The good news for the consumer is gasoline prices are closing in on $2.00 per gallon in many areas of the country. The bad news for the steel industry is the drop in oil prices means a slowdown in new drilling, one of the major users of hot rolled coil.
The good news for buyers of flat rolled has been the price of foreign steel. The bad news for the U.S. steel mills is that same foreign steel which has been taking market share from the domestic mills all year. The disparity between foreign and domestic steel prices will continue into 1st Quarter 2015.
A second issue to consider when looking at foreign steel purchasing by domestic manufacturing companies and service centers is the issue of lead times. Foreign steel is bought 3-5 months in advance. As inventories begin to build, the only way for a company with a constant flow of foreign orders on the books to adjust inventories is to reduce domestic mill purchases.
We think demand will be good going into the New Year. The issue will be supply. There is too much foreign steel coming into the ports and inventories are building at service centers and manufacturing companies. Our most recent survey showed distributor inventories at the highest levels we have seen (2.46 months) since we began keeping track of distributor inventories a few years ago. What we think is important is the trend toward growing inventories.
Part of the inventory story is related to orders coming out of the domestic steel mills early. ” My contract tons for end of January release have already been produced in HRB/HRPO,” is what one manufacturing company told us this afternoon.While a distributor told us, “…some mills are claiming to be stretching out over the past month our deliveries have been arriving early.”
We heard similar comments out of other service centers as early production combined with higher inventories are both negatives to mill lead times. As a result we are hearing of steel mills being concerned about their January order books only one week before the month begins.
A large service center executive told SMU earlier today, “There’s a possibility we see a sideways HR market for Jan, but I believe we then see continued slide afterward. I see zero chance of higher prices. Until the spread of Scrap prices to Iron Ore, and US sheet prices to foreign return to more historical levels, there will likely be a continued slide in prices. Further adding pressure will be high inventories caused by high imports and high US domestic production. There’s already talk of “who will take out production?” and we aren’t even in 2015 yet!”
A manufacturing company executive told us, “I think the CRU will continue to slide until mid February, bottoming out at $29.00 before it picks up again for a couple of months. We are still too high relative to cost position and HB pricing in the world.”
The bottom line is Steel Market Update is of the opinion that the chances of prices moving lower are much greater than prices moving higher over the next 30 days. Our SMU Price Momentum Indicator continues to point toward lower prices over the next 30 days.
John PackardRead more from John Packard
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