SMU Data and Models

SMU Price Momentum Indicator - Stuck in Neutral?

Written by John Packard

Our Price Momentum Indicator has been stuck in “Neutral” since the last day of June 2014. We are now entering our 4th month and hot rolled steel prices have barely budged from the center line (OK, there have been some mild gyrations but no clear cut path up or down during the past three months). As we mention in our “September at a Glance” article (coming up after this article), On July 1, 2014 the SMU hot rolled price average was $660 per ton. Fast forward to Tuesday of this week and our latest number is $655 per ton.

Everyone is looking at the peak of the cycle during these past three months which was $675 per ton and now we are $20 per ton lower than the peak. So, now we are getting phone calls asking when we are going to change our Price Momentum Indicator from Neutral to Lower.

Let us explain our actions and some of the issues which are of concern to us right now and why we are, for the moment, stuck in Neutral.

It seems like the focus of the industry is on raw material inputs used by the domestic steel mills to make steel. Iron ore spot prices (in China) have been dropping and are currently sub-$80 per dry metric ton (dmt) for 62% Fe fines. This is down from well over $125/dmt. US prices do not correlate directly with Chinese spot prices but they are one of the indices used to calculate price adjustments. Bottom line, steel buyers know the domestic mills which use iron ore are going to get cheaper prices and for an extended period of time.

The general manager of a large service center told us late today, “I think I’m in a similar camp as Timna Tanners, and others in and out of industry, which tend look at the fundamentals and see challenges ahead for the mills, particularly on the cost input side. With global IO [iron ore] and Coal prices facing headwinds far into the future based on serious over-supply, it tends to make one believe that there’s no magic bullet which will alter the supply/demand relationship very quickly.”

Scrap prices have been slipping and we are looking at October numbers to be lower by anywhere from $10 per gross ton to $20 per gross ton. Our sources are advising that scrap prices at one Detroit mill settled earlier today down $10 on primes (bundles and #1 busheling) and down $20 on everything else. It is expected that prices will start to solidify at these levels of change elsewhere in the Midwest in the next day or two.

With the strong U.S. dollar and cheap Chinese billet being shipped to the Middle East the sentiment in the market is the traditional Turkish scrap exports will not happen this year. If that is indeed the case those tons will make their way into the Ohio Valley and Midwest states driving scrap prices down in their wake.

Our service center general manager spoke about scrap in the comments shared with SMU this afternoon, “…Most importantly, what in the world is going to happen with scrap prices here given the dynamics at play globally now? What if we have a sustained lack of scrap exports due to a sustained strong dollar, the Chinese exporting cheap billets to the world making it difficult for countries like Turkey, increased use in the US of Iron Units (thus reducing demand for scrap)? That is why I am most concerned about the cost input side of all of this. We’ve all been affected by the 10-12 year Chinese commodity “Super-Cycle” and everyone rode the commodity price increase wave higher and higher, until it stopped, and it’s certainly stopped. Technically, US scrap prices this year have decoupled from their somewhat normal correlation to Iron Ore much like sheet prices have from the same and/or the global prices. So, is sheet causing scrap to move the way it does, or is it vice versa? If US scrap prices move down and stay down, does sheet then follow, and will it ultimately correlate over time? Or, does sheet de-couple from scrap and mills enjoy big sustained spreads to it?”

Port stocks of flat rolled steel continue to be high and the license data is suggesting that September will be another large month for imports into the United States. SMU believes that this steel is slowly making its way onto the floors of the steel service centers and we believe this will impact the amount of domestic steel purchased in late November and December.

Lead times are starting to come back (shorter) according to a number of buyers and we have seen reports of orders being delivered one to two weeks earlier than the promise date. Usually, if this is wide spread (and that is not what we are saying at this point), this would be a precursor to a slide in spot pricing.

An executive with one Midwest service center told SMU, “I think the mills are starting to see that life is not as easy as it was over the past few months. Everyone is looking for business – both mini’s and integrateds. I think people are nuts to ask for a quote right now. I would recommend that buyers sit on their hands. People may be better off waiting and not taking a chance on foreign.”

A manufacturing company threw in their two cents with, “I am still very concerned about the cost to make steel vs. selling price in US and global imbalance of capacity/demand.  I just cannot get thru my head that is sustainable – maybe so.  I have to think that most of the foreign is going into construction so maybe it is all absorbable.  I have lost track – what is capacity utilization?  Maybe we have found that magic spot where domestic producers can run at 78% and sell at a certain margin and maintain their discipline.  If that is the case, at some point USS has to make money. Right now we see business conditions as good – I don’t think we are planning any big expansion unless conditions stay good for a while. “

So, we are saying that prices are going to drop from here – correct?

Don’t be so quick to judge.

Supply has been the key phrase we have used over and over again this year. It continues to be of concern as AK Steel works on relining the hearth of their Ashland Furnace, US Steel works on one of its Pittsburgh area furnaces and we seeing that there are a number of one week to ten day outages planned at a number of mills around the country. During the month of October these outages include: SDI Columbus for 10 days, Nucor Crawfordsville for 7 days, Nucor Berkeley for 7 days, Nucor Tuscaloosa for 7 days, SSAB Iowa for 7 days, CMC Birmingham for 7 days and in November there is a NLMK Indiana outage planned. These outages are keeping lead times slightly longer than they would have been otherwise and the question then becomes can the domestic mills make it through the end of the year and into early January lead times without dropping their drawers in order to fill their books?

On top of this we have been hearing from a number of customers who are reporting not just good demand, they are reporting record breaking demand. This includes those associated with the energy business with hot rolled, plate and tread plate.   

We heard from two distributors into the energy sector over the past two days both reporting record sales, “The manufacturing market has been strong in Texas and south Louisiana. Floor plate sales have stayed strong due to oil and gas industry running strong all year in this region.” They went on to say, “We do expect the market to stay strong through the end of the year but also expect prices to start falling, this is because of the amount of steel that has hit the ground in Houston. As long as interest rates stay down and oil keeps going up we will expect it to stay strong for a little while longer.”

The second distributor told us, “This has been the best quarter since 2008. Demand across all market segments is good – manufacturing, energy, fabrication, construction….”

But it is not just the energy markets that are doing well. Automotive is going gangbusters and we are seeing movement from the sleepy giant – construction. Commercial construction is beginning to see jobs put into the ground meaning decking, studs, air handling units and many other steel products are being pleasantly impacted.

A manufacturing company told us, “Our business has gone beyond good from over the past 5 years – appliance is great, commercial construction is much improved.”

Then there is this whole consolidation issue. One of AK Steel’s customers told SMU in a phone conversation earlier today that right now the mill is being “a little hard to work with” as management is focused on integrating Dearborn into the rest of AK Steel. So, the door is open and we are not quite sure yet what direction AK will take in regards to spot pricing out of their mills.

Steel Dynamics is also continuing to work on their understanding of the order book out of the Columbus facility. We did have one of their customers tell us that they noticed the lead times came back in a few weeks on hot rolled soon after SDI took control.

Nucor received approval to buy Gallatin. Since Nucor is coming out of their existing cash on hand this deal should close prior to the end of the year (and probably sooner). Gallatin has traditionally been one of the “more aggressive” mills in the spot market with their selected group of customers.

So, when we look at the market we do not see a quick turn lower. However, we could very well see a continuation of the mild leak in pricing. With our HRC index now at $655 we are of the opinion that we could see leakage of another $10-$20 over the next few weeks.

The wild card, and the rumor mill this week is full of comments about the “wild card,” is will the mills file dumping suits against the Chinese and possibly other suppliers of light flat rolled steels (cold rolled, galvanized and Galvalume)?

A manufacturing company steel buyer when asked about the possibility of law suits echoed the sentiment of many buyers with whom we have spoken recently, “Well, they have been saying that since last October…inevitable – I guess if we wait long enough…”  

While a service center told us, “If the mills don’t file then it becomes another negative in the market and will work against them.”

There is a lot to consider.

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