Thursday, May 29, 2008

Are steel prices heading for meltdown?

Steel prices having been rising (and continue to rise) at record rates this year. A few in the industry are speculating about a possible fall in the fourth quarter. We spotted this item over at

Analyst says steel prices may melt this summer

But the mills are pushing for even higher sales prices

By Tom Stundza -- Purchasing, 5/28/2008 12:14:00 PM

Sheet steel prices have crashed the $1,000 barrier for the first time ever this month (hot-rolled sheet in coil at an average $1,020/ton) and the mills are looking to break the $1,100 plateau this summer. However, at least one analyst sees the possibility of a major reversal back toward $850 in the hot-weather months.

“While there is a chance prices could remain at or over $1,000/ton for the rest of the year, historical pricing trends would suggest otherwise,” says analyst Michael Willemse at CIBC Capital Markets in Toronto. He suggests that steel prices have increased beyond sustainable levels so that “steel producers will soon once again focus on pricing that generates a fair return on capital, rather than test the upward limits of the market.”

Willemse says in a note to clients and follow-up interview that “recent price increases have been more than was warranted from raw material cost increases” so “a correction over the summer months is possible.”

Although North American steel service center inventories continue to be at multi-year lows at 12.7 million tons in April (the lowest since the same amount was posted in February 1997), Willemse writes that “inventories can increase quickly if steel demand declines over the summer months, if global export opportunities decline or if import activity picks up due to the recent higher prices in North America.”

I know a few stockholders who are trying to go on with the minimum inventory possible, in fear of a price collapse that could prove incredibly expensive. Ironically in many cases they are struggling to source the steel they need now. It's a time for the gambler's amongst us and the stakes are high.

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