Steel Service Center Discusses Flat Rolled Price Direction, MSCI Data and Steel Inventories
A large U.S. based flat rolled steel service center discusses the latest Metal Service Center Institute (MSCI) data and what we are finding at Steel Market Update in our survey of flat rolled steel buyers.
SMU was curious to learn more about the MSCI data collection and how our information compares to theirs. We asked one of our service center contacts to comment on the variances we were seeing between our data and that of the MSCI. We traded emails this afternoon and these are some of the insights into the MSCI data as well as important keys for the industry to watch going forward:
“The MSCI data does include the large centers, but also smaller members. The numbers are actually "factored" up to effectively estimate the entire distribution market. I'm not sure there is so much of a disconnect in your survey vs. the MSCI.
MSCI flat rolled inventory has been about 2.2 since Oct 09 (except weak shipment months of Dec, and July, and a strong ship month in March). In that respect, all distribution inventory has been tight and well managed. Tons have been growing, but so have shipments, resulting in that steady 2.2 months. In July, inventory tons only moved up 100k - or 2%. I think this says that July was worse than expected. The finance environment is strict, and combined with a highly risk adverse distribution business (since Oct 08!), the new inventory normal is probably 2.2.
For merchants, the month for issuing purchase orders was July. I think this leads to the idea that more inventory will show in the August stats, and reflects what your survey members are telling you now about bigger buying. We don't yet have the Aug MSCI report; but one could expect higher inventories in tonnage, but the 2.6 dropping due to better shipments. I think that pattern will repeat in Sept.
From our perspective, demand is steady and growing. Steady, with usual a seasonal pattern. Growing, but with growth slowing from the rates of Nov 09 to May 10. Inventory too, is constant. The volatility is from the production factor in supply. Despite a growing demand scenario, steel mill production shifted ahead of demand in Apr/May and lead-times reversed. I think we still have supply ahead of demand, but supply is being trimmed slightly (since June).
This excess production pushed prices down until they bounced into production costs. The change in price direction is due to hitting the production cost backstop, and an outlook for demand to emerge from the seasonal slowing (even if demand growth rates appear to be slowing). The low relative price and the expectation of higher shipments, increased order flow to the mills in the weeks ahead of the price increase. This then increased the demand for scrap. With the price announcements, all reason for waiting to buy was removed. This added another round of buying and secured the rebound in price off of cost.
What we're waiting on today is for the flows of orders to the mill continue to the degree that lead-times move out beyond 3-4 weeks. Should this occur, more buying will take place to size the open order book to the new lead-time. Then we'll know the supply and demand have been brought more into balance. If that's happening the Oct price increases will further move the prices higher.
If the inventory ratio in August moves higher than 2.6, we'll probably also have seen mill order flow stalled. In this case, I think the November scenario you've suggested would be the way to play the market.”
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