NEW YORK Tepid demand for steel and drastic price cuts by Chinese producers appear to have thwarted price increases announced by U.S. steel producers for the fourth quarter.
Some U.S. steel producers said they never actually received $600 a short ton for hot-rolled coil, a benchmark for steel sheet prices. Others would not specify the prices they have received, but demand has ebbed since the increases were announced in August and Chinese prices have fallen sharply.
"I am sensing that the $600 didn't fly that U.S. Steel announced for November and December. The fact that they announced it for two months started a lot of the weakness," said Charles Bradford, metals analyst at Affiliated Research Group LLC.
"People said, 'Things can't be that good if they're willing to give a fixed price for a couple of months,'" Bradford said.
During the first seven months of 2009, U.S. steelmakers were operating below a 50 percent capacity rate and found it tough to push higher prices through to customers. But by late summer, the success of the U.S. government's cash-for-clunkers program and depleted inventories spurred some producers to restart capacity and announce price increases.
But according to some analysts, they think some mills tried to push prices too far, too fast.
"I'm hearing that there is some weakness. That the mills have pushed too hard and the customers just aren't willing to pay $600, which is what the mills are pushing for," said Bradford, adding that a CEO at a major steel producer told him "he never saw $600 and that $580 is the most he ever saw."
"PRICES COULD EVEN RECEDE"
Even if a few deals did transpire at $600 per short ton, their ability to hold has become doubtful. Most analysts think prices have already begun slipping.
Last year at this time, hot-rolled coil prices stood around $940 per short ton, then they slid to a low of $390 a ton at the nadir of the economic crisis in February and March.
In a research note, Goldman Sachs analysts said, "prices could even recede over coming months. Our channel checks indicate difficulty in getting prices to stick as supply restarts could overshoot the demand recovery."
Citing the Institute for Supply Management's manufacturing report and other data, analysts see mixed readings for demand.
"September's ISM survey reinforces our view that despite a solid inventory position in the key service center market, we don't expect to see much in the way of further price increases in the near term," said Michelle Applebaum, managing director at Michelle Applebaum Research Inc.
Citigroup metals and mining analyst Brian Yu said he viewed the ISM reading as positive, showing manufacturing sector expansion in September for the second consecutive month.
"Overall, the report is supportive of our favorable steel outlook, as the trajectory of apparent demand remains positive. The new orders index declined, but still pointed toward substantial growth, and destocking came to an abrupt halt."
CHINESE PRICE NEAR PRODUCTION COST
Either way, analysts have said falling steel prices should lead to supply cuts, and with inventories already low, price declines should be limited.
A producer like U.S. Steel (X.N) needs higher volume output to break even. Without it, the company may not be able to keep a blast furnace going even with higher steel prices. On the other hand, electric arc furnace producers, like Nucor Corp (NUE.N), are agile enough to be profitable at $600 a ton.
Last week, steel processor, Reliance Steel & Aluminum Co (RS.N) said it has seen no meaningful pick up in demand, though average daily shipping volumes have improved slightly.
Dahlman Rose, in a research note, reported a slight increase in the steel utilization rate last week.
"Utilization continues to trend higher, but we note that official domestic steel prices slightly decreased by $5 per short ton last week, the first time since spring of this year."
Most analysts point to sliding Chinese export prices over the past six weeks as a big factor pressuring U.S. producers.
Bradford said Chinese flat-rolled steel export prices are now about $450 a short ton. Applebaum said this is near production costs for Chinese steelmakers and therefore close to a bottom.
Pointing to rising utilization rates for 13 consecutive weeks, Goldman Sachs said, some producers have brought supply on line faster than many expected, and therefore thinks U.S. steel prices could slip to $520 to $530 in coming months.
At those levels, the note said, mills should again curtail supply, setting the stage for steel prices to move back up.
"We remain constructive on the domestic steel industry in the medium to long term, and we are bullish on the prospects for a sharp recovery in emerging economies," it said.
Bradford said some forecasters see $700 to $800 hot-rolled coil next year, "But some mills are saying they'd be thrilled with $600, which may be the break even point for U.S. Steel."
(Reporting by Carole Vaporean; Editing by David Gregorio)