The steel market was frustrating in July and August 2006. Analyses have been contradictory and consensus on the outlook is scarce. Yet that very ambiguity is a clear sign of things to come.

In the first half of 2006, almost every story in the trade press pointed to tight supply and rising prices. Every product—flat or long, carbon or stainless—was spoken of in the same terms. Mills were announcing price increases and buyers were grousing, but admitting their likeliness to cave in and pay. These themes were constant; almost no stories varied from these norms.

In recent months, this reporting trend has dissipated. There are still articles about price increases and tight supply, but there are also stories of improving inventory positions. Creeping into the rising price stories are signs of buyer resistance; moreover, there is no over-arching trend for all products. Stories about the sheet market are weaker than those for plate; structural is stronger than most for bar. When relying solely on the present coverage, predicting the future of the market seems difficult. But when placing these events in the context of recent history, a turning point has clearly emerged.

Every steel cycle produces the same analysis: two (occasionally three) quarters of stories about tight supply and rising prices, a few quarters of only negative press, and sandwiched in the middle are several months without a clear trend. We have seen the strong stories, we are now seeing the confusing stories, and by the fourth quarter we will see the negative stories.

Global Insight expects cyclical weakness in the steel industry to begin in the fourth quarter of 2006, with inventory having moved fully from tight to adequate at that time. Prices will decline modestly, for current highs can only be sustained when supply is tight. Despite cyclical easing, structural fundamentals are still strong, and so the downturn will be mild.

The ambiguous stories are an indicator of the turning point, but they are not the only sign. Our expectations are reinforced by some rather non-ambiguous trends. First, global production is higher, and not just in China. Year-to-date tonnage through July was up 19.1% in China and 4.7% in the rest of the world, including a 9.4% rise in the United States. Second, imports to the United States are up an astounding 37%. The effect of all the added tonnage is to turn deficit inventories into balanced inventories. And lastly, another indicator is the drop in scrap prices, a direct influence on surcharges and steel prices.

Raul Dary

24 Hartwell Ave.
Lexington, MA 02421, USA
Tel: 781.301.9314
Cel: 857.222.0556
Fax: 781.301.9416
raul.dary@globalinsight.com

www.globalinsight.com and www.wmrc.com