March, 2008

Back in December, 2007, Weldbend received information on the expected fluctuating state of the steel market in 2008.  At that time I told you that met coal prices were increasing rapidly, with demand far exceeding the supply.  I also told you that freight rates were on the rise and all the steel mills were expecting increases.  In February I wrote you a letter stating that Weldbend was raising prices because of increases we have received since December, and more price increases were anticipated in March or April.

In the past week some of our people have completed a trip around the world to see exactly what was happening in the steel market and specifically in the welding fitting and flange areas.  All the countries that were visited were experiencing a boom, with major construction on buildings, roads and infrastructure.  Since we returned we have begun to decipher the meaning of all of this, and we will attempt to relay our thoughts about conditions in the steel market.

The market for carbon steel product -- pipe, beams, rebar, etc., -- seems to be in a very frenzied state of fluctuation.  One of the first indications of what is happening is a tightening in the scrap metal market which, for the month of March, has been at approximately $255 for turnings and $320 for solids.  We are told that for the month of April, scrap prices are expected to rise approximately $50 a ton or more, a huge jump in just 30 days. 

We understand that a contract was given last week for scrap metal out of the United States into India/China for approximately $660 a ton.  If you remove the freight charges, these countries are paying more than $400 a ton for scrap.  If they are paying $400 now, and we understand our price will be approximately $305-$370 in April, we assume that scrap prices could easily be $400 a ton for us in the not-too-distant future.  Remember, in April, 2006, turnings were $125 a ton and $190 a ton for solids. 

In December I told you that met coal (the type used in the manufacture of steel) had risen from $90 a metric ton in October of 2007 to about $145 a metric ton FOB in Europe.  We are now told that contracts have been taken this month for $325 a metric ton for coal.

We understand that China is in the process of buying a controlling interest in an iron ore mine in Australia.  We also understand that a Canadian iron ore mill has just announced a $500 million expansion of their plant.

We have learned that in Japan a major steel producer has failed in negotiations to secure iron ore contracts for the coming year.  We are told that in normal times iron ore contracts run 4-5 years.  However, in this latest round, contracts were only offered for one year with a 30% escalation clause in the year, likely one of the major reasons why the negotiations have terminated.  Steel companies in Europe that are going through these same negotiations are having the same problems.  The biggest concern we have is that the word “allocation” has come up in several conversations, which could put further pressure on prices.  I recall a time in the late 1970’s when we couldn’t keep anything on the shelves.  At that time U. S. Steel went to allocation, making it difficult for us to get pipe.  We have not seen anything quite like this since we have been in business, because instead of a U.S.-driven market, it has become a world-demand market for pipe fittings, flanges and carbon steel products in general. 

With the probable sale of Koppel, a U. S. steel pipe mill, to a Russian group, there is a further shrinking of the ownership of steel pipe mills to a handful that would control policy.  In addition, one of the major U. S. pipe mills that supply the fitting makers will be shut down from April 12^th to May 10^th.  When they resume production, they will not be back to normal production until the 1^st of July.  They are also complaining of recent cost increases of 20%-50% for the manufacture of pipe, with special emphasis on natural gas, diesel fuel, manganese and chrome.

For insight on steel for flanges, we have to look to one of our billet suppliers, who advises us that in the month of April prices could easily go up anywhere from $65 - $100 a ton.  Although the official numbers are not out, that is where they think it will settle.  They also thought that they would have seen signs of a leveling off of prices by this time; but now they say they are not sure where it is going to stop.

If all of this information wasn’t enough pressure on the carbon steel market, on Tuesday, March 25^th, India steel makers called a truce by agreeing to stop exports, forgo DEPB (export) benefits and support reducing import duty on the steel.  The Indian Steel Alliance President reported that “in order to increase supply in the Indian domestic market and as a temporary measure to disincentivise exports, the industry extended support to the government in reducing import duties on steel along with abolition of DEPB benefits on exports.”

“The India Steel Alliance also sought fiscal and physical measures to contain exports of iron ore and asked government to take necessary steps to facilitate the establishment of additional capacity and augment steel supplies in the market.”

“Steel prices have been rising mainly due to unhindered rise in input costs.  The input costs are expected to increase further from April 1, 2008 and they have asked the government to contain iron ore exports through fiscal and physical measures.”  India in recent years has been a major exporter of finished flanges to the United States. 

The high prices have even affected us here at Weldbend.  We are installing a new piece of equipment to make large fittings, and instead of using gas to make the fittings, we have chosen to make this product with induction heat like our other forging equipment.  This is a cleaner heat with fewer emissions and less scale build-up on the product.  We have just priced 11 runs of power cable that run from one side of our building where the power enters, to the opposite side where the machine is located, and the estimate for the copper wire alone is around $88,000.  I am told just a year ago this copper wire would have been half that price.

Barring a major event, I expect prices on carbon steel fittings and flanges to rise in the near future, maybe several times.  Besides looking at the price of the product, we will also be reevaluating our terms for prepaid freight, as the cost of transportation has significantly increased since our current freight allowance was put in place.  We hope to give you a better outlook shortly.  Like you, we are frustrated by this pricing instability in the market.  We all know that occasional price increases are healthy; but we have never experienced conditions like those over the past 5-6 years, and particularly the last 3-4 months.  We will do our best to work these problems out together as we have in the past.  If you have any questions, feel free to call.

James J. Coulas, Jr.
President

You can depend on Weldbend!

www.weldbend.com