Steel Products Prices North America

Its Not Easy for a Leopard to Change its Spots

Written by John Packard

The market believed that consolidation of the steel mills would result in a much more disciplined industry, especially regarding flat rolled steel prices. Larger steel mills and fewer players would mean less negotiating and better control of production facilities. That is what the market wanted to believe.

However, it is not easy for a leopard to change its spots.

SMU received an email on Wednesday from a reader who was questioning the whole, consolidation is going to make everything good, theory, “Regarding the Consolidation article / argument… isn’t one issue that AK Steel doesn’t have the production footprint to remain as disciplined as the other Big 4/5?  The mini-mills can cost-effectively dial back production in their EAFs; and Mittal and US Steel have enough blast furnaces that they can more easily “manage” capacity, take a furnace down, etc.  But AK has 2/now 3 blast furnaces, and taking 1 of those down is a big deal.  What do you think?”

Each of those AK Steel blast furnaces is connect to one finishing mill. A second comment we would have is AK Steel is short slab – in other words they can roll more steel than they can physically produce. The purchase of Dearborn actually exacerbated the problem as Dearbon also has the ability to roll more steel than it can make. AK recently built up their slab inventories due to the reline of the Ashland furnace (hearth) which we understand will begin later this month and last about 30 days. Much like a service center who buys foreign steel, if they buy more slabs than they have orders for…

SMU has been hearing from multiple sources, OEM and service centers, that the domestic mills have been getting more aggressive both in the negotiations of contracts as well as spot business. We got this from a Midwest service center earlier this afternoon, “For significant tonnage all of our suppliers are willing to discuss price. We are typically presenting them with target pricing in a range of 500/2000 ton opportunities and in the last 3-4 weeks they have agreed to our numbers…” This service center went on to point out there has been significant freight equalization and playing with extras which takes base prices down to levels well below what SMU has as minimums.

Foreign steel is impacting the psyche of the domestic steel mills as they have to compete with steel coming from around the world. A service center executive told us, “We have had a long term relationship with one of the principle Mexican mills and are actively buying as the numbers have been softening.  They have an increased focus on export to the US and have priced HR and CR to gain market share in areas other than Houston (no surprise given prices elsewhere in the world).”

And, we are entering what is normally one of the typical slow periods for the industry (November & December production). Plus the MSCI (Metal Service Center Institute) reported flat rolled inventories as rising and our SMU forecast is calling for inventories to continue to rise over the next couple of months.

With rising inventories comes the need to adjust and buyers are beginning to sit on their hands and wait for the right price offer. A large national service center told us earlier today, “With inventories the way that they are there are not a lot of people rushing to place new orders.” He went on to say, “The mills catching up has inflated our inventory.”

The general manager of a large service center told SMU this evening, “The competitive landscape is evolving downward with some momentum, both for spot and contract, but again, not yet at drastic drops to current prices ($60+). The HR Futures pricing is being watched by many more players these days, and it’s impacting how people are viewing the market. The speed and depth with which the Futures curve has dropped is creating much uneasiness. Buyers have really gone into hibernation mode as anticipation of lower prices keeps them at bay. It’s been a long time since inventories were at a high enough level that allowed buyers to sit out for any length of time, but that seems to be happening now. Anyone who’s got some whiskers in the flat-rolled business knows that price downturns which are heavily driven by a glut of inventory, can be long and painful. Making matters worse still, many believe that the inventory situation will get worse before it begins to correct, creating even more anxiety in the near-term for the market participants.”

I thought one service center’s perspective was interesting when he told SMU, “The mills are doing a much better job of managing appearances.” Then went on to tell us that even as a small buyer of hot rolled he could easily get $640 per ton. He then challenged SMU to go find what price level is available for those with some tonnage to buy…

That is what we have been doing for most of this week. Even after we produced our latest flat rolled price indices on Tuesday evening. Steel Market Update continues to interview steel buyers on all flat rolled products and we may need to re-open our current price indices yet this week in order to accommodate what we are learning.

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