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CRML SHEET If there is light at the end of the tunnel, it’s flickering

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Niche markets face their ups and downs, and the downs can become pretty severe in trying economic times. The cold-rolled motor lamination (CRML) sheet market is a prime example.

A combination of factors—the weakness of the U.S. dollar, a lagging residential construction market and a shift in operations offshore—is driving the niche market to shrink from its already small standing, according to analysts. The exact size of the market is somewhat hazy.

"It used to be a market of about 1 million tons or so," Patrick McCormick, joint managing partner at World Steel Dynamics Inc., Englewood Cliffs, N.J., said. "But because of the international play—the weakness of the dollar—you're seeing the market shift to the point where it's no longer a 1-million-ton market in the U.S. It's about 30 to 40 percent of that. I'd say 600,000 tons per year is a reasonable number, and it's getting smaller."

CRML's most popular use is in household appliances, but it also is used in some industrial applications, like large motors and transformers.

With residential construction lagging, appliance business hasn't exactly been booming. And the near-term prospects for residential construction aren't bright. U.S. housing starts sank to a seasonally adjusted annual rate of 1,006,000 units in December, down 38.2 percent from 1,629,000 units in the same month a year earlier, according to U.S. Census Bureau data, and down 14.2 percent from 1,173,000 units in November 2007 following a 7.9-percent decline from 1,274,000 units in October.

"It's a market very dependent on housing because of all the motors in appliances, HVAC (heating, ventilation and air-conditioning) and others," McCormick said. "It's also a very cost-intensive product to manufacture. When you make the laminate to make the product, often times you end up throwing 30 to 40 percent of the material into the scrap bin. It's a very cost-sensitive product for steel."

Those factors contribute to what some see as more difficult times ahead for CRML. Mark Parr, steel industry analyst at McDonald Securities/KeyBanc Capital Markets Inc., Cleveland, said the weak U.S. housing market shows no signs of strengthening soon. "To the extent that the market is impacted by residential construction, you see housing starts at, what, a 15-year or 17-year low? That's certainly not a positive sign for the market," he said.

The National Association of Home Builders (NAHB) apparently agrees with that assessment. "The December report on housing starts and building permits was fundamentally weak, showing that the housing sector exerted a strong drag on economic growth throughout the final quarter of 2007," the NAHB said in a Jan. 23 report. The group said its recent builder survey measures also were quite weak, with residential fixed-investment housing production bound to be a major drag on gross domestic product growth in the first quarter of this year.

However, "builders are anticipating a time when market conditions will support an upswing in building activity," NAHB chief economist David Seiders said in a mid-January statement. But that's unlikely to come until the second half of 2008.

The U.S. economy is a key swing factor. Some were declaring in early January that the U.S. economy was already in recession, while others had it teetering on the edge. "NAHB believes that the economy still is in the black, and we believe that recession will be narrowly averted in 2008—our recession probability is 40 percent," the group's Jan. 23 report said.

Yet while there are major hurdles to overcome, particularly with the residential construction drag, the picture isn't entirely bleak. One upside might lie in the fact that even though housing starts are down, many people are choosing to remodel their homes. As they do, the need for power tools and, at times, new appliances to go into remodeled dwellings would seem poised to increase.

"It's kind of a generally held belief that if you are not buying a new house, you are fixing up the one you are in," Parr said. "So to that extent, if people are buying new appliances that might offset the reduction in new construction activity somewhat. The central issue really is the economy. How do people feel about their job and their earnings potential?"

Pricing also could be another upside for CRML. Steel prices in general are rising, and the semi-processed CRML closely tracks cold-rolled sheet, which was selling at about $750 a ton on the spot market for March delivery, up about $150 a ton since late 2007.

"We're pretty negative on automotive and appliances—in general on consumer durables more so than the industrial side. We feel that because of the inventory drawdown at the service center level in 2007, you will see apparent demand rise. The mills will see stronger demand from service centers replacing inventory taken out last year," Aldo Mazzaferro, steel industry analyst at Goldman Sachs Group Inc., New York, said. "But the service centers will have trouble selling to the end-use markets because of weakness in consumer durables. That's why we think things like auto and appliances will suffer a little. But prices will go up. Buyers will have to start buying because inventory levels are low and there is no import out there. Buyers have to buy even in a recession to keep their inventories from dropping. They're going to have to step up buying," he said, adding "I see there being a big short squeeze. I'm very bullish on pricing."


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