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Steel Price Correction Could Be Healthy For U.S. Steel Market
May. 17th, 2010
As Steel Market Update has been reporting for some time, steel prices have reached a plateau, and there are even some signs of easing. This is clearly evident in the US, especially on the flat rolled side, but also in many areas overseas, including China.
The interesting thing about this is that while the coil producers were still dancing in the streets and singing the praise of the automotive revival, the North American tubers were not sharing their joy, because they had been facing increasing resistance and push back from their customers for some time, mainly because demand clearly was lagging the breakneck speed of past price increases. For the record, it is not an unusual pattern for the increase to go up the value chain and then to see the pattern reversed when prices come down.
I strongly believe a correction at this time would be very healthy, because it is probably going to be mild. If this price increase spiral had been allowed to continue, the correction still would have come, albeit a little later, and then would have resembled a crash. The correction will allow demand to catch up with the lofty prices, which in the end will be good for everybody. In spite of their statements to the contrary, mills' margins are sufficient, even with the higher prices for ore and coal, which themselves seem to have reached a push back situation. More importantly, this will allow distributors to tweak their margins to where they will finally start enjoying sufficient spreads over their replacement costs, allowing them to make real profits. And none of the end-users will complain, as this will allow them to finally stop shaking their heads in disbelief over yet another price increase.
This is probably the longest we have gone in a while without an increase for mechanical and structural tubing or standard pipe, and it also appears that even in the OCTG sector, prices are taking a breather.
The huge vacuum left by the Chinese dumping suit-induced exit from the US market is apparently being filled faster than most people would have thought. Prices especially for mid range casing in the carbon grades had gotten ahead of themselves and the most ambitious numbers are going through a correction.
Now comes the hard part - where do we go from here?
Anybody who has been in this business for longer than a couple of months knows that prices never seem to go side-ways for very long. So, is the next move going to be up or down? Once again, I have to take the contrarian (in this case optimistic) view and state my believe that after bouncing around in a narrow band for a little while, prices will start moving up again, probably around the end of the summer.
Why? Because by that time, demand in this country will have come up nicely, and our market will have absorbed the additional hot metal from the three restarted blast furnaces - via exports if necessary. The Greek drama will be forgotten, the Euro will have recovered (with the resultant cheaper dollar facilitating those exports), and the Chinese will have loosened credit a bit, because they have to, if only to counter-act the newly appreciating RMB.
Will all be well? No, because there still will be greed-induced price volatility up and down the supply chain (I did not think I would ever say that), but all of this will play out on much stronger legs.
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