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Outlook for 2007: 'a more normal year': do rising imports and inventory levels signal a downturn in demand? Despite concerns, mill and service center executives remain optimistic about next year.

Article Excerpt
THE NORTH AMERICAN carbon flat-roll market continues to chug along, though clouds are gathering on the horizon that portend at least a modest softening in the fourth quarter.

The flat-roll market is actually being pushed in two directions at once, explains Roy Platz, director of marketing for Mittal Steel USA, Chicago. "Underlying demand is still very good, although it has shifted a little in the last couple of months. Demand for anything not consumer related is extremely strong."

At the same time, he says, U.S. flat-roll steel imports are very high and service center inventories have increased every month since November 2005. "They are not currently at an outlandish level, but I don't think the inventory build is over yet. Service centers still have orders for more steel from offshore that hasn't come in yet."

Demand remains "not great, not bad, but OK," says Steve Sorvold, vice president commercial for Wheeling-Pittsburgh Corp., Wheeling, W.Va., and chief operating officer of Wheeling Corrugating Co. "While automotive is off, most of our basic customers are doing well." Third-quarter business is playing out as expected, he adds, but the "modest inventory issue" makes the fourth quarter uncertain.

Whether inventory levels are cause for concern is a matter of some disagreement. Bob Weidner, president of the Metals Service Center Institute in Rolling Meadows, Ill., admits that service center inventory levels have risen. "But shipments have also picked up. I don't think that there are excess inventories in the pipeline. By historical standards, inventories are in fairly good equilibrium," he says.

MSCI's August inventory and shipments survey showed that total steel inventories rose 4.4 percent to 15.9 million tons, while months' supply on hand declined to 3.1 months from 3.4 months (due primarily to three more shipping days). Carbon fiat-product inventories showed the biggest gain, to 9.6 million tons in August, a 6.5 percent increase from the prior month. Months' supply saw the smallest decline, falling to 3.1 months from 3.2 months in July.

September inventories are likely to fall as buyers with a "fear of dropping prices" mentality slow purchases and scale back ahead of the weakening price levels, reports Michelle Applebaum of Michelle Applebaum Research Inc. in Chicago. Ultimately, this slowing of inventory purchases--and hopefully import orders--will strengthen the flat-roll market, she adds.

Charles Bradford, metals analyst and president of Bradford Research Inc. in New York, believes that flat-roll inventories are excessive. "They are probably bigger than people think," he says, noting American Iron & Steel Institute statistics show that U.S. apparent supply of flat-roll rose 14.6 percent in the first half (excluding imports of semifinished steel) vs. a year earlier. "There is no way that with a GDP growth of just 2.5 percent you could justify a 14 percent increase in supply. It must be going into inventories."

But at least two major service center chains say their inventories are not out of whack. "If our flat-roll inventories are high, they are only about 5 percent too high, and we will probably work...

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