In Flux

Features - Scrap Industry News

Increased supply of hot-rolled band this summer could lead to a pricing setback for steel producers.

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August 5, 2009

 

The Tier I mills’ hot-rolled band (HRB) export price in the month of May moved up by about $25 per metric ton to the $400 per metric ton level, FOB (free on board) the port of export. (As of mid-June, the price was at $450 per metric ton.) At the same time, World Steel Dynamics’ (WSD’s) contacts indicate that the steel slab export price has risen by about $30 per metric ton to approximately $330 per metric ton, FOB the port of export.

A further $10 to $50 per metric ton price spurt for hot-rolled band seems a 65:35 possibility in the month of June. Our contacts indicate that the mills in a number of countries are pushing for higher prices, while other mills are withdrawing from the market to jump-start higher prices. The weakening U.S. dollar is a factor pushing up the export price because many mills’ costs—in dollar terms—are up. (In fact, there’s a fairly good historic inverse correlation between the value of the dollar and the price of hot-rolled band on the world export market.)

Apparent steel demand, except for North America, seems to be rising as buyers are slowing, or ending, their inventory liquidations. With steel mill production still restrained in most countries, the market psychology from the steel mills’ perspective is clearly less negative than previously.

Granted that if the hot-rolled band export price rises to $410 to $450 per metric ton, FOB the port of export, WSD places the odds at 60:40 that the higher price may not be sustained. Even granted that global apparent steel demand will rise higher in the months ahead vs. the level seen a few months ago, the HRB export price may be driven down by increased offerings by steel mills in a number of countries, including perhaps ones in the United States and China, because the price is attractive and they need more volume; falling HRB production costs globally, perhaps to an average of $400 per metric ton, reflecting reduced iron ore and coking coal prices; a decline in steel scrap prices after their recent fairly sharp rally (in fact, scrap prices turned down toward the end of May); seasonal factors, including lower demand in light of the monsoon season in India that runs from June through August, holidays in Europe in August and the Ramadan holiday in the Middle East in September; and price resistance on the part of steel buyers.

Steel buyers, in many cases, are not confident about the outlook for steel demand. The steel industry and its customers remain in a "cash is king" mode because banks are still far more restrictive in their lending standards.

DECODING THE PATTERN

Will there be a "U" rather than a "V" pricing pattern for hot-rolled band on the world export market in the next year?

Since the mid-1990s, when a pricing "death spiral" occurred (i.e., the price fell to the marginal cost of many producers), the price stayed at the lowest level for only a brief period because the low price drove down production and stimulated new orders as buyers perceived a bargain price. At that time, the rise in new orders was sufficient to drive the operating rate back up to a level sufficient to boost the mills’ "pricing power;" hence, the "V."

In the current situation, because the operating rate is so low, even if apparent demand rises by 10 percent to 20 percent, the operating rate in many regions of the world may not be sufficiently high to permit the mills to enjoy a significant rise in pricing power. The mills will still be vying strongly for market share. Hence, for perhaps another year, WSD postulates that the hot-rolled band pricing pattern on the world export market might consist of recurring pricing "death spiral" episodes interspersed with "price spikes." If so, the price of hot-rolled band might decline to $350, plus or minus, per metric ton at the death spiral lows and rise to $400 to $450 per metric ton at the pricing rally peaks. The average price might be about $380 to $400 per metric ton, a figure not far from the average operating cost in the world to produce hot-rolled band.

MARKET MECHANICS

The Tier IV mills, such as the Ukrainian producers Zaporizhstal and Ilyich, have been experiencing a hot-rolled band pricing roller coaster to a far greater extent than the Tier I mills. Last October, when the Tier I mills were still seeking to sustain their export prices in the $550 to $600 per metric ton range, the Tier IV mills’ price fell to only about $350 per metric ton; and, subsequently rallied to about $390 to $410 per metric ton before falling back in mid-April to only about $330 per metric ton. Their current price, at which orders have been good, appears to be about $360 per metric ton. (The Ukrainian mills are in the Tier IV category because their hot-rolled band has a low coil weight—12 metric tons or less in some cases vs. 18 to 25 metric tons for the Tier I mills—and the product is produced to looser specifications. For example, there is more gauge variation. Nevertheless, the product is more than sufficient for many steel buyers.)

The leading Russian steel mills’ price fell to about $375 per metric ton last October, while the low in early May of this year was only about $350 per metric ton. The price as of early June, our contacts say, is in the $380 per metric ton area, FOB the port of export, with the mills sold out through June.

In the United States, steel sheet-producing mills appear to be experiencing a moderate initial rise in new orders. In fact, one would expect that the mills’ lead times would start to stretch out because of the 50-plus percent drop in U.S. steel production since August of 2008 and the 50 percent drop in imports in April 2009 to the lowest level since 1991 (only 1.1 million tons have been imported, down 55 percent year to year).

Yet, reflecting the continued oversupply, the spot hot-rolled band price appears to be in the $380 per net ton area for small buyers and perhaps $20-plus per ton less for large spot buyers. The Chrysler (May 1st) and General Motors (June 1st) bankruptcies have depressed steel sheet orders. At the same time, many steel-using manufacturers, especially those serving the automotive industry, and a number of steel service centers appear to be in financial jeopardy.

Looking ahead a few months, WSD expects United States mills’ new orders for sheet products to rise as steel buyers run out of inventory. Also, should the hot-rolled band export price rise to $440 per metric ton ($400 per net ton), FOB the port of export, a number of American mills may become active exporters. Steel shipments in the U.S. in 2009 may be only 61 million tons vs. 98 million tons last year—the lowest figure since 1958.

Global steel production in 2009 may amount to about 1.05 billion metric tons, which compares with WSD’s estimate two months ago of 1 billion metric tons. (In 2008, production in the second quarter amounted to 1.45 billion metric tons annualized, while output for the year amounted to 1.32 billion metric tons.) This latest production estimate reflects some recovery in steel demand from the lows in the Middle East and Far East; rising automotive sales in Japan and China; and growing signs that Chinese steel demand may be up 5 percent or so vs. our prior estimate of a 5 percent decline.

Rebar and long products have had a better recovery of apparent demand than flat products have.

Steel slab demand has risen strongly in the Far East and China, but not in North America, according to WSD contacts. The current slab price, at about $330 per metric ton, FOB the port of export, is only about $70 per metric ton below the hot-rolled band export price for the Tier I mills, which means that the independent hot strip mills that are buying the slab—such as the those in Thailand and Taiwan—are counting on a higher price for the hot-rolled band by the time the slab arrives.

SCRAP PRICES SLIDE

Steel scrap prices appear to be headed back down after a sizable increase the past few months. In March, the price of No. 1 heavy melting scrap in the U.S. bottomed at about $150 per gross ton. Then, in the next two months, it rose to about $185 per ton based on surging demand for scrap in Turkey and China. The export price of scrap rose to about $220 per ton, which pulled up the price of scrap in the United States interior as it was being shifted to the coasts to be exported.

When the scrap price delivered to Turkey rose to $280 per metric ton, this meant that the price of billet needed to increase to $380 per metric ton to cover the cost to convert the scrap to billet; and, the price of rebar needed to rise to about $430 per metric ton. These price requirements were simply too high for the market; hence, demand fell. Subsequently, prices headed down.

Billet prices delivered to China are so high, at about $410 to $415 per metric ton, that some buyers have been cutting up slab to make billet. Slab had been available delivered to China in some cases at about $340 per metric ton; but, this price now has risen to about $370 per metric ton.

In China’s case, demand for steel scrap declined when the price rose to that for pig iron inside of China. At that time, buyers preferred to buy pig iron, which is more valuable than scrap given that it is exothermic (useful in basic oxygen furnaces, which account for about 90 percent of steel production in China vs. 10 percent for electric arc furnace steel production).

Chinese pig iron costs have come down in light of the decline in spot iron ore prices and may come down further if rising offshore coking coal deliveries bring down the coking coal price in China (high at about $160 per metric ton, delivered to the steel plant, because so many coking coal mines have been closed because of safety problems). Unlike the case a year or more ago, steel scrap is less likely to sell at a premium to pig iron prices in China.

This is an excerpt from World Steel Dynamics’ "Steel Thermometer #41." Word Steel Dynamics, Englewood Cliffs, N.J., analyzes and publishes reports on steel prices, steelmakers’ costs, steel supply/demand and steel finances. More information is available at www.worldsteeldynamics.com.