SMU Price Momentum Indicator Adjusted to "Lower" from "Neutral"
Steel Market Update has adjusted our SMU Price Momentum Indicator to "Lower" from "Neutral". Our expectation is flat rolled steel prices (hot rolled, cold rolled, galvanized and Galvalume) will move lower over the next 30-60 days.
The following was taken from the most recent issue of the Steel Market Update newsletter which was published on Sunday evening:
One of the most difficult challenges SMU has is with our Price Momentum Indicator. There has to be a balance between keeping buyers appraised of changes in the market dynamic without becoming a factor in moving prices based on our judgment of the data we collect from active buyers and sellers of steel on a daily basis.
So, what is SMU seeing and hearing which is causing us to move our SMU Price Momentum Indicator from “Neutral” to “Lower” at this time?
Last week all of the products we index – hot rolled, cold rolled, galvanized and Galvalume – saw a break in the upward trend which had been with us since mid-November 2011. SMU had hot rolled down $5 per ton, cold rolled lower by $10 per ton, galvanized by $10 and Galvalume dropping $5 per ton compared to the prior week. Ours was not the only index to pick up signs of a slowdown in flat rolled. Prices moved lower at the CRU (galvanized) and Steel Orbis (hot rolled) while Platts was flat on cold rolled and only up $3 on hot rolled for the week.
Scrap prices are reported to be dropping $30 to $50 per gross ton which in many cases puts scrap pricing back to early December levels. Scrap prices impact the psychology of the market, especially for larger customers who are able to provide large volume buys and in doing so tend to be at the all important lower end of the price range.
A large service center located in the center of the country explained how scrap prices can affect the market prices in an email to us on Friday, “Still stable with mills for the moment with pricing mostly around $37.00-37.50 [$740-$750]. I think this is one of those moments in the markets where small and large users are being offered close to same. Lowest I’ve heard is just under $36 for large volume. With scrap news out, perhaps the higher volume lower end may start to tumble. Minis have shorter lead times and order books vs. integrated [steel mills].”
As we have discussed in the recent past, the impact of RG Steel Sparrows Point coming back into a market after shutting down the hot end of the mill for a few weeks will be felt in the coming months. The mill had orders on the books – orders taken back in November at much lower numbers than what exists in today’s spot market – which will keep the mill busy for a number of weeks. Most customers do not want to cancel the lower priced orders. As they start taking orders for new production we are hearing from their customers of prices at the lower end (or beyond the lower end) of our range. We are already seeing other mills in the area beginning to react to the competitive situation.
The flat rolled steel industry reacts many times to what buyers and sellers believe the market to be. The psychology of the market had been for prices to move higher but this has changed in the past couple of weeks and is no longer the case. We noted the change in last Thursday evening’s SMU when we pointed out the erosion of those believing prices would exceed $750 per ton during this cycle. During the middle of January only 7% of those responding to our survey believed prices would peak at $750 per ton (or below). The survey concluded on Thursday of this past week saw those now pegging $750 as the top of the market cycle at 32%. SMU believes this to be an indicator of a shift in the psychology of the market.
The change in the psychology of the market is not exclusive to the service center segment of the industry. SMU received an email from a large manufacturer who explained what they are seeing now and what it means to them going forward:
“Every mill two weeks ago was offering $780 for quotes with 30-60 day validities, today they are at $760-$740. Mills never quote a forward price lower than the current price, usually $20 or more higher. Simple psychology, if they tell you your price is coming down in 30 days, the fear is you will just wait (if you can) or worse yet cancel or re-price orders on the books. The current forward pricing we are seeing does not support any additional increases, and in fact indicates the mills are expecting prices to go down. In discussions with some mill execs, the consensus is the March price will be rolled over into April. The “March” price started out at a firm $770 and will finish the month at something closer to $740. April prices at best will be at the $740 number, but we are expecting to see offered prices closer to $700 in the next 30 days as scrap drops and availability of all raw materials increases.
Imports in March and especially April will decrease lead times and force prices well below $700 by early 2Q. There are several cargoes coming in unsold both to the WC and the Gulf.
In talking to the mills in the last week, I got the impression they were happy with their first quarter and they are making money. They do admit that the price is going to go down, but feel lower scrap prices and slightly higher utilization rates will compensate. They all agree that imports, scrap prices, and RG steel could contribute to a deeper drop in prices later in the year, however these are all out of their immediate control. No one is looking much beyond what will probably be a profitable 1Q . Most of our suppliers would prefer to discuss market share and tons in 2q rather than the price. In 30 days pricing power will pass to the buyers and we will be in a buyer’s market through the summer into the fall. We are still betting a $750-$650 range in HRC prices for the year.”
The steel buyer above speaks to the unsold imports which will be hitting the docks in the coming months. SMU spoke to a number of trading companies this past week who also told us to expect high import tonnages during the months of February, March and April (when market prices began moving higher in November and December domestically foreign import prices did not move in tandem and therefore foreign became more attractive and the risk of domestic price erosion fell). At the time (November/early December) one trading company executive explained taking a position on low $600’s Russian hot rolled as a “no brainer” as domestic prices began rising.
The Hot Rolled Coil Future market is also reflecting the change in the psychology of the market. According to Andre Marshall, CEO of Crunch Risk, LLC (and our Hedging Price Risk Instructor) July and August futures sold on Friday at $665 per ton ($33.25/cwt) while March and April were being offered at $700 per ton ($35.00/cwt) and were not able to be traded at that level.
Steel buyers need to be aware there can be regional competitive differences which allow prices in the Upper Midwest to remain higher than those in the East or Southeast. We believe over the next 30 to 60 days all regions will be impacted. SMU is not yet a believer in a wholesale collapse in the current price structure in the short term. Longer term we will allow the market to determine how far and how fast prices could drop.
It is SMU opinion the domestic mills will attempt to roll March pricing into April. At this point, that appears to be the most optimistic result the domestic mills can hope for.
Steel prices over the next 30-60 days are poised to move lower and we have therefore adjusted our SMU Price Momentum Indicator from “Neutral” to “Lower”.
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