Articles
2009 Metals prices: Low and holding
A bottoming out year; a buyer’s market
January 5, 2009
All metals prices are near their trough points and will probably not bounce back for a couple of quarters going forward. So for all of these metals, that’s a common theme. Markets will bottom out in the first quarter of 2009 and both the pricing and demand will be relatively slow in recovering throughout the year.
Look for 2009 to be a bottoming-out year for the consumer-related metals—copper, aluminum, stainless steel, and carbon steel.
Obviously, right now we are in the midst of a major crisis, not only in the economy but in the steel industry as well. And that involves a very sharp downturn in steel demand that has resulted in a significant pickup in inventory throughout the system at the world export level and at the steel producer, service center, and end-user level—and therefore, declining prices.
By Markets
Three markets account for almost 80 percent of all steel demand in North America—construction at about 40 percent, and automotive and industrial equipment each at about 20 percent of demand.Construction. First, construction, the largest, is composed of housing at 10 percent of that pie, nonresidential at 60 percent,and public works at 30 percent.
By itself the residential subsector of the construction sector represents a very small part of overall steel demand, but it does have a significant impact, ultimately, on nonresidential and public works construction markets, as well as other related sectors, like appliance and office furniture.
Most who are tracking the housing markets are calling for a bottoming out and a slow recovery to commence mid-2009.
The nonresidential construction segment, which is the largest single market for steel, currently even slightly larger than automotive, is starting to taper off significantly and is projected to head into a recession into 2009. That market had been exceptionally strong, growing at 11 percent to 12 percent in 2006 and 2007. It is still about half that growth rate at 5 percent to 6 percent for 2008.
The public works construction subsector tends to be one of the last to go into recession, just because of the nature of the long planning, lead-times, and construction times. It's also among the very last to recover.
So those two subsectors of construction—nonresidential and public works—are going to be a drag on steel demand for the next couple of years.
Automotive. Total NAFTA automotive production, about 20 percent of steel demand, was down 13 percent through September. Total NAFTA light trucks declined by 21 percent, and passenger cars declined by 2 percent. Light trucks use anywhere from 50 percent to 100 percent more steel per vehicle than a passenger car.
A sizable decline in total output is magnified by the simultaneous shift away from the larger vehicles.
However, the severity of what's going on right now—the shift away from heavy trucks and the decline in passenger vehicles—is not sustainable.
We expect auto production next year to bottom out at some point and end up being slightly higher in 2009 than in 2008.
Industrial Equipment. Last among the big markets is the industrial equipment category—railcars, ships, off-highway vehicles, and stationary machinery. Altogether it accounts for about 20 percent of steel demand. Up until about September, it has been driven very strongly and positively by export activity, especially by makers like CAT and John Deere, and going into Europe, China, India, and other parts of the world. That export market has now started to dry up significantly.
Market Recovery. Historically the markets that hit bottom first and start recovering first are those in the consumer sectors—housing, appliance, and automotive. They will hit bottom sometime in the second or third quarter of next year, possibly earlier, and then slowly commence sometime in 2009, in the first and second quadrants of the recovery cycle. The industrial capital equipment market will follow that, sort of mid-cycle in the third quadrant; and then the nonresidential construction will come in last.
Several segments, such as industrial capital equipment and nonresidential construction, may have a number of quarters or even a couple of years to go before they bottom out and start recovery. The domestic demand for industrial capital equipment probably won't significantly kick in for 12 to 24 months beyond mid-2009.
By all measures, most analysts and economists are viewing this as a relatively severe market correction that we're in the midst of and recovery will be a bit slow and long.
Prices—Low and Steady
Scrap. One of the best bellwethers of where carbon steel prices are going is the price of scrap. The most common grade, No. 1 heavy melt, has moved from peak levels of $550 per ton as recently as July to $90 a gross ton in mid-November. That's a phenomenal drop in a very short period of time. That price has not been seen since probably 2001 or 2002.
Right now, with raw material prices still in freefall, and with the surcharge mechanism on carbon steel, buyers can see with a fair degree of transparency what the prices will be one, two, and three months down the road.
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Carbon Steel Hot-rolled Sheet. For hot-rolled (HR) sheet on the spot market in the U.S.—and this is what Midwest service centers—the largest steel-buying group—were paying about $1,068 per ton at the peak in July 2008. Because of the surcharge mechanism, that price has dropped fairly steadily since. The average price of steel was about $855 per ton in October. There's at least another $200, possibly $300 on the table which is likely to be taken away.
Scrap. The driver for this steel price reduction is scrap price declines between July and early mid-November by $450 per ton. Electric arc furnace (EAF) steelmakers like Nucor and Steel Dynamics that use scrap as their primary material reduced their surcharges on scrap. The price of scrap has gone about as low as it's likely to go, with the price of No. 1 heavy melt at $90 a ton and the price of high-quality scrap grade, No. 1 busheling at $125 per ton.
The interesting thing is that both grades of scrap have gone way below the threshold price that triggered the surcharges on carbon steel in 2004.
Raw Materials. In terms of blast oxygen furnace (BOF) raw materials, in June iron ore fines were about $120 a ton. The latest spot pricing on iron ore fines, including freight transactions primarily involving China, has been at or below $70 per ton. While still growing, China is in a noticeable economic slowdown. It produces half of the world's integrated steel and therefore it buys half of the world's iron ore.
The other factor of lower iron ore pricing is a large number of expansions or new projects coming on in the iron ore sector.
Prices. Spot prices are among the most important determinants of where prices will go, so these spot prices—about one-third below the current contract price, factoring in the price of freight—are indicative of what may happen with steel from the BOF mills with the next annual contract that will take effect on April 1.
Exposed automotive or appliance steel products are really the 100 percent domain of integrated steel mills, or BOF mills. These prices are not going to go down quite as soon or by as much. That is because although BOF mills are moderately affected by reduced scrap and energy prices, the iron ore and coal prices will be more of a factor and the raw materials prices are not falling by as much as scrap prices.
All the integrated steel companies in North America will continue to operate through the end of March 2009 with metallurgical coal and iron ore pricing fixed since April 1 2008. So BOF mill prices will not really be determined until April when the new iron ore and coal contracts are signed.
Integrated steel mills such as ArcelorMittal, U.S. Steel, and AK Steel are being squeezed in this scenario in that they're operating in the spot market but they're operating largely under fixed pricing contracts for their raw materials—metallurgical coal, coke, and iron ore. Typically, only about 20 percent of their raw material is in the form of scrap, and of that only about 40 percent is purchased on the open market. So they're paying the same fixed price while the spot price is declining.
For the integrated mills, a very significant part of spot prices in the second quarter will be that they must compete with steel made by electric arc mills, and so will be subject to these more severe price declines.
The scrap-driven spot hot band price which peaked at nearly $1,068 in July is likely to fall to $500 to $600 per ton during the first quarter before bottoming out. In a worst-case scenario, prices are not likely to drop below $450 per ton. We don't see prices moving up to any significant degree, probably remaining within that range for most of 2009.
Then at the end of the first quarter, the added impact of reduced contract raw material pricing will show up in the market; for iron ore, down 15 percent to 20 percent. Metallurgical coal contracts that have not been signed yet may be down possibly 10 percent to 15 percent.
Pricing in the contract markets is expected to be down probably by at least 10 percent for 2009 from 2008.
Overall, bargaining power is shifting more toward the buyers. Steel pricing will probably continue to decline through the early part of the first quarter, at least.
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Stainless Steel. Stainless steel shows the same general picture as carbon steel; that sharply reduced demand and reductions in raw material pricing. Probably one-third of the stainless market is consumer related; and the other two-thirds are primarily petrochemical and industrial markets which will lag in terms of their recovery.
More than half of the price of stainless is in the form of a surcharge for all of the alloying elements, plus scrap and energy. Again, the surcharges are based on the average of all of the mix of alloys and energy price changes of the prior two months. So there's a rolling, moving two-month lag, but you can clearly see where things are moving because you know where the prices for the energy and alloys are today.
The raw materials, are nickel and chrome, primarily, and, in most cases, scrap rather than virgin nickel or chrome. Nickel, chrome, manganese, and titanium scrap prices have gone down considerably. The most commonly used stainless steel scrap, 304 solid, was trading mid-November at just under $1,700 per ton, whereas the July price was $2,700, so it's lost $1,000 of value from the price peak mid-July.
Nickel peaked in April at $13.04 per pound this year. In mid-November, nickel was down to $5.17 per pound. The record peak was in May 2007 at $23.65 per pound. So that's a dramatic change in all of these.
Nickel prices for 2009 will drop below $5 per pound, and then average only slightly above $5 per pound.
The most common type of stainless consumed is cold-rolled (CR) grade 304 coil. That peaked in May at $4,375 per short ton, including surcharges. The price for that same product dropped to $3,950, so it has been dropping off pretty steadily.
We see stainless steel CR 304 steel prices bottoming out somewhere between $3,000 and $3,500 per short ton by the end of the year, mid-first quarter 2009, and stabilizing for 2009.
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Aluminum. For aluminum, as for all of the commodities, we're seeing sharply reduced demand at a time when a lot of new capacity is coming on the market.
Aluminum pricing peaked this year at $1.49 per pound in July. The daily trading rate as of mid-November was around $0.88 per pound (LME current 3-month cash market basis), so they've come off quite dramatically, now down by more than a third.
Aluminum end markets are a bit different from steel, with construction, aircraft, and beverage cans being significant factors. But the situation for aluminum is fairly similar. They're all in a significant correction and a relatively weak year for 2009 for prices. We think the consumer-related demand will bottom out sometime in the first half of the year and that pricing will bottom out in the first quarter.
To the extent that these metals are related to other markets—commercial construction and industrial equipment, the timing of the trough and the recovery will be longer than what we'll see in the consumer-related items.
Next year for both, aluminum prices are likely to reach their trough point, somewhere around $0.85 per pound. Ultimately aluminum will probably trade next year between $0.85 and $0.95 per pound.
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Copper. Copper prices were down to $1.70 in mid-November. Copper peaked at an average monthly price of $3.94 per pound in May (LME cash price).
Next year prices will be getting close to their likely trough. We're projecting copper to bottom out at $1.50 per pound in the first quarter, and then hold up within that $1.70-per-pound general range without much upward recovery in 2009.
The general theme here is that all metals prices are near their troughs and will probably not bounce back for a couple of quarters going forward. For most of 2009, metals prices will be at or near these trough price points.
Producers are making unprecedented levels of production cutbacks, not only in the U.S., but around the world in China, India, Russia, Brazil, Ukraine—places that, historically never have experienced such coordinated cutbacks. These cutbacks are coming at company levels at a magnitude of 20, 30, and 50 percent of total company capacity.
Producers are attempting to get the supply/demand balance in line as quickly as possible. But the reality is, getting the supply in line with a sharply reduced level of demand is not likely to show significantly in 2009.
For metals consumers, the lower prices are good news that will be tempered by the fact that they're going to be facing lower demand and prices for their services and products.
managing director,
Metal Strategies Inc.
Christopher Plummer is managing director of Metal Strategies Inc., 515 N. Locust, Suite 1, West Chester, PA 19380, 610-719-9800, www.metstrat.com. Metal Strategies is a management consultant firm to the steel, aluminum, metals, raw materials,and end-using industries.
cplummer@metstrat.com
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