Mr. Bull:
Hi Mr. Gloom, I have been thinking about you for the last two months as steel markets have been picking up. Prices are still rallying in record territory. Long products are extremely strong, and the flat rolled market has only shown the tip of the iceberg. Huge price gains are looming upon us. It looks like it's 2004 all over again. Knowing you, you probably still have something negative to say. OK, go ahead and spit it out.
Mr. Gloom:
Yes, there is something negative to say. Admittedly, steel prices are going up on a broad front, however, the increases are largely cost- or supply-driven. Just because oversea markets are strong and
scrap prices are going up does not mean that the prices in the US will go as high as the steel mills are pushing for. Demand for most steel items is normal at best, and in some sectors, steel consumers still have quite a bit of inventory. They will postpone major purchases until the very last moment, hoping that the mills, domestic or offshore, will cave in.
Mr: Bull:
If you wait until the steel mills cave in, you will wait for a long time, my friend. Unfortunately, the US is not the king anymore. Whether we like it or not, the other major markets like the Persian Gulf and
Europe are dictating the demand and pricing right now. The US has become only a small piece of the puzzle. Look at rebars for instance. While the US customers were dragging their feet, prices went up more than $150 /ton in the last two months. Still, the mills are not all that interested shipping to
North America. Oil-rich countries like United Arab Emirates and
Russia are happy to spend their petrodollars on large
construction projects and pay the big bucks for Turkish rebars. When there is such a boom going on in the rest of the world, who needs the US?
Mr. Gloom:
It is always dangerous to discount the US market. Other markets may be temporarily more lucrative, but the US is consistently a big importer. Last year, 9.4 million mt of long products were imported; out of which rebars totaled a record 2.4 million mt.
Turkey alone shipped over 1.1 million mt of rebars. I don't think that anybody wants to jeopardize their US market presence in the long run.
The economic data just does not bear out these unrealistic price increases. The economy is not bad, but it has perceptibly slowed down. The housing and automobile markets continue to be in a slump with no immediate turn-around in sight. Service centers and end-users have have plenty of inventory on their hands, and it might last longer than we think. There will come a time when steel inventories will have to be replenished. It remains to be seen if
US steel prices will still be at this lofty level when the time comes.
Mr. Bull:
Just like you said: US economy is not bad and getting better. You predicted the slowing housing market was going to spell disaster for steel market before. That was wrong. Yes, the housing market has slowed down significantly and it may not improve this year. However, the non-residential market is extremely strong. It's time to build commercial infrastructure around the new living areas, such as schools, shopping centers, libraries and hospitals.
Construction will still be strong this year. I would say that
automotive hit the bottom already -- it certainly can't get any worse than it is now. Therefore, we will see a gradual increase in demand for flat products as well.
On the supply side, raw materials, particularly
scrap, will be in a constant state of short supply for the next several years. Plus, the US mills are incredibly disciplined now. Maybe we need a few more big mergers in the US and we should be done. There will not be senseless price cutting anymore. Just look at how much money the US producers make. There is no going back to the old times.
I think 2007 is the year when we will forget all the talk about steel prices in twenties ($20's cwt or $440's mt), just like we forgot about talking about steel prices in the teens in 2004. My prediction is that the new price increases will be permanent and sustainable. I don't know how much more the prices will rise. From the looks of it $40 cwt. ($880 /mt) is within reach for rebars and is a reasonable level for this hot summer. I would expect the other long products to follow.
Mr. Gloom:
I grant you that commercial infrastructure is strong and is driving the
construction business. But this cycle will expire too one of these days. In certain areas, warehouse space is already saturated.
Rebar business is being fueled to a large extent by the Highway
Construction Bill passed last year. Still, $40.00 is a bit of a stretch. As far as
wire rods are concerned, there is no way that such a price level can be sustained by the lackluster
wire business, especially since an ever-rising number of
wire products are coming in from
China. Domestic nail
production has been on a long slide of decline and will probably disappear in the not too distant future.
Wire rod over $30.00 cwt. ($661 /mt or $600 /nt) or even $40.00 cwt. ($882 /mt or $800 /nt)? If it happens, then it will stay there for a short while only. The
wire business would simply move offshore. At one time, the domestic rod mills want to fill their order books and revert to the time tested solution of price cutting. Rebars will stay high a bit longer. But remember, the higher the prices go the harder they will fall. This week's upheaval on the stock markets is a timely reminder that bubbles burst and sky is not the limit at all times.