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Friday | 01 September, 2006 | 3:53 am

How to predict the unpredictable

By Abbe Miller

September 2006 - Roller coasters used to be considered a good time. Being violently jostled about in rickety little carts once produced shrieks of pure excitement. But for many, the thrill is gone.

The carbon flat-rolled market experiences similar ups and downs. Prices will steadily make their way to the top and then, just like a roller coaster, suddenly they're heading back down. Some say, though, that for the time being, the ride is over.

"My forecast is that things will be very stable," says Steve Gottlieb, executive vice president of Ratner Steel Supply, Roseville, Minn. "I don't see the market going up any further this year, and if it goes down, it will go down minimally." He attributes his prediction to a healthy amount of demand, non-competitive foreign prices and industry consolidation.

Located in the heart of the Midwest, Ratner Steel serves the agricultural industry, among others. "From Tier One down, we're hearing nothing but glowing forecasts and nice backlogs through the rest of the year," says Gottlieb. "And we're not hearing about a lot of import deals coming into Minneapolis and the Midwest. At this point, foreign numbers haven't been low enough for us to take advantage of them."

To even consider a foreign purchase, Gottlieb says that prices must be at least $80 lower than domestics due to long lead times. In a market that is historically known for its fluctuations, without a "nice cushion to start with," he says the risk is too high. Others interject that China's capacity is increasing and that ultimately its presence will affect stateside stability.

Looking further out, a Chinese influence should be anticipated. "The monthly exports have sequentially increased every month since November 2005 and dramatically increased versus the May net export of 2.7 million metric tons," states a July 18 industrial-products bulletin generated by TD Newcrest, the Toronto-based equity division of TD Securities. "The high export level is consistent with the domestic price declines showing in China over the past month as international markets provided better pricing than their local market, which encouraged exports."

Stateside contributors
As of yet the Chinese imports haven't posed much of a threat because of lower domestic production levels. Plant accidents, corporate reorganization, labor strife and furnace maintenance have left capacity utilization in the ballpark of 88 percent. But if output regains its footing, which it is expected to, and if imports don't subside, price adjustments will be inevitable. Still, the impact should be minimal. It is hopeful that the days of drastic roller-coaster-type plummets are becoming distant memories.

Some aren't waiting for how or when Chinese shipments will substantially affect U.S. prices. Scott Shapiro, CEO of SteelSalvor, Narberth, Pa., is one speculator. He agrees that an external presence will be a factor, but for the near term, he says that internal dynamics weigh heavily on pricing.

"All the imports are in, inventory levels have risen and there's weaker demand, some of which is seasonal," says Shapiro. Seasonal trends are nothing new for the industry. Current furnace maintenance is one of the strategies companies use to keep supply and demand in equilibrium during less-active, sector-specific periods, notes Gottlieb.

Shapiro also bases his downward forecast on restrained public spending that the industry may not always be able to prepare for. With energy prices through the roof, families aren't as willing, or able, to shell out for new automobiles or appliances. "Web site activity has been softer than it has in the past, and that gives us a real indication that buying patterns are changing and that people are really only buying the items that they absolutely need. I wouldn't be completely surprised to see prices fall even more so than they have to date."

Sensible pricing ahead
A recent drop in scrap brought hot-rolled to $630 per metric ton, with cold-rolled sitting at $725 and galvanized at $790. Previous prices were at two-year record highs, so regardless of the cause, a dip was inevitable, but not damaging to those holding inventory. An August 4 report by World Steel Dynamics, titled Truth (Fear) & Consequences No. 36, also said that, "Steel scrap prices, besides being highly volatile and unpredictable, were high by historic standards."

Perhaps prices will now plateau at reasonable levels. It's hard to say. One point that everyone can agree on, however, is that consolidation has produced a more resilient industry. One hopes that its greatest benefit may be in stabilizing prices.

"In the old days, if you had 15 mills and one was down for whatever reason, it never mattered," Gottlieb explains. "It was so fragmented and immaterial to the marketplace. Nucor, Mittal and U.S. Steel, as market leaders, have done a tremendous job of educating the industry. They've acted with good conscience and done a great job of somewhat obtaining the status quo. It's inspiring to think that this can be a normal market for years to come."

Companies that deal in steel have learned to cope with fluctuations. But if that status quo can be achieved, for once the industry could rest easy.MM

By Abbe Miller, from the September 2006 issue of Modern Metals.

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