SMU Market Momentum Continues to Point to Lower Flat Rolled Pricing
Jul / 21 / 2010 -
SMU Market Momentum Continues to Point to Lower Flat Rolled Pricing
Why we believe prices will continue to drop on flat rolled steel
SMU received a phone call yesterday from a manufacturing company we know very well. The head of purchasing for the company which buys cold rolled, galvanized and Galvalume wanted to let us know, “I am calling a bottom.” They have not been alone. We have had similar calls from service centers and analysts. Everyone wants to be the first to predict an end to the erosion of steel prices.
We read an article this morning in another steel publication where one of their sources believes steel prices have “hit bottom.” SMU would very much like to believe this as true but it is not what our sources and data points are telling us. We continue to see further erosion in flat rolled steel prices over the past seven days and we believe the trend over the next 30-60 days is for prices to move lower.
SMU does agree there will be a point at which prices will rebound. We pointed to three keys earlier this week we are watching on a regular basis: Mill lead times, scrap prices and SMU Buyers Sentiment. We want to add a fourth “key” which is steel inventories on service center floors.
Lead Times
Lead times continue to be shorter than normal with hot rolled available within a couple of weeks (2-4 weeks). Cold rolled and galvanized (non-automotive) leads are being reported this week at 4-6 weeks. We would like to see the lead times move out by at least two weeks from where they are now. We have more about lead times in our SMU Steel Price article below.
Scrap Prices
Scrap prices (article below) appear poised to make a small move higher. We are aware of a new mill purchase of shred out of the east at $332 which is $28 per long ton higher than the same dealer sold to the same customer earlier this month. SMU is anticipating flat to slightly higher scrap prices in August but, many of you may recall earlier this year we had forecasted prices to go in one direction and they headed in the other.
As one of our members shared with us earlier today, “its spot on with what I am seeing [potential for higher scrap prices in August]. Only difference is that I think mills will try to buy down in August... At least give it a shot... Otherwise the mini-mill margins are going to compress if scrap goes up and steel goes down further. They will at least TRY to drop scrap prices to protect margins.
I just don’t see how steel prices can reverse course though just because there is some modest supply tightness in scrap... If scrap prices firm $10 - $20 in August/Sept it won’t be because of higher operating rates or better end-user demand it will be because of slightly diminished scrap flows into the yards of obsolete scrap. I’m just not sure that mills can raise HRC prices when HRC operating rates are 80% or less and lead times are nonexistent.
The only thing that can make things worse for the mini-mills now other than declining operating rates, overcapacity, and zero lead times is the prospect of margin compression due to scrap prices decoupling from steel prices.”
SMU Buyers Sentiment
SMU Buyers Sentiment continued on its pessimistic path this week. The SMU Buyers Sentiment Index reading is -20 as of late Tuesday afternoon. This is compared to a -13 from two weeks ago. We are continuing to collect data and will publish more about our SMU Sentiment Index on Wednesday (blog or featured news on website) and in Thursday’s newsletter.
Our opinion is Sentiment will continue to be negative until a few mills start saying “no” during price negotiations. The thrill of victory (negotiating lower prices) is quickly off-set with the realization the inventory on your floor has just lost more of its value.
Service Center Inventories & Purchasing Plans
With the release of the MSCI inventory and shipment data SMU needs to add one more item to our keys to watch list: inventory levels at service centers. Along with inventories is the trend service center buyers are making is to increase, reduce or keep inventories stable moving forward.
The graph below is from this week’s data from our SMU Market Survey.
As you saw from the article on the MSCI data earlier in this newsletter, inventories are growing. At the same time we are learning through our SMU Market Surveys service centers are moving to reduce inventories (as are end users for that matter). Growing inventories and a mindset trying to reduce inventory does not bode well for domestic steel mills getting a boost to their order books over the short term.
At least that is SMU opinion and we do welcome yours. You can send any comments directly to John Packard (Publisher) at: john@steelmarketupdate.com
