Steel Market Update (SMU) changed our SMU Price Momentum Indicator from Lower to Neutral on Tuesday of this week.

SMU has been in New York City over the past couple of days meeting with the financial community and hosting one of our Hedging Price Risk workshops. The result being our newsletter was a bit hurried (and you may have noticed came out much later than usual). So, you may not have noticed we adjusted our SMU Price Momentum Indicator to Neutral based on our opinion that one, or more, domestic mills were about to announce price increases.

Our move to Neutral means there is a potential for the market momentum to change. In this case the change would be from Lower to Higher if the mill(s) are successful in putting a bottom to the market slide and reversing course thus collecting prices higher than where they had been.

We go to a Neutral indicator as it is not necessarily a given that the mill(s) will be able to collect all or any of the prices announced. We also go to a Neutral position because the fact that at least one mill is taking a commercial position many times results in a bottom being achieved (at least temporarily).

Because SMU happened to be in a setting with a number of steel buyers – both end users and service centers – at the time of the announcement, we got to see firsthand what happens as buyers come off the sidelines. The BlackBerry’s and iPhones were quite busy and we actually witnessed thousands of tons being placed within a one hour time span.

Our Neutral position is a recognition of the psychology of the market and we will need to wait and see how mill order books are impacted as reluctant buyers all of a sudden have a reason to conclude their contract and spot purchases for December and into First Quarter 2012.

Does this mean SMU ranges and indexes will rise next week – Probably not as the first business which gets transacted are those quotes which have been “open” for a period of time and where relationships exist to hold the prices at the originally quoted price. Our range on hot rolled announced on Tuesday evening was $600-$640 per ton ($30.00/cwt-$34.00/cwt). The deals we are aware of were getting done today (Wednesday) within that range – not lower (unless there has been a specific negotiation on extras which pushes the base number under $600) and not higher.

We expect the mills will be busy on Thursday and Friday both evaluating the move made by Severstal as well as how they will react to the surge of orders they may be asked to book on outstanding quotes.

It will be an interesting next week or two as the market starts to shake itself out and determine whether there is enough demand to fill the order books. If not, then someone is going to have to cut supply or prices will crash and both buyers and sellers do not want that to happen.

We will remain at Neutral until we have a clear indication as to the trend for prices over the next 30-60 days. We encourage buyers to listen carefully to their mill reps and management as they try to explain/justify moving prices at this time. This will be your first key as to whether the domestic mills will be able to push numbers – even with falling scrap prices, lower world iron ore spot prices and questions regarding the supply/demand balance for flat rolled steel products.