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With steel output down, buyers are driving the deals


North American steel producers heard plenty of frightful economic news as 2008 drew to a close. Some fear that a stronger U.S. dollar combined with lower freight rates and lower global steel prices opens the possibility of more low-priced steel imports heading this way.

The global financial crisis and tight credit market helped contribute to weakening demand from most steel customers, an equation that helped send steel prices down from a peak of around $1,100 per ton for hot-rolled sheet in August to around $650 per ton by late November.

Steel producers responded to the demand sag by quickly moving to cut production, with predictions pointing to reductions of up to 50 percent of North American steel capacity by January.

The production cuts, however, led to some positive signs. Lakshmi N. Mittal, chairman and chief executive officer of ArcelorMittal SA, Luxembourg, said the cuts showed the industry was more flexible than it had been in the past, able to adjust to weakening demand in a matter of weeks rather than months.

That also led to some good news in terms of costs of fluxing materials, refractories, electrodes and other consumables. Lower steel demand means less production, and less production means fewer purchases of those materials.

"It's not rocket science," said John Ferriola, chief operating officer of Nucor Corp., Charlotte, N.C. "The basic laws of supply and demand are still in effect. When demand for those kinds of things—demand for raw materials or fluxes or electrodes or other consumables—goes down, supplies get a little higher."

That happened for steelmakers in the latter stages of 2008. Several producers found themselves in a position to cut better pricing deals on electrodes, fluxes and refractories.

"Some of these guys are talking to us now," Keith Busse, chairman and chief executive officer of Steel Dynamics Inc., Fort Wayne, Ind., said "Even the energy companies are talking to us. But I think most of those folks (providers of materials) understand that there is a recession going on. They've looked at the forecasts and they see where things are going. People are uncertain because of the economic crisis and in some cases, because supplies of these things are a little higher than they were, we're getting a chance to make some deals at lower prices."

That wasn't the case earlier in the year, when strong steel demand, together with rising raw material costs, drove steel prices to their summertime peaks. Raw materials were in shorter supply, as were consumables, because most steelmakers were running at close to capacity.

"We don't see an issue with availability," said James Hrusovsky, president and chief executive officer of Severstal Columbus, Columbus, Miss. "Everyone has cut back, and in that environment there is less need for electrodes and other consumables. My opinion is that we have not seen the full impact of this (financial crisis) yet."

Ferriola pointed out that about 60 to 65 percent of Nucor's steelmaking costs revolve around the cost of scrap. Its other costs are move variable, leaving it with a low percentage of fixed costs compared with what most integrated mills face.

"The costs of these materials are variable," he said. "The prices, like with raw materials, are a function of production. When mills are producing at high levels the prices for these things go up, and in times like these—when production is down—the prices come down. We've gotten to the point where our suppliers are coming to us now and showing a willingness to work with us on price."


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