Cold-Finished Bar Market: Update And Outlook For 2008

  The economic climate in the U.S. has recently experienced some significant turmoil, and this makes a serious prediction for the remainder of 2008 difficult at best. However, in order to assist in the process of budgeting and business planning, here is our best guess, based on the conditions that currently

 


The economic climate in the U.S. has recently experienced some significant turmoil, and this makes a serious prediction for the remainder of 2008 difficult at best. However, in order to assist in the process of budgeting and business planning, here is our best guess, based on the conditions that currently prevail, starting with a review of the supply and demand market forces, which ultimately control pricing.

Supply

The fundamental worldwide supply of special bar quality (SBQ) steels—the types used to make cold-finished bar products—is adequate. There has been some significant consolidation of producers, especially in the U.S., but this has not adversely affected supply.
Internationally, a weak U.S. dollar has caused less material to be produced for export from Europe and South America into the U.S. market, and material that does arrive will be priced higher.

Demand

The manufacturing side of our economy is relatively weak, and the basic demand for cold-finished bar products in the U.S. is down about 10 to 15 percent from the past 2 years, essentially in line with the drop in manufacturing business levels, automobile sales and housing starts.

There are, however, some potential bright spots in the cold-finished bar demand. First, the most recent data (January 2008) indicates that the service center inventories are close to their lowest point in decades. An optimist would see this as a potential for increased cold-finished bar shipments to the service centers.

Second, there is the opportunity created by the very weak dollar for parts manufacturers in America to export to Europe, or to euro-based customers in the United States. The demand for dollar-priced barstock will increase to international parts and equipment manufacturers who have a global footprint, which gives them the option to shift manufacturing from Europe to the United States. There is also a slight indication that some OEM parts manufacturing, recently “lost” to Asia, may now be repatriated to the U.S. The reasons for this are a combination of speed to market, quality and relative cost. The last is being driven by the weak dollar.

Third, there is an inexorable trend for the Japanese transplants to “localize” their sourcing. This last opportunity is likely to be the slowest, but may well turn out to be the most secure in the long term.

However, it is clear that overall U.S. demand for cold-finished bar is currently close to historical lows, and it will probably be closer to the end of 2008 or even into 2009 before the impact of opportunities related to currency and localization will be realized in increased demand for cold-finished bar.
The demand for cold-finished bar worldwide is another story. Virtually everywhere, except in North America, business is booming. Europe is enjoying a modest 3- to 5-percent growth with manufacturing and automobiles at normal levels, while in Asia, particularly India and China, the growth in manufacturing, industrial and automobile markets is remarkable.

Also, perhaps a consequence of this is a significantly devalued U.S. dollar worth about 40 percent less than it was only 2 or 3 years ago in terms of many world currencies. That means anything needed to import (like the raw materials to make steel) will be 40 percent more expensive in dollar terms even if the world price of such commodities stays the same. Unfortunately, the absolute world prices are going up, because Asian demand is so strong. World iron ore prices are expected to increase by 65 percent this month. If this anticipated price rise actually occurs, then we can expect further significant upward pressure on finished steel products later in the year.

The end result is that we can expect significant price increases in 2008, driven entirely by costs, as the effects of world supply/demand and currency revaluation percolate through the American manufacturing economy.

Price Direction

A few years ago, the expression “What’s the China price?” was a favorite of purchasing agents seeking to use global leverage to squeeze down U.S. domestic prices. Soon those same words may become the reason to explain why the price has gone up. The “China demand” will have caused the world market prices to increase, and this, coupled with the weak currency, could cause prices to rise significantly despite the weak demand in the U.S.