Wednesday, September 2, 2009

Steel Pricing - Looking Back and Going Forward

2008 began with a strong global demand for steel and a weak dollar but it climaxed with customers paying more for steel scrap than they had for prime cold-rolled steel just the year before. This disappointing turn of events was due to the global recession and steel producers headed into 2009 hoping they could weather the remainder of the storm.

Early August 2008 saw cold-rolled steel costs up by 72% since December 2007. At this time steel scrap (the most essential input in the production of new steel with the most volatile pricing) was selling for a market price of around $.38/lb; this was more than what Midland Metal Products was paying a year prior for the cold-rolled steel sheets that we process on our laser.

A steel-making ingredient costing more than the finished product had just one year previous is without precedent.

The steel industry, which had been soaring since fourth quarter of 2007, toppled as credit availability became scarce in the wake of crisis in the housing and financial markets.

Due to the country’s financial crisis projects requiring steel slowed significantly. Steel scrap, which had sold for $.38/lb in August, plummeted to $.21/lb in September. Steel prices followed and closed the year at only 11% higher than December 2007. This was down from 72% four months earlier.

In an effort to keep up with demand in the first half of 2008 steel mills ramped-up production - averaging 90% utilization. But when economic growth swiftly declined in late third quarter of 2008 the industry found itself with a surplus of supply and diminished demand. Steel producers spent the fourth quarter of 2008 through the second quarter of 2009 waiting, their equipment idle, for better times. Throughout this period prices kept falling and steel mills saw their utilization drop to an average of 35%.

By June 2009 cold-rolled steel pricing had sunk to levels not seen since early 2004. This did prove to be the bottom as the market began to stabilize. Since June prices climbed quickly by 25%.

Demand for steel, though not robust, does presently exceed supply. This is due largely to the drastic production cuts steel mills had made when the market was in such steep decline. In an effort to keep up with the flow of new orders they are reactivating furnaces and equipment that have sat dormant all year.

Industry analysts expect that cold-rolled steel prices will continue to rise for the remainder of the year. 2009 will probably close 10% to 15% higher than current prices. If their predictions hold true we may head into 2010 with steel costs comparable to those at the start of 2007.

We hope that 2010 will be a stable year in the steel industry. Prices have returned to a level at which steel producers can run profitably without charging exorbitant rates to the distributors or end users. It will be nice if we can stay here for a while.

Aaron Blaisdell
Purchasing Manager

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