BY ANDREA HOLECEK, Times of Northwest Indiana
holecek@nwitimes.com
The large domestic steelmakers earned huge profits in the first two quarters of 2008 and had expectations for continued profitability into 2009. But economic realities are intervening as the year proceeds.
Both U.S. Steel Corp. and ArcelorMittal had record earnings during the second quarter 2008, and third quarter profits also are expected to be high. But steel prices slipped during September and are expected to continue declining as steel demand deteriorates in U.S. and global markets.
Steel service center inventories remain at higher than desired levels, and steel buying has slowed as consumers wait for prices to retreat as steel scrap prices drop.
U.S. Steel Corp. and ArcelorMittal stocks reached $191.02 and $101.95 a share respectively on June 25, as hot roll sheet prices were selling at record levels.
Since June, the two largest domestic integrated steelmakers shares dropped by more than half. U.S. Steel shares closed at $63.41 Thursday day while ArcelorMittal's ended the day at $40.85.
In response to the downturn of demand, mills are cutting production, with output falling to 1.986 million tons during the last full week of September. That marked an 18-month low, with some mills opting to schedule maintenance outages during the depressed buying cycle.
ArcelorMittal slowed iron production at its Burns Harbor mill recently as it relines its "D" blast furnace, taking the furnace out of production until December. The company also has announced production cuts at its Dofasco mill in Ontario, Canada.
Roy Berlin, president of Hammond-based Berlin Metals, said cutting supply is a "smart move that tightens the market," which is in a quiet spell.
"Customers aren't busy. There's no other reason than it's because of the economy," he said, adding that if steel consumers don't need supplies immediately, they are waiting to buy because steel spot prices are falling.
"I started hearing about it in late June -- about holes in August order books for flat rolled steel -- but that wasn't confirmed until July when prices started to drift down. The news I'm seeing is that prices around the world are drifting down."
In the past two months, prices for hot rolled sheet have fallen $100 or more a ton from their $1,100-a-ton high. How long and how far steel prices may fall depends on the economy, Berlin said.
"The economy drives worldwide demand," he said. "Last year around this time, demand was good around the world. It seemed demand was stronger than supply, and there seemed to be a steel shortage for 2008. Now in the last couple of months, the lines have crossed, and supply is stronger than demand. And prices are going down."
Mark Parr, steel analyst with KeyBanc Capital Markets, warned of challenges for the rest of the year and into 2009.
"The (decline) in ferrous scrap pricing and the fragile state of domestic financial markets has likely further reduced buying momentum for steel, while steel equity values have collapsed in concert with most other basic materials-related equities," he wrote in a client note.
Parr stated that investor focus will likely return "to the uncertainty around timing of a Chinese industrial rebound, the true magnitude of slowing global and domestic growth and potential implications for steel pricing after the (decline) in ferrous scrap resource costs."