“If capacity doesn’t come off First Quarter could be ugly,” was one of the comments made to me by the head buyer at a steel wholesaler this morning.

There are plenty of reasons why buyers are fretting over the most recent price announcements by Severstal, NLMK USA and RG Steel and now AK Steel.

Scrap prices have moved lower by $30-$35 per ton and perhaps more in local markets. Steel prices and scrap prices tend to move in tandem – although they have not been moving in tandem over the past few months which is one of the concerns the domestic steel mill industry has as their margins have been compressed when steel prices fell and scrap prices remained essentially unchanged.

Lead times are not yet extending. Even with the normal (and expanded) maintenance schedules being planned during the later potion of 4th Quarter and a flurry of orders being placed over the past week – buyers still consider the existing lead times as either being “normal” or shorter than normal. The key in a steel buyer’s psyche is seeing lead times moving beyond their comfort level. SMU spoke with one buyer this afternoon who told us they would be buying their December needs “sometime next week”. They did not yet feel any need for a sense of urgency.

A manufacturing company which is a large buyer of spot tonnage told us over the weekend, “The folks who did not move this week, may find themselves unable to get steel if they need it in December. Then they will either pay the price (once December is closed at major mills, anyone with available tons will be selling them at a premium) or not have steel. This along with some New Year restocking pushes the momentum through January and into early February.”

Supply is not coming out of the marketplace. ArcelorMittal and US Steel have both made statements during their recent conference calls with analysts that they did not see a need to remove supply from the market and they were comfortable with existing production levels.

Many of the steel buyers we spoke with earlier today view the current domestic mill supply situation as one where there is an excess of capacity. Steel buyers worry that the excess supply will ultimately keep lead times short and then will negatively impact steel prices.

There are some who believe demand is growing, foreign supply is shrinking and the market will find itself back in supply/demand balance by sometime during the 1st Quarter 2012. A large service center provided us with thoughts on the subject over the weekend:

“This week's announcements are a good reminder that low prices cure low prices. However, any changes in market fundamentals are eluding me. The market has been slightly out of balance with excess production. This might be in the early stages of getting addressed as a rolling average of weekly production is migrating lower. I'm anticipating more growth in steel consumption next year, and I am more optimistic on the question of GDP than many. The market should back into balance in Q1.”

The debate will continue over the weeks ahead as demand for 1st Quarter comes into focus and we gauge how well the domestic mills are able to manage supply.

The Steel Market Update newsletter follows market trends like capacity issues and pricing issues on a regular basis. SMU has a special offer for those wishing to become annual members: If you sign up for membership and pay now your will receive our newsletter and access to our website until January 1, 2013. Contact Sophia in our office for more details and to register (not available online). She can be reached at 800-432-3475 (706-216-5440) or by email at info@steelmarketupdate.com