Last month, I made the case for sourcing steel (and other direct materials) based on sagging demand and excess capacity. Since then, the data we’re seeing indicates the drops in production, employment and demand are worse than expected:
- US Steel Mill Capacity utilization was 36.3% for the week ending 1/3, versus a value of 88.7% for the same week last year. That means that 2/3 of the potential US steel production is lying dormant!
- The Precision Metalforming Association (PMA) December survey of 157 metals companies revealed: “The number of metalforming companies with a portion of their workforce on short time or layoff continued to increase to 54% in December-up from 42% in November and at a substantially higher rate than December 2007, when only 18% of companies reported workers on short time or layoff.”
- The primary US and Asian automakers posted December sales figures that were down 31% - 53% compared to December 2007.
In the past, those of us who follow steel production took notice when capacity dipped below 65%. So, the fact that it’s now at half that level is downright scary.
Lower mill production will eventually force steel prices higher, especially since the mills will clearly “wait-it-out” and reduce production and their workforce as needed to get prices to go up. In fact, a NYTimes article last week said mills will do exactly that. They reported that the job furloughs are hitting integrated mills the hardest and the union that supports those workers expects around 20,000 members to be on furloughs early this year.
Additionally, we can expect less scrap being created by the automotive makers and their suppliers. Lower availability of scrap will cause scrap prices to eventually rise, which will help to pull up steel prices.
What does all of this mean for steel buyers?
Since so many metals manufacturers and suppliers have tons of capacity to fill, it’s a great time for competitive sourcing…although you need to have the demand for the products (vicious circle). I’m one of the presenters for a webinar next week discussing direct and indirect categories that are hot sourcing opportunities right now. Register here if you’d like to attend.