World steel prices have slipped this month in several regions, with a pronounced pullback evident in Asia and Western Europe. The slight rise in North American spot pricing for sheet steel is a case of post-summer bounce, rather than any movement toward the $40/ton increase announced earlier by regional mills.
Despite price-hike announcements in China, Europe, South Africa, and the United States, regional auto production has already passed near-term peaks, so steel sheet demand is weak from such major markets as motor vehicles and parts, nonresidential construction, and major appliances and equipment. Also note that costs of raw materials are actually retreating. World iron ore prices will drop 23% in the second half of 2010, largely because of a 10% decline in Chinese steelmaking output during this same time. This is attributable to Beijing’s clamp-down on energy use and inefficient industrial plants. Atop that, global scrap prices for October deliveries have begun to retreat by at least as much as their increase in September, due to expectations of reduced fourth-quarter world trade activity.
Scrap—a key steel input—is grossly overpriced, given that demand (year-to-date consumption plus exports) is 8% below the 2007 level (the last year before the recession), while prices have soared 27%.
Upshot: Most of the announced $30–40/ton increases for steel in North America for September are not sticking, and there’s little chance of another $40 hike being implemented during October and November. IHS Global Insight still believes prices will decline in the fourth quarter of 2010, and maybe even the first quarter of 2011.
Hot-rolled sheet steel has averaged $581/ton this month, up 2% from the August level ($568) but still below the July level of $595. That’s because there is steel sheet price-discounting earlier than seasonally normal. Such discounting is already evident for fourth-quarter deliveries in North America and some parts of Europe. Moreover, with no surge in early-autumn purchasing, North American prices for plate, beams, rods, and bars struggled to rise 1.3% in September. In effect, the $40/ton increase in plate prices announced in late August has not been accepted, despite published reports otherwise. The actual transaction price average of $759 is under the $780 sought for cut-to-length product.
U.S. consumption of steel mill products looks to be about 75.4 million tons this year, up from 42.1 million in 2009, but still the weakest since 1993. There is excess supply, since mills continue to operate around 70% of capacity and service centers have 2.6 months of mill products in stock. Pricing power remains limited, because of excess steel capacity both in the United States and globally. And there is new sheet capacity that is just adding to the surplus supply. ThyssenKrupp’s new plant in Alabama plans to make 2.7 million tons/year of sheet steel, and made some initial deliveries this month at a $30/ton discount below the lowest prevailing market price. This is a common practice for a start-up. Meanwhile, Severstal North America plans to double capacity next year at its 1.7-million ton/year mini-mill facility in Mississippi and its Michigan sheet-steel facility.
Again, bottom-line implications point to favorable fourth-quarter buying conditions, with the recent announced increases nothing more than an attempt to keep prices from free-falling, rather than a shift in underlying market fundamentals.
by Tom Stundza and John Anton