vendor managed inventory

According to data from MEPS (International) Ltd., a British metals industry consultancy, average prices for benchmark hot rolled coil (HRC) steel rose from about $680 per metric ton in September 2007 to more than $1,200 in July 2008. The prices have since fallen to about $670 per metric ton.

What the price reduction means is that many steel producers across the country will have to curtail production and let go thousands of workers, said Charles Bradford, president and metals analyst at Bradford Research Inc. in New York. Already, Pittsburgh-based U.S. Steel Corp. has announced plans to idle its plants in Granite City, Ill.; Keewatin, Minn.; and at Great Lakes Works near Detroit. The Granite City plant employs about 2,210 people.

The prognosis for the steel industry in the early part of 2009 is grim, Bradford said. He said domestic and international inventories of steel remain high at a time when the auto industry, commercial construction and other sectors that use the metal in large quantities have stopped buying.

“It’s pretty clear there are excess inventories of steel because producers ramped up when prices of many types of steel doubled from the fourth quarter of 2007 to the third quarter of 2008,” Bradford said. “There’s 3.4 months of supply — over 9 million tons — which is relatively small, but demand is so weak.”

One of the most dramatic drops in demand for steel consumption occurred in November, a month when sellers dumped more of the metal into global markets in efforts to reduce excess inventories. The selloff eroded prices even as demand plummeted.

“Demand in the U.S. has fallen to such an extent that the mills are currently only producing at 65 percent capacity, compared to 91 percent in August this year,” MEPS analysts noted in a report Nov. 25. “Service centers report that business has come to a virtual halt, leaving them with substantial volumes of high cost stock that they are selling off as quickly as possible at very low prices.”

As the price of processed steel has fallen, so have those of scrap metals, which many of the so called mini-millers recycle to make different types of steel. Shredded automobile scrap, for example, plummeted 70 percent, from about $443 per ton in July 2007 to about $227 in late October, according to trade publication American Metal Market.

With the outlook for steel pricing and consumption looking shaky, analysts covering the metals sector are reassessing stock ratings of many steel production and iron mining companies. That includes David Martin, an analyst at Deutsche Bank, who on Dec. 22 downgraded the stock of U.S. Steel to “hold” from “buy.” Johan Rode, an analyst at Citigroup, has retained a “sell” rating on Luxembourg-based ArcelorMittal, the world’s largest steel producer.

“Steel production cutbacks, raw material inventory de-stocking and weak underlying demand supports our view of lower raw material and steel prices,” Rode wrote in a research report Nov. 16. “Although we believe the production cutback will reduce inventories, it does not look like enough to return prices to 2008 levels.”