May 11, 2005|By JAY HANCOCK
THE weaker dollar, retirement of obsolete steel mills and eternal global demand from China were supposed to keep the U.S. steel industry's amazing 2004 profits from being a one-time deal.
So why did Mittal Steel Co.'s Sparrows Point plant in Baltimore County shut down large parts of its operation for four days late last month? Sparrows Point kept on smelting iron during the pauses, says Mittal spokesman David Allen, but it temporarily stopped turning it into steel. "We're adjusting to the order book," which has declined, says Allen. "We're still seeing a fairly strong economy, but there is a glut of steel out there in steel service centers that has been up to three months' worth of supply."
Steel service centers are wholesalers, and three months' supply, for the uninitiated, is a lot. As hot-rolled steel headed toward $800 a ton last fall, service centers stocked up on all kinds of product in the fear that prices would keep rising and the expectation that demand would stay smoking.
Neither event came to pass. Now, in developments that bear implications not only for Sparrows Point but the larger economy, steel marketers are cutting prices, slowing production and holding their breath.
"The market has softened considerably over the last couple of months," says Michael Locker, president of Locker Associates, a New York steel consultant. Prices, he adds, "keep deteriorating, though not at a rapid, explosive pace."
Besides its Sparrows Point pause, Mittal recently idled blast furnaces at mills in Cleveland and East Chicago.
This is usually the strongest time of the year for steel. But prices for hot-rolled steel, an industry bellwether, have fallen to around $560 a ton recently, down from more than $700 in 2004 -- although nowhere near the sub-$300 levels of two years ago, executives say. And plenty of steel is still on the distribution shelves as demand stays shaky.
"From what we can tell, it's a receding horizon as to when that excess inventory gets worked off," said an executive at a Mid-Atlantic steel service center. The executive requested anonymity so as not to risk economic reprisals from suppliers and customers.
"What the steel mills are trying to do is perpetuate happy talk" that the slowdown is short-lived, the executive said.
Certainly industry inventories are extraordinary.
This is the age of "just-in-time" delivery, when computers are supposed to tune every point in the supply chain like a Stradivarius and financial officers demand the least possible carrying cost for unfinished goods. And yet on Monday the Commerce Department reported that, on average, metal wholesalers held 1.92 months' worth of product in their warehouses in March.
That's up from 1.48 months' inventory a year previously and the highest reading since at least 1992, according to Commerce Department figures.
And the weakness isn't just with wholesalers. Steel mills do huge amounts of business directly with carmakers and other manufacturers, and those sales have been disappointing, too. Ford's and General Motors' problems, which include slow SUV sales and downgraded debt, have rippled onto the steel manufacturers.
Continuing high prices for raw materials -- iron and coke -- are adding to the pressure. Mittal, which is based in the Netherlands and bought Sparrows Point as part of its acquisition of International Steel Group in what looks more and more like the peak of the market, expects profits to slip by $25 or $30 a ton this quarter. Its stock has fallen 40 percent since February.
"I think we're going to bottom out in this quarter in terms of pricing and probably have some upward movement in prices, but nothing dramatic," says consultant Locker.
But if the market keeps deteriorating and carmakers and other big customers start renegotiating contracts with Mittal and other mills -- look out.
Three months ago Mittal boss Lakshmi N. Mittal said he intends to cut the company's worldwide work force by 30 percent -- 45,000 jobs -- between now and 2010, although he didn't say at which plants. A collapse in steel prices would accelerate the process.
The economy faces challenges across all sectors: higher oil prices, rising short-term interest rates, heavily indebted consumers. But manufacturing in particular is struggling.
Factory employment fell last month even as service companies added jobs, suggesting a tug of war in which either sector might pull the other its way. Let's hope steel trends follow those of computer consultants and Starbucks stores and not vice versa.
