HardAssetsInvestor

This segment was taped at the American Stock Exchange, which offers trading across a full range of equities, options and exchange-traded funds.

Mike Norman (Norman): Paul, you were talking in Part I of this interview about continued strong demand for steel despite forecasts for a recession―a very fascinating idea. Price trends have been continuing to rise. Let me ask you something. In many other commodity markets, we have seen an element of speculation contributing to price increases. Do you see that at all in the steel market?

Paul Quartararo (Quartararo): Well, the only real area where we see speculation is when you have had these increases in price trends domestically, where you normally have a three-month lead time from the point at which you place the order to the point at which you get it.

Let’s say, for example, that it’s April, and we are pricing steel from the domestic steel mills: I would have my fixed price in April, and I wouldn’t get the steel until June. Where we see speculation happening is for that same production period. I could buy import [steel], and if my import price is the same or a little bit less, I would buy at April but that material wouldn’t come in until August. So if I order from a domestic mill, I get my material in June. If I order the import, I’m getting it in August. In those two months, the domestic market could increase even further, so by the time that material lands, I would have a nice spread on my material.

Norman: But that represents people in the trade itself who are operating in the markets either to cover their physical needs or to speculate on price movements. Let me ask you something: Getting back to country-specific demand, is the United States the largest consumer or have we lost that position?

Quartararo: Over the years, we had lost that position. Now China is the No. 1 steel consumer in the world, and we’re going to see probably India in second place in the very near future. The U.S. is becoming a smaller and smaller player as far as consumption is concerned in the global arena for steel.

Norman: Do we produce enough steel in the United States to meet our own consumption needs or do we import?

Quartararo: Right now the manufacturing capacity in the United States can only satisfy approximately 75% to 80% of typical demand. That’s not anticipating any uptick in the economy or in future demand down the road. So without imports coming in, there’s about a 20% shortage in the U.S. market.

Norman: That’s significant.

Quartararo: Absolutely, and with the value of the U.S. dollar decreasing, there has been less and less import [steel] coming into the United States.

Norman: Why is that? Is it just that producers want to sell into a higher-priced currency? I was going to ask you about the dollar effect: Is it impacting our ability to get steel into this country?

Quartararo: The foreign mills have other alternatives to get higher-priced currency, especially the euro. A lot of manufacturing mills―when they’ve exported to get the best bang for the buck―they’ve been going to Europe. In addition, for the mills that want to keep some consistency bringing steel into the U.S., the steel has increased tremendously. By whatever percentage point the U.S. dollar devalues, they have to tack that on to their price to us, and for the last few months, compared to the domestic price, import has not been a value.

Norman: Have steel company profits been consistent with the rise in steel prices? Because of the input costs you mentioned, like raw material costs, etc., maybe profitability is not increasing at the same pace as prices.

Quartararo: That’s absolutely correct, Mike. The profit levels have not maintained the same strength as the value of the steel because of the cost of raw materials, iron ore and energy, specifically. But what we’re going to see, I think, in the next six months, as integrated mills increase the price, they’re going to be making money.

Norman: All right. Paul, I want to thank you very much for coming on the show. It was very, very fascinating. There you have it, folks, a positive outlook for steel despite forecasts for a slowdown in the United States and perhaps around the world, but consistent with what other commodities are doing as well. Thanks a lot. This is Mike Norman; see you next time.

Make sure to check out Part I of HardAssestsInvestor.com's interview with Paul Quartararo