North American Flat Rolled Steel Prices will Continue to Rise
Jan / 31 / 2010 -
North American Flat Rolled Steel Prices will Continue to Rise
The trend for flat rolled steel prices will continue to rise over the short term...here are my reasons why
Steel Market Update (SMU) has not altered our steel pricing momentum direction – the North American steel market flat rolled prices continue to rise and here is why:
On Tuesday evening of this week, while discussing our adjustments to our various flat rolled steel indexes, we indicated in our newsletter concerns regarding pricing trends and the potential for a shift in momentum. Since Tuesday we have been able to have a greater number and more diversified contacts with steel buyers around the country and into Canada. We also have spoken to scrap dealers and companies associated with the scrap industry as we get closer to the 1st of February and the new scrap numbers.
Scrap – Sideways to Up
First, one of our concerns has been a potential interruption in the price of scrap as we move into February. SMU had indications from a small number of dealers late last week of a potential for prices to move sideways (remain the same) or decline by a small amount – maybe $10 per ton. The contacts we had today are indicating worst case scenario is sideways to up $20 per ton or more. One Midwest dealer told SMU today they already had an offer for prime grades for February up $20 (prime grades for January were approximately $390 per long ton). However, the final scrap numbers for February have not yet been determined but are expected to be finalized next week.
While at the AMM State of Steel conference I had a number of conversations with industry consultants and scrap-related companies regarding longer-term scrap prices. During those discussions we were told long-range fundamentals are for scrap prices to go higher. The reasoning provided was the lack of “obsolete” grades due to limited non-residential construction activity, a declining value of the U.S. dollar which makes our scrap attractive to Turkey, Korea and other parts of the world, the appetite by the Chinese for more scrap, over-all world steel production trends, iron-ore prices which are expected to increase by 20-25% although one of the consultants advised SMU the increase could be as high as 40%, higher coking coal costs and low inventories at the domestic steel mills.
Mill Lead Times – Extending (for most)
A second item we watch are mill lead times – We are seeing short lead times out of Nucor (Berkeley) which still has February tonnage for Hot Roll and Galvanized (much longer lead times on HRPO and Cold Roll). We are also seeing short lead times from the galvanized conversion mills. The integrated mills are at the opposite extreme with lead times either approaching or into April – although we heard today U.S. Steel lead times at Fairfield moved back into March and our assumption is this is due to the imminent return of Gary #14 blast furnace which will allow Fairfield to keep all of their melt. For the most part lead times appear to be slightly extended to extended on hot roll and cold rolled while galvanized lead times are all over the board from early March out into April.
Demand – “Don’t underestimate the power of restocking”
Demand – automotive demand continues to be strong – well, strong in comparison to the anemic build levels of last year. Toyota has announced they are halting production on those products affected by the faulty gas pedals – a couple of the Toyota suppliers have informed SMU the impact right now was to move out affected plants steel orders by up to two weeks. The suppliers we spoke with over the past two days are not canceling or moving out orders – although one told us they would not order new material until Toyota advises them the issue is resolved. One supplier told SMU the intention is for Toyota to work over-time once the issue is resolved and to maintain the total number of units to be built. Since the decision to stop production was just made earlier this week the ultimate impact to the domestic steel mill industry is not yet known.
JP Morgan analyst Michael Gambardella made a good point in a note to his clients earlier today, “Don't underestimate the power of restocking. While true end-market demand in the U.S. should rebound throughout the year given our economists’ forecasts for IP growth, restocking should also create a significant pull. Yesterday the WSJ noted that Caterpillar recently told its steel suppliers that it would more than double its steel purchases this year even if its own sales did not rise. We think this comment demonstrates just how low inventories have become, and how production just matching final sales (even if they remain at low levels) can stimulate significant demand for steel.”
SMU included the comments of Mr. Gambardella above since we found evidence of similar growth in demand while speaking to one of our service center contacts in the Chicago area on Thursday. Our ears perked up when the owner of the company described business as “very, very busy” and across virtually all their customer base. Their customers who cover such industries as tubing, shelving, communications equipment and some non-residential construction (and many other industries) are increasing their orders for flat rolled steel. “There are lots of orders and they are building for real business…customers are living hand to mouth” our service center source told us. He went on to tell us their customers still fear prices moving lower and they don’t think the higher prices will last for an extended period of time. The market “stinks like 2008 right now” he told us. His prediction was prices will reverse course – the question is will it be “April, May or June…?”
Not all of our contacts over the last couple of days were so upbeat. One Midwest service center located close to a domestic mill and in sight of several other service centers reported limited truck activity in the area and sluggish sales out of his facility during the second half January. A Southeast service center told SMU there was “not much going on” in their market at the moment. Then there are those associated with the U.S. residential and non-residential construction markets…where today was just another long, lonely day…. (Canada is not so bad according to our sources).
CRU Based and Adjustable Contracts are Buying Heavy in 1st Quarter
We heard from a number of mill customers that they were taking advantage of the buying “edge” provided by CRU based and other adjustable contracts which will most likely adjust higher on April 1st. In order to protect from rising prices orders are being placed at the upper limits allowed under the contract – even if the end customers needs are not requesting all of the material. Once the new pricing takes affect in the 2nd Quarter purchases will then be reduced down to the lower limits of the contract. There is no way of knowing how much buying is being done in this manner but, it could be positively impacting 1Q lead times and tonnages being placed and then have the opposite affect during 2Q.
Non-Automotive Galvanized Continues to be the Weak Link
Non-automotive galvanized appears to be the weakest product as a number of the conversion mills are only into early March bookings and a couple we have spoken with have communicated their order book as “sluggish”. One conversion mill pointed out their large buyers had not yet made an appearance as they hold out expecting lower prices (or have speculated and do not need to place March orders).
In a spot check of the larger mills - Nucor Berkeley still has February tons according to their lead time sheets while Severstal is showing product as being either Inquire Only or out to late March/mid-April (although the reasons why are not clear at this time). The integrated mills all appear to be booked fairly solid – and anedotaly SMU is hearing of over-bookings of products in March with the customers being told up front not to expect delivery until early April.
Pricing
We are finding minimal instances of “discounting” (i.e. nothing unusual) and no instances of “deep-discounting.” Based on what we are hearing from our buying sources the market prices appear to have firmed with non-automotive galvanized hanging out there as a potential weak link – but, with the exception of some minor negotiations on extras (with zinc moving lower) we are not aware of any mills breaking from the ranks.
Tweaking of mill prices are working their way around with Hot Roll moving up to $31.00 ($620 per ton) or higher, Cold Rolled at $36.50/cwt ($730 per ton) and galvanized at $37.00/cwt base plus extras.
