Although positive signs are emerging, the turnaround in metals industry activity remains a fragile one and many metals service centers continue to cut inventory.

While overall steel production and metals shipments are gradually improving worldwide, the major indicators for business activity in the metals industry remain far below their pre-recession levels. The metals recovery is set to be a slow and fragile one, but the prospect of increasing output and trade may signal a return to market stability in the near future.

According to the latest report from the Metals Service Center Institute (MSCI), shipments of steel and aluminum from metals service centers in the United States and Canada increased slightly last month. U.S. August steel shipments rose to 2.55 million tons versus the July total of 2.5 million, but remained 42.3 percent lower than in the same period last year. Service centers also continued to destock their inventories, hitting a record low of 5.62 million tons in August and leaving steel inventories with a roughly 2.2-month supply.

Aluminum service centers performed similarly in August, shipping 85,800 tons, a decrease of 38.8 percent over the same month in 2008. Aluminum inventories fell to 261,200 tons, slightly below the July stock levels and constituting a three-month supply. Respectively, steel and aluminum inventories were 42.6 percent and 42.4 percent lower than in the same period last year, the MSCI reports.

Meanwhile, the latest monthly data from the World Steel Association (worldsteel) shows that crude steel production levels in August made modest gains over July. The U.S. produced 5.2 million metric tons of steel in August, up from the July total of 5.04 million but still 40 percent below August 2008 production.

Overall crude steel production among the 66 countries included in the worldsteel report rose from 103.9 million tons in July to 106.5 million.

Much of the worldwide increase may be attributed to China, which produced 52.3 million tons of steel, 22 percent more than in August 2008 and the highest amount of crude steel the country has ever produced in a single month.

“When governments, especially China, rolled out stimulus packages, steelmakers saw an opportunity to bring production back online, after having made steep cutbacks earlier in the recession,” the Wall Street Journal notes.

However, the gradually improving steel output over the past four months has also elevated certain expenses. “Higher steel production led to higher demand — and prices — for raw materials needed to make steel, particularly iron ore. Spot prices for iron ore rose to $110 a metric ton in July from $60 a metric ton in March,” the Journal explains. “Those prices have since fallen 18 percent to about $90 a metric ton.”

Rising demand for steel due to the federal government’s “cash for clunkers” program also boosted production levels among U.S. steelmakers. But now that the program has ended, some experts worry that increased steel production levels may exceed demand.

“Aside from automotive, and a few other smaller pockets, there hasn’t been a real pick up in end-user order activity. There’s a meaningful amount of capacity coming online and we’re somewhat concerned that it may have gone too far,” Luke Folta, a steel analyst at Longbow Research, recently told Reuters.

Steel imports have already seen a decline. According to the Department of Commerce, the value of U.S. steel imports fell to $0.8 billion in August, down from $1 billion in July. As of July 2009, the year-to-date total of imported steel came to 8.7 million metric tons, significantly lower than the 17.1 million tons imported over the same period in 2008.

Nonetheless, there are some positive indications for the metals industry, as output continues to rise and additional demand for certain metals may be on the horizon. The latest monthly figures from the American Iron and Steel Institute (AISI) show that in July, U.S. steel mills shipped 5.27 million tons, a 9.9 percent increase from the 4.8 million shipped in June.

AISI’s month-to-month comparison indicates that hot dipped galvanized sheet and strip steel shipments rose 5.8 percent, hot rolled sheet gained 6 percent and cold rolled sheet increased 15.9 percent in July.

Many steel companies also expect to see improved demand for hot rolled, cold rolled and coated sheet products as General Motors Co. increases factory operations in Michigan, Indiana and Kansas in early 2010 to make up for lost production in 2009, Purchasing.com reports.

As demand picks up and output continues to rise, metals service centers may soon stop cutting into their inventory levels. “I think it’s fair to say that the bulk of inventory destocking is behind us,” Folta told Reuters. “If you look at stock inventory levels at the distribution level, they are very low.”

Earlier

North American Metals Service Centers Continue to Destock

“Cash for Clunkers” Plan Said to Have Beat Expectations

“Cash for Clunkers” Closes Out

Research

Destocking Continues at U.S., Canadian Metal Centers
Metals Service Center Institute, Sept. 17, 2009

August 2009 Crude Steel Production
World Steel Association, Sept. 21, 2009

Steel Prices Drop, Reversing Course in Sign Mills Ramped Up Too Quickly
by Robert Guy Matthews
The Wall Street Journal, Sept. 14, 2009

U.S. Steel Sector Wary About Post-Clunkers Demand
by Carole Vaporean
Reuters, Sept. 11, 2009

Preliminary: U.S. Imports for Consumption of Steel Products August 2009
U.S. Department of Commerce, Sept. 22, 2009

July Steel Shipments Up 9.9 Percent from June
American Iron and Steel Institute, Sept. 16, 2009

Steel Sheet Purchasing Will Expand as the Year Closes
by Tom Stundza
Purchasing.com, Sept. 23, 2009