The price increases that US flat rolled mills announced earlier this month for January orders are expected to be largely accepted; however, so far, there are no signs that end-use demand is picking up.
Since demand is still only lukewarm, up to the present time the price increases have not been a "slam dunk" case. Buyers are dragging their feet when committing to the January prices (which are $30 /nt to $40 /nt higher than December prices), and are still in the negotiation phase. So far, an increase of approximately $20 /nt has been accepted by the market since mills announced the price hike in early November. As we approach the end of the year, not much buying activity will take place, so it will be a little while before it is evident whether or not buyers will accept the full amount mills are asking for.
Currently, the domestic market price for hot rolled coils ranges from $26.50 cwt. to $28.50 cwt. ($584 /mt to $628 /mt or $530 /nt to $570 /nt), while most offers for cold rolled coils still range from $31.00 cwt to $32.00 cwt. ($683 /mt to $705 /mt or $620 /nt to $640 /nt), based on ex-works prices in the Midwest.
The general expectation in the market is that customers will accept the price increase as they will have no other choice. With service center inventories at the end of October reaching a nine-year low of 12.26 million tons or a 2.6-month on hand supply, according to the Metals Service Center Institute (MSCI), and virtually no new import arrivals to speak of, buyers will have to nowhere to turn but to the domestics to replenish their inventories.
Another reason why the price increase is expected to stick is that mills have a strong incentive to stick to their guns, as raw material and energy prices continue to increase. With prices for slabs, iron ore and scrap trending upward, mills will likely insist on recovering these input costs.
Looking forward, the general outlook for the US flat rolled market going into next year is positive because of the aforementioned low inventories and lack of imports. Another promising sign is that investment firm Goldman Sachs is once again interested in steel - on Friday, Goldman raised its view on the steel sector to attractive from neutral, explaining that the weaker demand will be offset by the tight supplies, resulting in rising prices in 2008. Still, financial crises resulting from mortgage and housing issues will keep the domestic demand low, so mills will need to cut production further or resort to more exporting to get rid of the excess production.
Currently, exporting is still a small part of the flat rolled market. While US flat rolled export activity is up from last year because of the weak dollar and relatively lower steel prices in the US compared to the rest of the world, the high ocean freight rates and weakening price environment in Europe have rendered most export deals unworkable. Europe is slowly getting back on its feet, however, so some new deals are currently being discussed. Popular European destinations for flat rolled exports are Spain, Portugal, Italy, UK and Holland. Also, Peru is a new potential export destination in South America for North American mills. Mostly hot rolled coils are exported because the US mills are not so familiar with export packaging for cold rolled and galvanized coils.
Inter-NAFTA flat rolled trade is still strong, as Canada's favorable exchange rate with the US has allowed many profitable deals to be made.
Preliminary license data from the US Import Monitor show that hot rolled sheet exports from the US in September 2007 totaled 105,854 mt (59,739 mt of which went to Canada) compared to a total of 49,035 mt exported in September 2006. Cold rolled exports totaled 36,476 mt in September 2007 (20,415 mt of which went to Canada), staying steady from the 36,280 mt exported in September 2006.