Overview of Current Steel Industry
Jun / 22 / 2009 - Overview of Current Steel Industry
Overview of Current Steel Industry
Notes from my Conference Call with Bank of America/Merrill Lynch
I did a conference call for Kuni Chen of Bank of America Securities/Merrill Lynch this past Friday. I thought I would share some of my notes with you as it gives a bit of an overview of the industry and events over the past few months. This may help put some things into perspective as we roll up our sleeves and deal with the second half 2009.
Background
My last conference call hosted by Mr. Chen was on March 13th of this year. At the time of our last conference call SMU had a hot rolled pricing range of $440-$520 per ton with an index average of $480 per ton. At that time in March – hot rolled prices had declined from their peak of $1100 per ton achieved in the summer of 2008.
Since March hot rolled prices have continued to decline and, according to our data, the bottom in hot rolled pricing was reached earlier this month – in the first week of June - with a range of $360-$400 per ton and an index average of $380 per ton – this is essentially a 20% decline over a 13-week period from March 13th to the first week of June….
First Round of Price Increases – June 1st
If you are at all interested or invested in the domestic steel industry you are already aware of the price increase announcements by the domestic steel mills which began that very first week in June. As I stated in one of my articles at the time – AK Steel set the pins up and the rest of the mills proceeded to knock them down. Price increase announcements varied from the AK Steel $20 per ton base price increase to ArcelorMittal putting a specific price out there of $410 per ton on Hot Rolled which was an increases of $30 over the SMU indexed average at the time - it also represented a $50 per ton increase to those who were at the lower end of the pricing range.
I won’t go into a lot of detail about the first round of price increases other than to say the marketplace has accepted them.
Second Round of Price Increases – June 15th
On Monday of this week ArcelorMittal made a second announcement which I had already prepared my readers to expect. Although, the increases announced were a bit more aggressive than anticipated. I had anticipated the next round of increases would be approximately $50 per ton and Mittal did come out with $50 per ton on hot rolled – but they moved $70 per ton on cold rolled and $90 per ton on coated products – galvanized and Galvalume.
Essentially, this took their numbers on Hot Rolled from $380 to $460 in a two-week time period. I look at it another way – and the domestic mills probably look at it as I do – in reality all they did was take prices back to essentially where they were in March.
On Wednesday evening Nucor made their price announcement which is on paper was less than Mittal’s. Yesterday (Thursday of last week) AK Steel published their pricing announcement which based on my calculations will put them on par with Nucor and Mittal on HR and slightly below Mittal on Galvanized.
I have been through this process of sifting through competing price announcements and it will take a little bit of time to figure out what pricing will stick – or if the market is strong enough to have tiered pricing depending on the mill and product. Each individual mill may be having a difficult time reconciling exactly where their order book is and where their pricing should be. On Friday Nucor, Berkley closed their coated order book until further notice. A sign of the resurgence of strength in coated products.
However, it is important to note our market survey results clearly indicate both service centers and end users are psychologically prepared to pay higher prices – and for that matter they are anticipating they will be paying higher prices over the next 3-6 month time period.
Keys SMU is Watching
There are some key questions or issues which will determine how far prices can move. Here are some of the items I – and this newsletter – are following:
•The status of inventory destocking – and I have broken it out into two segments – service centers and manufacturers.
•The amount of actual steel demand in the “new normal” economy which we find ourselves.
•The laws of supply and demand – at what point will the mills restart too much capacity for our “new normal” economy.
•Scrap prices – will scrap prices increase, decrease or stay the same and what affect do they have on steel prices?
•Imports – what is the status of imports now and what does the future hold?
•Prices – can the domestic mills collect more increases in the spot market than what they have already announced?
Status of Destocking – Service Centers:
Much has been made about the “destocking” of service center inventories. According to MSCI data (which is backed up by our survey results) it is true the service centers in the flat rolled market have taken their inventories down to 2.5 months of supply based on their current shipping rates. The research I have done through my market surveys and direct contacts with service centers across the country is showing me the distribution network is strained – by that I mean the service centers are getting to a point where they have “holes” in their inventory and those holes are getting harder to fill – especially as mill lead times start to extend.
Last week SMU conducted a market survey of both service centers and manufacturing companies. Our survey results indicate the vast majority of service centers are no longer destocking and found that 20% of the service centers are now in a re-stocking or buying mode. Two weeks ago our survey found only 3.9% of the service centers were in a re-stocking mode. This is a significant move in a short period of time.
Another point I need to make here is you need to look at the anemic daily shipping rates of 62,700 tons per day of flat rolled products - and then ask yourself what would their inventory levels look like if shipments improved by just 10%? The answer is 2.3 months. If service center shipments returned to the levels seen last November – or 82,200 tons per day – there would be less than 2.0 months of inventory on the service center floors. That is what has some of the service centers nervous and is making the domestic steel mills get aggressive.
By the way – the daily shipment rate last May was 123,400 tons per day. At 82,200 tons per day the service center shipments would be 34% lower than last years levels.
Status of Destocking End Users/Manufacturers:
The majority of manufacturers in our survey reported they were maintaining their current inventory levels – only 5% reported they were building inventory – and 31.7% continue to report they are reducing their inventory levels.
I spoke to a number of manufacturers over the past 24 hours in various industries and found with the exception of automotive (which I will speak to momentarily) – most manufacturing operations are not reporting spikes in demand – they are reporting modest increases in demand compared to what they had seen earlier this year.
Automotive has been a wild card so far this year. I listened to a CSM conference call on Wednesday and I spoke with one of the automotive service center suppliers this morning – with the combination of lower sales rates and the bankruptcies of Chrysler and General Motors – the steel supply chain for automotive is drained of any excess material – based on this mornings conversation, GM and Chrysler could well be short steel as their supply base races to meet new production schedules and deals with mill lead times which are extending. I believe it is for this reason you are seeing AK Steel, ArcelorMittal, USS and Severstal so aggressive on their pricing announcements as their lead times start to extend.
Question of Demand – New Normal
The question you have to ask yourself is what is the “new normal” for the flat rolled steel industry? Is business truly down by 50% or more – or is it more like 20%-35%?
It is my opinion – based on both our market surveys and the detailed conversations I am having with service centers and manufactures across the country – that real demand has decline approximately 20-30%.
If that is correct – then the domestic steel mills should be at raw steel production utilization rates around 60%-70% for the 2nd half 2009. We are getting early indications the mills are booking at those rates as U.S. Steel is bringing back to life Granite City and our sources are telling us they may not idle the hot end of Fairfield after all. I also saw a report out of India this morning (Friday) quoting the CEO of Essar that their Canadian mill – Essar Algoma – would be running at 80% of capacity in July.
My belief is the stabilization of the manufacturing sector of the economy, inventory adjustments and some resolution to the automotive problems which is now leading to new production (or resumed production) plus a conclusion of the destocking of the service centers are leading to much improved utilization rates at all of the domestic steel mills.
Mills Bringing Back Too Much Capacity?
Of the mills who have capacity down – USS, ArcelorMittal, Severstal and AK Steel – so far USS has been the first to act to bring back capacity. We will have to wait and see who moves next. I do not expect AK Steel to keep both of their mills down if their order book will support them bringing their idled mill back up – Severstal and ArcelorMittal have tough decisions to make as they may have facilities that in reality are not able to perform at levels which can make their company money. I don’t know what those two mills will do going forward.
Direction of Scrap Prices:
Our sources are telling us scrap prices will go higher in July and due to the slow flow of scrap into the yards, high exports to countries like China and renewed buying interests from mills like Nucor – will move prices higher. Right now for the month of July the increased scrap prices are forecast to be $15 to $50 per long ton depending on the product and the area of the country.
With higher scrap prices – this supports higher steel prices and will make mini-mills like Nucor and SDI more aggressive to maintain and increase their prices.
What About Imports?
Normally imports are approximately 25% of the total U.S. market. Part of the reason being when our apparent consumption of steel was around 120 million tons the domestic steel mills did not have enough capacity to satisfy the market. Secondly, there are a number of mills located in the United States who use foreign slab or hot bands to produce their products. So, imports will never go to zero.
But, considering there are no new Section 201’s or dumping complaints against foreign flat rolled steel at this time – the amount of speculative foreign purchases is practically nil. Foreign prices have been higher than our domestic market on many items for some time. China has been a net importer for the past few months and the value of the dollar has not been conducive for a flood of foreign steel to be attracted to our shores.
I expect the domestic mills to push the envelope with their price increases to the point when the benefits of foreign steel may outweigh the risks of longer lead times and price uncertainty which has existed over the past few quarters. The new prices just announced do not appear to be at the point when foreign becomes a good alternative to domestic buyers.
Mill Pricing
Lastly pricing – as I just mentioned I expect the domestic mills to push prices to as high a level as possible. Remember, approximately 50% of mill production is on contract – so we are actually only talking about spot pricing.
I am not one to predict future pricing peaks – but I would anticipate the domestic mills want to get hot rolled to at least $500 per ton and possibly higher by early 4th Quarter.
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