still almost 30% behind last year, and in the first quarter of this year, US car production went down 9.5% compared to last year. Real estate prices are falling, and house owners continue to lose equity and have subsequently less money available for discretionary spending. Rising oil prices are good for the pipe market but not for the overall well being of the economy. To top it all off, the Federal Reserve has started to hint that an interest rate hike could well be possible on the next go-around.
Also, the wire business is not strong at all, and the recent price announcements by Mittal and now Gerdau have very little chance of being implemented. Not only because of the falling scrap price, but mostly because of lack of demand. The mesh business is strong in some areas only. The Chinese will do whatever they have to do to get their wire rods, and the canceled VAT rebates has long been factored in their prices.
There is no question that the rising steel prices are cost-driven and cannot be sustained by an overwhelmingly strong demand.
Mr. Bull:
Sorry to break the news to you, but the US economy is just not as bad as you portray it to be. High oil prices really don't have a negative impact on the economy. If they did, we would have felt it years ago. The housing market was over-inflated, and now that the speculators have been taken out of the market, it has become more sane. But the transition didn't really decrease home values all that much. There are still houses being built, and there hasn't been a bust. Interest rates are still very low, and a slight increase is not going to change anything. In addition, consumer confidence is there, and latest consumer spending numbers were higher than most economists predicted. Aside from the economy, all I see is less imports coming in, and mills are getting smart and consolidating. They've tasted the sweet profits in the last few years and there is no going back. Let's assume I am completely wrong and demand is not as strong as I predict -- mills will still cut production and maintain the current level of pricing.
May will be a sideways month. Domestic mills are very smart to keep the imports at bay for another month. They will put the prices on overdrive when holes and shortages start developing in June and July.