Saturday | 01 September, 2007 | 3:38 am

Keep a stiff upper lip

By Abbe Miller

September 2007 - The residential housing market is in a tailspin, and the domestic automotive sector has taken a back seat to its foreign counterparts. The two biggest industries that carbon steel sheet feed into aren’t just making headlines, they’re making history. In July, the Big Three found themselves, for the first time ever, dwindling below 50 percent in market share, and on Aug. 21, the bankruptcy announcement of First Magnus Financial Corp., the nation’s second largest privately held mortgage company, marked the 14th of its kind in only nine months.

According to an article published by Reuters on Aug. 17, 2007, consumer sentiment "deteriorated to its weakest in a year." And the current prices for carbon steel sheet seem to be a direct reflection of the nation’s waning lack of confidence in purchasing. Compared to last year’s prices for the same period, price tags have dropped 19 percent, as reported in the "Second Quarter Economic Overview" by P&M Corporate Finance, an investment banking firm with offices in Chicago, Detroit and Cleveland.

As of Aug. 23, hot-rolled sheet was priced at $510 per ton, cold-rolled at $600 and galvanized at $750. One year ago, prices were more robust: $630, $740 and $840, respectively. When reflecting back on a boom period, only to compare it to one that’s a bit lackluster, the industry is anxiously anticipating what’s ahead.

Scott Shapiro, CEO at Steel Salvor, Narberth, Pa., takes a realistic approach when it comes to what’s to be expected. "Everyone would like to think that prices will rebound because that would indicate an increase in demand, which there still isn’t any," he says. "It’s not that people want to pay more for their steel, because they don’t, but they think that an increase in pricing would demonstrate that there’s been an increase in demand, and they’d probably feel good about that."

The ups and downs
The fundamentals--demand, import patterns and inventory levels--are a helpful yardstick for determining the current value of steel, but according to other factors, such as current economic conditions, as well as the quality of mill and service center management, they aren’t always a concrete measurement.

"Declining import levels are a positive indicator for steel fundamentals, as they improve the regional supply-demand balance, however, lower imports reflect lower steel prices in the United States relative to the rest of the world. Steel will typically be imported to the regions of the world that have the highest prices," said Valerie Davisson in her July 2007 report titled "Steel: What is driving stock prices?" Therefore, the decrease in imports carries a mixed message.

Exacerbating the situation is the resurgence in scrap prices. P&M’s report lists ferrous scrap up 24 percent over the past 12 months. The reason for the hike is, of course, multi-faceted. In addition to the effect that worldwide demand has on its price tag, scrap prices are determined by steel recycling rates. According to the Steel Recycling Institute, 2006 rates were at their lowest in five years.

Lower prices in flat-rolled steel inevitably can result in a decrease in shipments and an overabundance of inven­tory. But, in terms of inventory, that may not be the case for the steel industry. "Inventories of steel and aluminum products continued to fall at U.S. and Canadian metals service centers in July, reflecting sluggish summer demand and the uncertain economic environment," notes the Metals Service Center Institute in its Metals Activity Report for July.

The Metals Activity Report also indicated that as of July of this year, 11 months had passed with consecutive declines in shipments. The lull in outgoing product, however, was matched with intelligent inventory planning. "At current declining shipping rates, U.S. steel inventories at the end of July were sufficient for 3.2 months of shipments, unchanged from June," according to the report. The 3.2 level mirrors a 19-year average, but not one that can justify restocking.

"I believe there’s a shift and that the steel industry may never be the same. I’ve seen this take place in other industries," says Shapiro. "The survivors are going to learn how to manage their businesses with lesser inventory. And you can’t afford not to because of the volatility in the markets. There’s a different kind of paradigm here; people are going to have to learn how to do things differently."

Unlike the stereotypical spending habits that Americans have been known for, consumers are apprehensive to make larger-type purchases. With foreclosures on the rise, homeowners are antsy to open up their pocketbooks. So until the economy levels out, there will have to be a certain amount of patience and replanning across the board.MM

By Abbe Miller, from the September 2007 issue of Modern Metals.

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