Steel - Get Ready for Hard Times

Today, Novamerican, a large Canadian steel producer, reported 3rd quarter financial numbers. Novamerican reported a drop of revenue of 5.2%, but found a fall in net income of over 80%. Sounds remarkably odd, doesn't it? Well, this is the financial result of a company that has been in the situation of surplus within its industry.

Recently, within the steel industry, companies have been trying to shed excess inventory within the market under very unfavorable conditions. Prices of steel tonage have been at very low levels since the beginning of 2004, and companies sitting on this inventory have been looking to sell at higher market prices. Prices were "artifically" low, so to speak, as energy prices were lower, and the amount of steel on the market was quite high - a result of producing as much as possible while the prices of production implements were low. As the prices of natural gas - a very important implement in the production of steel - have risen quite rapidly, the cost of producing steel has increased, which, along with market pressures as a result of the surplus, have driven prices of current inventory back to pallatable levels for manufacturers.

However, current inventory levels are declining, and the level of production has been lower than in recent quarters within the industry. Combine this with the higher cost of production, and I believe hard times are coming for the industry in the form of a shortage of domestic steel - and an opportunity for foreign manufacturers to dump steel in our market.