Steel price rise not safe bet

Ailing Bethlehem, other makers faced with big inventories

Steel industry

June 08, 2000|By Kristine Henry | Kristine Henry,SUN STAFF

A sharp buildup of steel inventories makes it unlikely that Bethlehem Steel Corp. and other producers will be able to implement a July price increase they announced earlier this year.

The inability to boost prices could be especially hard on Bethlehem, which has been struggling and lost more than $180 million last year.

"The price increase is dead," said Waldo T. Best, an analyst for Morgan Stanley Dean Witter.

The Bethlehem, Pa., company, along with other steel giants such as U.S. Steel Group and LTV Corp., had planned to raise prices next month about 6 percent, or $20 a ton.

A spokeswoman for Bethlehem said the officials who could comment on pricing were traveling and unavailable.

Inventories at steel-service centers - the middlemen between steel makers and steel users - rose in April for the eighth straight month to a record 8.7 million tons, according to the Steel Service Center Institute in Chicago.

"The fact of the matter is, inventories are much, much too high," said Charles A. Bradford of Bradford Research in New York.

The inventory buildup could be an indication that the Federal Reserve's interest-rate increases are having their desired effect of slowing the economy - and that means demand for products made from steel is also declining.

The National Association of Purchasing Management's monthly factory index fell to 53.2 last month - the lowest reading since April 1999. Spending on construction declined in April for the first time in seven months.

"Everything's softer, it's not just one piece of data," Best said. "Some wanted to believe [the strong economy] would continue forever, but economic data gives clear signals it's decelerating. It will grow, but grow at a slower rate, and because of that, steel demand is going to moderate."

Service centers had purchased extra steel in anticipation of price increases in the third quarter. But when economic factors made a price increase less likely, they cut back purchasing and sold more product, in effect putting even more pressure on prices.

"I think there was stocking up ahead of price increases," said Craig Shulz of the Steel Service Center. "As the economy slowed down a little, while inventories were high, service centers were not prepared to increase inventory a whole lot more."

Integrated steel companies such as Bethlehem will likely fare a bit better than minimills, Best said. Integrated mills make their steel from scratch and have long-term contracts with fixed prices. Minimills, which use nonunion labor and make their steel from scrap, are more vulnerable to market volatility.

However, minimills are able to operate with much lower costs and, even with pricing pressure, are better positioned to compete.

Bethlehem has been hit hard by high fixed costs and cheaper imports that drove down prices. It lost $183 million in 1999, although things picked up in the three months ending March 31, when the company reported net income of $3.1 million, up from a $25.6 million loss in the year-earlier quarter.

But the imports continue to pour in. More than 13 million tons of steel were imported into the United States during the first four months of the year - a 29 percent increase over the like period last year and 23 percent higher than the "crisis" year of 1998, according to the American Iron and Steel Institute in Washington.

Officials at Bethlehem have said that every 1 percent price decrease means a loss of $40 million in net sales. The company shipped about 8 million tons of steel last year.

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