SMU Data and Models

SMU Price Momentum Indicator Adjusted to Neutral from Higher

Written by John Packard

On Friday, Steel Market Update (SMU) adjusted our Price Momentum Indicator from Higher to Neutral.  

Now why did we go and do that?

We have been stuck in a very tight trading range on most flat rolled steels since late April of this year. Benchmark hot rolled, which is used by most in the industry as “the” gauge to use when referencing steel prices, is up $25 per ton from the cycle low of $445 (SMU index). Since late May HRC has been essentially holding its own at $465-$470 per ton.

There have been two price increase announcements by all of the steel mills totaling $40 per ton and a third by US Steel of another $40 per ton.

To date, the domestic mills have been unable to achieve the full amount of the first two and the mills (other than US Steel) have sent a clear signal that they do not believe another $40 makes sense at this juncture.

Perhaps the reason why was best described by a service center in a note to SMU on Friday of this past week, “USS recent price increase produced laughs from all, but in steel when everyone thinks one thing is going to happen, it sets up nicely for a whammy the other direction.”

This particular service center was not negative on the market longer term telling SMU, “We expect things to pick up by the first of August.  Scrap and iron ore pricing will continue to scare service centers from buying, continuing the draw-down of what I think is becoming very thin inventory which at some point this year could produce sharp rebound.”

One reason SMU believe prices have been essentially going nowhere over the next couple of months is because inventories at the service centers continue to be too high. We have to admit that we can no longer ‘wish” the problem away and excessive inventories will continue to exist for some time to come.

We heard from one southern based service center, “We’re not exactly scrambling to get steel in from the mill because July shipments, to this point, have been semi-sluggish.  I can only speculate that the MSCI number would be flat to lower because everybody seemed to be busy in June.  I think we’ll know a lot more once we see the July number next month because that will have allotted time for the price increases and CRU adjustments up to take hold and see what impact that has on shipments/inventory.  June shipments were strong (2nd best YTD) but July seems to be stalling and the feedback from the customer base as to why they’ve slowed are varied.  Most say they are either 1) overstocked based on current orders or 2) overcommitted based on what demand as proven to be for them this year which feeds into the “pile up” you mentioned [Our comment to the customer was we were hearing that service center inventories were being built up due to customers taking advantage of cheaper prices or a build of inventory to protect against any supply disruptions].”

A Midwest based service center told us, “Material is readily available and the rumored and published price increases have not done anything to stall transactions. We are seeing the mills chase inquiries to close orders. We are seeing plenty of inventory being offered at or below published pricing from other larger warehouses and distributors. We are also seeing customers wait until the last second to place any orders waiting to see if pricing is going to move and not worried about availability of product. In fact many distributors that have taken positions with imported material are offering fire sales to move it further disrupting the possibility of price movement upwards.”

We heard from a number of service centers that their inventories are actually (or will actually) be growing as they bought extra steel to take advantage of the cheap pricing. As one Upper Midwest service center put it, “Inventory seems to be right in line for most of our customers.  As they do not believe prices will rise, they are not taking more than needed. On the other hand, we believe prices hit a low in June and we bought an extra month’s worth of steel.”

MSCI June inventories for flat rolled dropped to 2.4 months supply from 2.7 months reported at the end of May. On the surface this appears to be a positive from our vantage point the “Apparent Excess” did not drop as we had expected. SMU missed of forecast for flat rolled shipments by 91,000 tons and inventories by 125,000 tons. The net result is based on our analysis is distributors continue to be over-inventoried by approximately 600,000 net tons.

At this moment, with shipments coming in below year ago levels, imports remaining above 3.0 million tons and flat rolled imports not dropping as fast as we expected by this time in the year, we believe that inventories will remain high going into the October.

We are also concerned about those who have been reporting “sluggish” sales during the month of July. This is not universal to the service center industry and SMU will be quite interested in what we learn about the residential and commercial construction side of the industry from our HARDI conference call which is scheduled for Tuesday of this week.

Even with all of this extra buying lead times remain relatively short on most non-automotive products. Lead times (a growing order book) is a key to strengthening steel prices. We saw lead times expand by about one week after the price announcements and coated trade case being filed. Since then they have stalled and are about a week shorter than what we saw last year.

We haven’t even begun to discuss what is going on in Asia as commodity prices have stalled and appear poised to drop once again. Steel prices are moving lower in China as growth slows there and the rest of the world puts up barriers against Chinese steel.

SMU opinion is we expect steel prices to remain range bound until something happens that causes buyers to begin ordering more domestic steel and lead times begin to move out. We are not sure that even a new trade case will move the needle over the short term.

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