Steel Price Forecast for 2014
By John Hall
The irony is not lost on anyone who watches the steel markets. The world is drowning in it and the industry that relies on it the most isn’t using it anywhere near what it should have been if we could have skipped the years 2007 and 2008.
Construction consumes nearly half of all domestic steel produced in the U.S., and excluding meager upticks in new housing permits, demand for steel in commercial building and infrastructure is abysmal, analysts say.
According to the U.S. Census Bureau, the value of residential construction in the U.S. is outpacing that of commercial by nearly six-fold (17.6% vs. -4% for the 12 months ending in June 2013). For commercial construction, the biggest building over the past year has been in lodging (whose total value increased 22.2%; among the weakest areas has been education and religious sectors). The value of new infrastructure over the past year also has been uninspiring, with highways and street construction losing nearly 13% in value over the previous 12 months.
Meanwhile, two key sectors--auto and energy--kept the domestic steel industry relatively vibrant in 2013 and promise to do so in the coming year, thanks to upticks in consumer demand and a domestic oil drilling spree, respectively.
Sluggish Demand to Keep Prices Down?
With few exceptions like hot rolled, prices for unfinished steel goods remained flat through most of 2013 and could remain so in the coming year as the world’s biggest producer (China) continues flooding the markets with steel amidst global sagging demand.
Anton_John_2010_HighRes_0.jpgAccording to IHS analysts, the oversupply situation has caused a price depression on everything from iron ore to finished goods throughout the global supply chain.
“We’ve seen some improvement [in pricing] but it’s sort of a dead cat bounce,” John Anton, Manager, IHS Steel Service, tells My Purchasing Center. Even the current uptick in prices is likely to be short-lived. “It was almost so low that it had to come up,” he adds.
Anton says North American steel production has actually been tightening recently because of notable shutdowns of sheet steel manufacturing, a furnace breakdown in Alaska and a major strike in Ontario. “There’s been just enough offline capacity to bring back pricing a little bit in the U.S., but nothing very vigorous or high in terms of pricing,” he says. “As far as the supply side goes globally, the Chinese are still over-producing. They dropped back marginally in July but they are still far above where they should be.”
Since June 2012, industry prices from iron and steel mills have dropped 7.91%, or 3.23% for each 1% fall in manufacturing costs, according to AlertData.com. Suppliers in NAICS 331111 lowered prices by an average of 0.45% in June 2013. Compared to a year ago, prices are down 7.91%. On a year-over-year basis, prices are falling at a rate of 9.07%.
Meanwhile, a “sustained” rise in domestic prices for hot rolled futures this year have caused imports to swell, which Steel Market Update expects to have a calming effect on prices going into the fall.
Metal Miner, which tracks the markets, warns buyers to watch for sudden price increases because steel happens to be one of the most volatile “commodity” metals today. Metal Miner’s index for raw steel, for example, shows prices beginning a precipitous plunge beginning in February 2013, only to ascend to a healthy clip in June. Meanwhile, the firm’s index for stainless steel depicts it as the “poorest performer of the major industrial metals,” due mainly to poorly performing nickel prices.
Even amidst overall net declining raw material costs (down almost 6% from 2012), supplier margins are taking a beating, according to AlertData. For iron and steel mills, for example, margins are losing $7.11 per $100 of market-valued output, after adjusting for price/cost changes and other economic factors. Offsetting this loss would require a price hike of 9.29%, according to the firm.
The likelihood of that seems, well, unlikely. The biggest reason: China’s continued steel production binge.
According to the American Iron and Steel Institute, the lion’s share of the nearly 600 million net tons of steel globally sits in China, steadily flooding world markets at low prices. The organization, in fact, sees no end to the country’s production binge until 2020. It doesn’t help that once-steel hungry Asia has waned in demand, and European orders are abysmal. One look no further than the announcement earlier this year that Germany’s second-largest steelmaker, Salzgitter AG (SZG), expected a pretax loss of $530 million.
According to the Institute, the overcapacity caused finished steel imports to surge in the U.S. in 2012, a 37% increase over 2010. What perplexes many analysts the most is how China can continue cranking out steel without literally losing its shirt. “If you’ve fallen in love with volume and you don’t care about profit, that’s a hobby, not a business,” says Anton, referring to the production binge in China.
“There’s no question the people losing the most money are in China,” he adds. “They’re not even covering variable costs. They’re spending $550 [per ton] to make steel and selling it for $530 but they’re not even covering the cost of materials, much less the interest payments.”
The situation has become so dire for the U.S. steelmaking supply chain that the Iron and Steel Institute a few months ago formally petitioned the U.S. Congress to intervene by enacting “more effective trade policies to keep our antidumping and countervailing duty laws against unfair trade strong.” The organization also implored Congress to strictly enforce trade agreements and trade remedy orders, “and use all means to prevent and address unfair trade and injurious surges, including … addressing the unfair export subsidy Chinese goods enjoy because of Chinese government currency manipulation.”
Anton, meanwhile, is more than cautious about any drastic changes in trade policy with China, mainly because the net impact domestically comes from non-Chinese importing countries that have been forced to sell cheap steel here. “The evidence would have to be found carefully because China may be distorting the rest of the world but the rest of the world is what’s hitting the U.S.,” he says.
“China needs to be broken of its over-production bias but I’m not a China basher,” Anton says. “They’re not doing anything different than what we saw many years ago among American steel producers, and by the way, those companies no longer exist. The U.S. was in love with volume and barely mentioned a profit. Now the U.S. industry very wisely worries about profits. You don’t worry about volume and forget price, you worry about both. The Chinese are worried about volume and not very concerned about profit and price.”
In July 2013, China ordered more than 1,000 companies across various sectors to cut production excesses; among them were steel, but the net effect was all but a blip, according to Bloomberg.com. “China traditionally cuts capacity between May and November every year,” says Anton. “In 2009, they cut capacity by 8%; in 2010, about 13%; and in 2011, about 17%. In 2012, they only cut about 4%. So far this year, they’ve only cut about 2.5%. This isn’t going to balance the market. We need 13-15% minimum. We need deep cuts to really balance the market and allow us some pricing power.”
Few analysts, if any, see light at the end of the dormant tunnel that is commercial construction, an industry the steel business has relied so heavily upon. When discussing buyers’ sentiment, buoyed recently by flat rolled futures, Steel Market Update notes that the construction segment of the economy has placed “a drag on optimism. Buyers and sellers of steel are being cautious not to be too optimistic about their company’s ability to be successful in both the current and future markets,” the website notes.
Meanwhile, robust growth in car sales and a frenzied domestic drilling spree have made the auto and energy sectors true success stories for steel. According to Anton, the automotive share for steel demand is up 5% this year and energy’s portion is up nearly 8%.
Short-Term Forecast: Something Has to Give?
Anton’s firm, IHS, paints the coming year as short on buying opportunities and long on risk in its June 2013 report. Global steel prices may be at historic lows--always good news for buyers--but with their backs to wall, manufacturers may be forced to cut production and implement 10-15% price increases some time in 2014. All bets are off if China throttles its steel-making machine, which could happen, the firm notes. The greatest risk is for buyers who procure steel heavily from Chinese producers.
“I have been seeing a good news-great news-terrible news scenario,” Anton tells My Purchasing Center. “The good news could be prices will rise next year but they won’t be exorbitant or destroy your budget. The great news is prices won’t rise at all. And the terrible news is, if prices don’t rise, someone is going under.”
If there is pity to be spent, use it on the Europeans, whose economies have stubbornly fought any meaningful recovery since the global meltdown a few years back. “Their [steel] volume after a partial recovery has been falling continuously,” Anton says. “Each seasonal peak is lower than the last. Each seasonal trough is deeper than the last. And they have a currency in danger of getting stronger.”
That said, Anton sees something “breaking” either next year or 2015. Even that is hard to say with complete confidence. “The situation was actually in crisis stage in 1999 and 2000 in the U.S. steel business, but it took another two years or so for many of the failures to occur,” he says. “Financially troubled steel mills have business plans that basically vow to stay in business until someone else shuts down. So everyone has incentive to stay in business and an incentive to make too much.”
While Anton isn’t predicting any mill closures and stresses American mills are far from the most likely candidates, such things are included in the outcome of some scenarios. “If the Chinese slow down, and that’s part of my forecast that assumes a ratcheting down of lending, prices could rally next year,” he says. “If they don’t slow down lending and the Chinese producers still produce at the same level, prices don’t go up next year and there will be a point when someone runs into a wall.”