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2006 outlook survey: just a little off the top: MCN's Optimism Index shows little falloff in industry sentiment, which remains largely positive regarding expectations for the coming year.

Article Excerpt
HOW MUCH LONGER can the boom times last? At least another year, predict service center executives. Figures from the latest MCN Service Center Outlook Survey show that industry optimism has been trimmed only slightly by threats of a slowing economy and moderating metals prices.

Each fall, MCN polls its readers to gauge their expectations for the coming year. To quantify industry sentiment, MCN asks respondents to rank their feelings on a scale from 1 to 6. Those indicating 1, 2, or 3 fall on the pessimistic half of the scale; 4, 5 and 6 on the optimistic half. Quantifying industry "optimism" helps to track the trend in service center executives' attitudes, which affect the decisions they make regarding expansion and contraction, raising or lowering inventory levels, increasing or decreasing manpower, making capital investments, etc.

Overall, 90 percent of respondents characterized themselves as somewhat or very optimistic about their prospects for the coming year, down only slightly from 92 percent last year. About 17 percent ranked themselves at the very top of the 6-point scale, vs. 19 percent last year.

Averaging all the responses revealed an Optimism Index of 4.7 for 2006, down only slightly front last year's 4.8. Nevertheless, this is the first decline in the index, which has risen steadily since MCN began tracking industry sentiment in 2000, when the index was at 4.0. This change of direction suggests that some executives feel the market may have peaked.

Companies responding to this year's survey ranged from less than $500,000 in annual revenues to more than $4 billion. The average service center reported $169 million in sales in 2005> tip dramatically from $76 million in 2003 before the historic run-up in steel prices. Measured as a median (the point at which half the responses were higher and half lower), the typical service center is a $20 million business with 35 employees.

Pricing predictions

At the heart of the service center Industry's continuing prosperity is the unpredictable high price of metals. Service center executives have had a poor record of price prognostication in the past few years. In fall 2003, nearly all expected the price of steel to increase in 2004, but only by an average of 7 percent. The actual increase topped 100 percent as the price of steel spiked to unprecedented levels. Hot-rolled sheet reportedly hit highs over $760 a ton in September 2004, but declined to around $680 later that fall when MCN conducted its survey.

At that point, 42 percent of respondents predicted further increases in the price of steel, while 40 percent expected decreases. On average, they predicted the price of steel would remain flat or decline slightly in 2005. In fact, the steel sheet price declined by nearly one-third in the first half of the year, to about $440 per ton, but regained ground in the second half to the current $550, according to industry sources.

For 2006, service center executives are mixed in their predictions once again, with 46...

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