Q: WHAT IS GOING ON WITH STEEL PRICES?
A: I expected some very sizeable increases. But for sheet steel, the prices have nearly doubled since December, and they will double effectively by the time they quit rising, which should be around June.
Q: WHEN WAS THE LAST TIME YOU SAW INCREASES IN STEEL PRICES OF THIS MAGNITUDE?
A: The price increases in 2004 essentially established a new level. Prices for almost every steel product doubled in 2004. Quite a few steel products tripled. There was a partial retreat in 2005.
Q: HOW DO THESE INCREASES IN STEEL PRICES COMPARE TO THOSE IN 2004?
A: For one thing, the global economy was on the rise in 2004. The global economy is not real strong anywhere except for China right now, and although China is still growing at a very high rate, the rate is slowing from the high 11-percent range to the mid-10 percent range. We think it will slow down more as time goes by.
The U.S., as far as steel consumption, is in recession. Actual consumption is actually falling. Apparent consumption is rising because there is inventory restocking going on. That's part of the reason prices are able to move up so much right now, but inventories are very thin. Once inventories restock, I think prices come back down and come down dramatically.
There was some inventory restocking going on in '04, but in '04 you saw rising actual and apparent consumption. The difference between the two is that apparent consumption is easy to track — it's just shipments plus imports minus exports (shipments plus net inflow or outflow of imports). Actual consumption is how much is actually being used. The difference is inventory accumulation or drawdown. Right now, it's very clear that inventory must be restocked, because 2007 was a fairly weak year for steel volume and even though it was not a bad year for the economy, there was a lot of inventory drawdown. Too much in fact. 2008 is a fairly weak year for steel demand, but it's a fairly strong year for apparent consumption because inventories have to be refilled. Once inventories are refilled, a lot of pressure comes off the United States, and I think prices come down pretty dramatically because I don't think the underlying demand fundamentals support it.
2004 actually was a very strong year in the beginning when the impact of Brazil, Russia, India and China were first fully felt upon the global stage for commodities. Now those countries are still pushing commodities higher, but I think this one is overdone. And I think we see a generalized retreat late in the year. No relief until then.
Q: WHAT DO YOU THINK IS THE ROOT CAUSE OF THE STEEL PRICE INCREASES?
A: Thin inventories, very high price for raw materials, demand from the growing markets, although the growth in raw materials exceeded the growth in steel production. The raw materials should be getting looser, not tighter. The prices don't reflect that, which is again another reason I believe eventually these prices unwind. Also, the very weak dollar. When the dollar gets weaker, prices go up. And the practical effect is exports are very lucrative and imports are very expensive. So from the point of view of a buyer, the trade flow has really deteriorated. From the point of view of a steel maker, it's wonderful news. The practical effect of the dollar has been not just in how commodities move, but the practical effect has also been to tighten supply.
Q: WHAT HAS THE REACTION BEEN ON THE CONSUMPTION SIDE?
A: Some customers in the booming sectors don't like it, but they are swallowing it, it seems. Some of the customers in the weaker sectors are trying to decide whether it's worth it to even go forward right now. I do believe the high prices will lead to demand destruction; that some people will just say, “With steel at these prices, I can't make a profit.” In fact, I'm already beginning to see that.
Q: DO YOU SEE ANY END IN SIGHT FOR THESE PRICE INCREASES?
A: Yes. I think they rise through the second quarter. The third quarter is unsettled, but generally prices will move sideways. And then prices start cracking in the fourth quarter and by mid-2009, prices should be approximately what they were in mid-2007. But there will be a big peak in between.
Q: ARE PRICES EVER GOING TO DROP DOWN TO WHERE THEY WERE BEFORE?
A: The simple statement is that the new floor is higher than the old ceiling. For hot-rolled sheet, a $380-a-ton price was extraordinary in the first years of this decade. Steelmakers were jumping up and down for joy at their profits. I can't see the price in our worst recession scenario moving below $450 now as a floor. So the new floor is higher than the old ceiling. And generally I see hot-rolled sheet staying $550 to $600. Let's say from 1992 forward, each peak was lower than the prior peak and each trough was deeper than the prior trough. The peaks were suddenly descending and the troughs were suddenly getting deeper. And we were looking at prices around $300 to $330 early in this decade for hot-rolled sheet. I now see that being about double. I don't see us going back down to those prices from the early part of the decade.