Impasses or Just Lousy Demand?

April 17, 2007
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A read of Purchasing.com items paints a clear picture. Suppliers have been aggressive all though the 1st quarter with price increases, yet basic demand is waning and all indications are that a significant cyclical downturn is under way. Here are some representative remarks from this source.

Chemicals Flash Report (April 2, 2007): Imminent global oversupply of ethylene may throttle prices of olefins, derivatives

North American petrochemical industry sentiment is shifting towards concern about a probable demand downturn, a secular shift towards expanded Middle East and Asian production and the probable need for capacity rationalization in such industrialized regions as North America and Europe. Most petrochemical market analysts believe the peak of the current ethylene and chlor-alkali cycle is over and the long cyclical decline is searching for a bottom. For buyers, this scenario suggests overexpansion of world supply and slippage in market prices. An analyst forecasts that “the recent slowdown in U.S. economic activity, falling real estate sales, inflation, and rising interest rates all put pressure on chemicals consumption and, consequently, on demand.”

Steel Flash Report: Cost-driven price hike are taking hold; buyers won’t make it easy for the mills

Steel prices are beginning to emerge from their winter hibernation as steelmakers work to offset higher costs of iron ore, scrap and energy. However, end-use buyers are not paying the prices yet that are being quoted throughout the marketplace. That’s because demand for carbon and alloy steel products is weaker than the mills believe—which is why the inventory correction is taking longer than expected to eliminate the overhang. Steel prices actually paid increased for 44% of the buyers polled in March, the highest such response in six months. But, the price push is cost based since the North American sheet, plate, bar and structural steel market sectors remain overstocked. That’s why we believe only a portion of the announced price hikes worked their way into the marketplace in March.

Also on steel:

“While the mills think that everything is going to go boom again, our customers are not responding positively to price increases or extended leadtimes,” says Bill Sutfin, director of purchasing at distribution firm Kelco Metals Inc., Gary, Ind. Analyst Chuck Bradford at Bradford Research/Soleil Securities in New York adds that “steel buyers are concerned that the mills have increased their prices too much and too fast. Thus, they may be pulling back their purchases next month as their inventories remain high.”

The steel market really isn’t all that strong as only 34% of the buyers polled plan to increase their bookings through April—while 16% plan to less buying and 50% plan to book only what they bought last month. Most steel buyers at original equipment manufacturers (OEMs) say their steel inventories remain in oversupply and they will be reducing stocks over the next six months. Sixty-five percent of the buyers polled by the Institute of Steel Management in February thought their steel inventories were too high for demand and 66% surveyed by Purchasing Magazine in March said the same.

√¢‚Ǩ≈ìIt√¢‚Ǩ‚Ñ¢s a strange market,√¢‚Ǩ¬ù admits Tom Moseley, vice president of sales at the MST Steel Corp. distributorship in Warren, Mich., √¢‚Ǩ≈ìsince demand doesn’t seem that strong but increases in shredded steel scrap prices of more than $80/long ton since January are causing mills to all announce price increases for March and April.√¢‚Ǩ¬ù And that has resulted in buyers grousing that the mills aren√¢‚Ǩ‚Ñ¢t paying attention to supply-demand realities.

Aluminum:

In a note to clients this morning, analyst Mike Gambardella at J.P. Morgan Securities says that “new aluminum mill orders remain weak compared to the last few years; mill orders are down nearly 20% compared to March 2006 and mill orders for the first quarter are down almost 15% compared to the same three months of 2006.”

Automative End Market and Trucks:

The automotive end market remains relatively soft as the Detroit Big 3 move along with expected production cuts and the commercial vehicle end market is weaker than last year due to the massive pre-buy of heavy duty trucks in 2005 and 2006 in anticipation of stricter (and more expensive) electric power system, or EPS, emission standards that came into effect this year.”

Truckmaker Freightliner recently said orders for its biggest on-highway trucks had been weaker than expected so far this year and that the company was cutting second-quarter production. Chrysler’s Truck Group which includes Freightliner, expects that the Class 8 segment of the U.S. truck market will decrease by as much as 40% this year. Navistar expects sales of medium and heavy trucks to decline 24-28% from 2006. Tier one supplier Arvin Meritor is laying off workers and citing a declining truck market as the reason.

Diesel engine maker Caterpillar has forecast a 48% drop in North American truck production in 2007. And Cummins continues to forecast as much as a 50% drop in its heavy duty engine shipments in 2007, spokesman Mark Land told Reuters recently. “We don’t have any reason at this point to alter that view.” In the same report, Stoney “Mit” Stubbs, CEO of Fort Worth, Texas-based Frozen Food Express Industries, said, √¢‚Ǩ≈ìThere are still too many trucks out there on the highway√¢‚Ǩ¬ù and his company plans to purchase only a few 2007 model trucks late this year after “quite a bit” of advance buying last year.

After visiting the Mid-America Trucking Show, the largest U.S. conference for the industry, last week, Ann Duignan, an analyst at Bear Stearns, wrote that “the industry is very concerned about the outlook for Q2’07 and even Q3’07.” “There is very little interest in the marketplace for 2007 trucks.

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