Steel Report : The Sheet Steel Paradox

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The last time (Fall 2009) I wrote to our fabricator partners concerning the steel market, I commented: "There is as much evidence to suggest prices could stop rising and perhaps even decline as there is to suggest certain steel-consuming sectors are improving, and prices might continue a slow, gradual rise. It really is that difficult to predict."

It would appear I got the difficult to predict part right!

Despite continued stagnation in many sectors of the US economy, prices for sheet steel began rising in December 2009, and all indications are that they will continue to rise for the next several months. To this end, all major US producers have announced price increases and/or raw material surcharge increases totaling in excess of $70 per ton for January and February 2010. Based on what the market is they are likely to get all of this and perhaps more.

As steel consumers (especially those in the non-residential construction market) we scratch our heads and ask, “How?” How, with a weak economy in general, and a very weak non-res construction environment in particular, can steel prices be INCREASING? The root of this paradoxical situation lies once again in a series of complex and intertwined macro-economic conditions.

1. The US economy is no longer the tail that wags the dog. Although very few countries escaped impact from the US financial system meltdown, most found their footing and began recovering much earlier. The Organization for Economic Cooperation and Development forecasts GDP growth in Brazil, India and China for example to range between 6% and 10% in 2010, versus 3 to 4% for the US.

2. Our massive government spending (and ensuing deficits) have pummeled the US dollar, making imported steel more expensive AND exported US steel more attractive. As a result, US producers are shipping more steel overseas.

3. Raw material prices are on the rise. Scrap steel prices increased more than $60 per ton in both December and January. Iron ore contract prices are forecast to be up 30% for 2010. Zinc prices are 13% higher in just the past month.

4. Some steel consuming segments are improving, albeit modestly. Automotive production schedules (post “Cash for Clunkers”) are somewhat higher than expected. Likewise appliance sales, which have improved modestly as the result of improved housing absorption, due in part to the “First Time Homebuyer Credit.

5. Not ALL markets for ALL steel products are created equally. We could see an interesting dichotomy developing where sheet products (like the galvanized coil used to make Ultra-Span®) continue to rise, while other “long products” (structural steel shapes, re-bar) experience less volatile pricing. This is simply because the demand for sheet products is driven by more end-use markets than just construction, whereas “long products” are used almost exclusively in the construction trade.

In conclusion, global steel market dynamics have clearly changed since the last issue of Steel E-Notes. And, there is little to suggest their inherent volatility will be any less through the coming year. As such, Aegis fabricators and their contractor customers can be certain of only two things:

1. Steel prices WILL fluctuate.

2. Aegis WILL continue our tradition of clearly and proactively communicating these fluctuations and their potential impact on pricing for our products. You have my commitment on this!

Thank you for your support and business in 2009. We look forward to continuing our partnership in 2010 and beyond.