Are Questions about Demand, Pricing & Supply Negatively Impacting Sentiment?

Steel Market Update (SMU) Steel Buyers Sentiment Index retreated to +34 which are 5 points lower than the +39 measured just two weeks ago. Our index is now 15 points lower from the all-time high achieved during the middle of January when Sentiment was measured at +49. A reading of +34 is still well within the optimistic range of the index. Sentiment has now been above zero, or in the optimistic range, for 16 consecutive months.

SMU Steel Buyers Sentiment Index measures how those who are actively involved in buying or selling flat rolled steel feel about their company’s ability to be successful in the current market environment. The Index is an indicator of both weakness and strength in the flat rolled steel markets as buyers and sellers respond to the various forces which impact their ability to do business.

SMU is seeing evidence of three trends which we believe are impacting the SMU Steel Buyers Sentiment Index:

Questions Growing about Demand

Demand has slowed within certain segments of the flat rolled steel industry. During the survey process a service center reported to SMU, “Not much activity, phones are dead.” We have also had various phone conversations with companies around the country which are reporting demand to be below what was forecast for the month of March. A grain bin manufacturer which reported to SMU as having record sales years during 2010 & 2011 provided the following information to SMU during our steel market survey which concluded on Wednesday of this week, “We are seeing a decline in orders for May & June. We think it is due to the farmers getting out early to plant crops, and not wanting to bother ordering bins at this time. At least we hope that's the situation.” In a follow-up phone conversation the manufacturer advised SMU they would have to begin pushing out mill orders if the situation did not reverse itself within the next two weeks.

Uncertainty Exists Regarding Pricing

The domestic steel mills have been trying to increase prices since AK Steel announced the first price increase on the 14th of March. Most of the domestic mills followed with a slightly lower increase and then the mills were only able to collect a portion of the announced numbers according to the SMU Indices. Over the past week a second round of modest price increases are coming out of the mills as they try to regain momentum. However, 57% of those responding to our early April survey believe prices will trend sideways over the next 30 days with 26% believing prices will rise and 17% thinking they will actually move lower. A Midwest service center executive told us during the survey process, “While pricing has stabilized based on the increase announcements the mills simply do not have enough volume to support the market.”

Earlier today in an email to Steel Market Update a large service center buyer told us, “There is a lot of confusion today. When was the last time you remember such discrepancy between the domestic mills and the service centers/OEM’s? Both seem to be holding ground and it is similar to a Wild West Shootout. Right now we see who is drawing first – but the question remains who will be the last one standing? I believe we are 2 to 4 weeks away from knowing the answer.”

A wholesaler/distributor referred to the market as being “…like a hot day in Charleston when all the bugs come out and eat you to death.” The reference was to the lack of momentum has created new competition which in normal markets as prices move in one direction or another competitors also come and go. Without a clear direction the “bugs” (competitors) come out of the woodwork and disrupt the market which causes confusion and a growing anxiety.

Imports Have Grown Over Past Few Months

Based on preliminary license data from the U.S. Department of Commerce steel imports for the month of March will exceed 3.1 million short tons. For the first three months 2012 the U.S. will have imported 8.6 million tons (short tons) based on DOC data. This represents an increase of approximately 2.2 million tons or 34% than what was received during the first three months 2011. At best, demand growth so far this year has not exceeded 10% and is more likely closer to 5% so the flood of imports is impacting both pricing and the psychology of the market. The expectation is imports will begin reversing trend in the coming months. An end user who responded to our survey echoed this point when they told SMU during the survey process, “We use to feel $60/ton under was good. Now that Galv is $800 + a ton, I feel the spread has to be $100 ton. This market is too volatile to commit on something 3 months away.”

With growing imports and the domestic mills running at a higher capacity utilization rates (January 2011 = 73.2% while January 2012 = 77.6%; February ’11 = 75.4% while February ’12 = 80.7%).

The result, in our opinion, is a weakening SMU Steel Buyers Sentiment Index as buyers and sellers of steel struggle to deal with the ramifications of questionable (not bad) demand, confusion regarding steel pricing and price direction and the appearance of more supply than demand.

SMU Future Sentiment Index at + 52

Both buyers and sellers of steel continue to remain squarely entrenched in the optimistic range of our SMU Steel Buyers Future Sentiment Index recording a +52 during this week’s survey. This is down 2 points from the +54 measured two weeks ago and is down 11 points from the all-time peak which was achieved during January 2012.

About the SMU Steel Buyers Sentiment Index

SMU Buyers Sentiment Index is a measurement of the current attitude of buyers and sellers of flat rolled steel products in North America regarding how they feel about their company's opportunity for growth in today's market. It is a proprietary product developed by Steel Market Update for the North American steel industry.

Positive readings will run from + 10% to + 100% and the arrow will point to the right hand side of the meter located on the Home Page of our website indicating a positive or optimistic sentiment.

Negative readings will run from -10% to -100% and the arrow will point to the left hand side of the meter on our website indicating negative or pessimistic sentiment.

A reading of “0” (+/- 10%) indicates a neutral sentiment (or slightly optimistic or pessimistic) which is most likely an indicator of a shift occurring in the marketplace.

Readings are developed through Steel Market Update market surveys which are conducted twice per month. We display the index reading on a meter on the Home Page of our website for all to enjoy.

Currently we send invitations to approximately 700 North American companies to participate in our survey. Our normal response rate is approximately 130-200 companies. Of those responding approximately 48% are manufacturing companies, 49% are service centers/distributors and the balance is made up of steel mills, trading companies and toll processors involved in the steel business.

Steel Market Update does canvass those being invited to participate in order to confirm their active participation in the flat rolled steel business. Our list is updated at least once per month and we are adding new companies on a continuous basis.