Steel oversupply hits prices, production sliced
Northwest Indiana News: nwitimes.com
Since peaking in August 2004, steel prices have declined steadily as service centers overbuy and overstock due to market pressure.
From a low averaging near $360 a ton in mid 2003, the average price of cold-rolled sheet more than doubled to more than $800 a ton in late summer on the strength of heavy Chinese and steady domestic demand. But since August, prices have dipped month after month and now rest below $500 a ton.
In an effort to prevent further price erosion, steel producers have cut back production to take capacity out of the marketplace. Both U.S. Steel Corp. and Mittal Steel Co. USA have cut production by banking furnaces and moving up maintenance.
U.S. Steel recently announced its second-quarter flat-rolled shipments are expected to be 7 percent lower than the first quarter, resulting in a drop in annual shipments levels below the 14.5 million tons it had projected.
‘They (steel producers) waited too long,’ said James Bouchard, chief operating officer of Chicago Heights-based Esmark Inc., which operates seven steel service center companies in the Midwest. ‘If they would have done it earlier in the cycle, prices would have stayed up.’
As the automotive industry’s demand for steel soured in late 2004, steel companies pushed for orders and service centers obliged, even when inventory levels were beyond the ideal two-and-a-half month level, Bouchard said. Plus sluggish consumer demand has aggravated the situation.
By the time producers cut capacity, the majority of the nation’s service centers were sitting on inventory levels so huge that ordering basically stopped.
Steel is a pure commodity and follows the law of supply and demand, he said. When service centers have inventory levels of 2.5 months to 2.7 months, prices go up. When they’re above three months, prices go down.
The concern about ever higher prices and the resulting orders, which at times where larger than actually necessary, created a situation where steel production wasn’t meeting demand. Delivery times and prices rose through 2004 and by the end of the year steel service centers began to experience inventory overhang and supply began to exceed demand.
“Once the prices begin dropping, people wait to make their next purchases and that exacerbates the situation,” Labriola said. “Clearly supply and demand got out of whack.”
The run up in prices occurred within a relatively short time span in comparison to an historic steel cycle, which normally is years long, creating volatility that made it difficult for steel sellers to price their products correctly and earn a return on their capital.
“Prices went up 100 percent, then down 40 percent,” Labriola said. “That type of volatility adds confusion to the market. You’re making decisions based on 90 days in the future. If you’re off by 5 percent a month, that’s 15 percent.”
No one wants to see great volatility, he said.
“Anytime you can eliminate that component it makes for better financial planning, better business planning and better production planning,” Labriola said. “You want to remove all the variables you can.”
He agrees it will be August to September before prices stabilize and he praised steel producers for reducing their output.
“The fact that the integrated mills have decided not to force product in the market healthy for all participants,” Labriola said. “That kind of leadership is quite welcome.”