Economy

How Long Can This Last?

September 29, 2015

Flat rolled steel prices have been slipping on a regular basis for a number of months. This has created a market where buyers expect lower prices each time they order steel, even if there is only a week or two between orders. This tends to keep order sizes modest and develops a feeding frenzy between service centers as they opt to eliminate inventory knowing they can replace at lower prices. It also creates a competitive environment between steel mills as they push to improve their order books.

The question on both service center and end user lips is “How long can this last?” There is no easy answer. One service told us when asked to answer that question, “If I knew I would be working with you….”

A trading company executive pointed out, “Customers (OEMs and service centers) are fatigued, not optimistic, and the menacing malaise that grips the market is real and pervasive.”

Others agreed. A large national service center chain shared with us, “There was a notable weakening on customer front with the last 45-60 days, and that has held for now. In speaking to many others, this change appears to be fairly widespread, and has been a surprise.”

One of the service center purchasing managers with whom we speak on a regular basis pointed out that “…most mills and service centers losing money, bankruptcies around the corner if this persists.” He went on to ask, “How long can it last like this?”

So, as we canvassed both steel distributors and end users today we asked how long they anticipated the market to remain weak and what will change the direction prices are currently headed?

A large national service center told us, “I believe that the US market is/has corrected in concert with what has happened to the global steel market. Moving ahead, the US market should more or less correlate to the global market and whatever changes occur there. The factors around raw materials and China are just too strong and those factors will heavily determine what happens to the steel market globally. We actually might be moving into a period where volatility is much more muted than it has been for a while – stability at the low end. I’m assuming a sluggish environment for the next 6 months, with possibility for price improvements in late spring through 2nd half 2016.”

Not everyone thought it would take until sometime in 2016 before we see improvements. A service center with a couple of locations told us that the prices will bottom out, “By November. Import is dropping, contracts and 2016 fixed deals will be concluded and spot prices will find a bottom.”

A distributor on the East Coast told us, “We will get to a 45 day supply within the next two months and stay there until we can get our finger on a strong pulse. Lots of talk with no real foundation on where the trade suits are, how they will affect future shipments from the ‘unknown’ foreign suppliers. And what percentage of the Chinese tonnage will be replaced by the newbies? They then went on to say, “Our feeling is the market will change much closer to year-end than most thought. Inventory levels and unsold foreign material on the docks will not be consumed at the rate as previously discussed. The only unknown is where the domestic mills are with negotiations and what their take is on staying with the current bargaining agreement. Should a lock-out or strike occur, all bets are off.”

A large service center told us, “Demand is weakening; [the] summer slowdown was greater than expected, and the Sep return was lighter than expected. This is more than offsetting lesser volumes available on the import market (the new players have less volume in total than those named in the cases, but it doesn’t matter now).” He went on to tell SMU when they see prices rebounding, “With more demand! Or a recovery in raw material prices….”

One of the Midwest based service centers spelled out for us the factors affecting prices and their thoughts on when the market might turn, “Factors putting downward pressure on market- Strong dollar, lower commodity/input prices, weak Chinese consumption, excess Chinese capacity, slow Europe, recession in Brazil, low oil prices, low US infrastructure spending, possible UAW strike. [The] Factors that could put upward pressure on market- anti dumping suits in US, USW strike, Overall, I don’t see prices rising anytime soon. There are too many factors pushing prices lower.”

Out of the Southeast we heard, “We just quoted one of our large contract customers for 2016 and I do not have feedback on that yet so should prove to be interesting as they wanted an annual deal. I am not seeing any strengthening out of the supply side but most of our customers seem to be shipping as expected. My business is about 60% contract and 30% spot. I would not buy anything on the spot side that we did not have a confirmed order for on the other side. Why would you – pricing has not bottomed globally or domestically.”

This Southeast buyer then told us, “Thankfully, my inventories are in pretty good shape except for Aluminum so I will maintain at tight levels until I sense a change. Mr. Packard, I wish I knew what would turn this market but I do know that for the past 11+ years the domestic market scrap pricing has been a key driver. I am hearing that the minis are bringing in foreign scrap – someone needs to expose this – and the published prices are certainly somewhat manipulated. But the fact that scrap pricing is tumbling cannot be hidden. I keep thinking that at some point inventories will get to the point that the market will bottom but that is just so hard to see. The deal is this death spiral has only been happening in the US for about the past 10 months but it has been going on in the world for a year longer than that and just seems to be accelerating. I go back to what DiMicco said at your conference – it is really too late for steel.”

We also spoke with manufacturing companies to get their view on this question. An appliance manufacturer told us, “ If asked this question a couple of months ago, I would have said late Q3 into Q4 would be the bottom, but now that we are getting closer to year end and there is still a ton of excess supply in the market, I don’t think it will bottom until sometime in Q1 of 2016. The only way I see pricing turning around and making a worthwhile jump is if there is a big supply shutdown either due to a USS or ArcelorMittal lockout or someone shutting down some significant capacity.”

A manufacturing company associated with the construction markets told us, “Well, back in April/May I thought it would be mid 4th Qtr (hence we loaded up) but now I’m guessing sometime in 1st Qtr. It’s not going to happen until this glut is consumed.”

Another manufacturing company associated with construction and other markets told us, Unfortunately, I don’t see anything suggesting strength from the mills. Some customers are talking about 2016 – a good sign. But with the continued price erosion, many are definitely just waiting, anticipating even lower prices to come. It feels like we are in something of a spiral now. We are definitely looking to lower inventories – although luckily, we never bought heavy, and much of what we do have is tied to customer orders. But still – no desire to hold inventory right now.

For starters, I think demand is currently so weak, and inventories still relatively high, we need to see scrap stabilize. If scrap continues to fall….I fear the mini’s will feel compelled to compete on price advantage vs integrated mills and imports and prices fall further. Obviously import levels slowing would help too – but I fear that’s a medium-term fix (maybe months, not weeks). Of course demand picking-up would be very good – but I just don’t see that yet. Eventually, I think scrap settles and buyers get serious about buying for 2016. That should help stabilize things. And then if / as imports are curtailed – depending on the trade cases – I think a modest bump into next year is possible (late 1Q?). But sure looks bleak from here for the next several weeks…..at least.”

We spoke with another manufacturing company located in the South who reported that their business, “…is great, business is up 13 percent in tons and I had originally projected us to be up 5 to 6 percent.” In fact, they told us their business was “the highest seen since 2008.” This buyer also realized that they do not live in a steel world all to themselves and they do not believe that prices will turn until at least some time during the first half 2016.

Going back to the service centers for a moment, we spoke with the owner of a Midwest based distributor who told us that over the short term prices will continue to drop but in the medium to longer term the trade suits and the falling domestic prices will turn this market faster than people give it credit for. He told us, “The further it goes the closer you are to the bottom.”

We haven’t answered the question asked, How Long Can This Last, because there are too many moving parts. We agree that scrap prices, the China factor, commodity prices, the value of the dollar, the strength of the U.S. economy and inventory levels at service centers will all play a part in getting to an answer. Also playing a part are the various labor negotiations and the potential for strikes or lockouts at the automotive companies, US Steel and/or ArcelorMittal and we cannot forget the decisions coming down on the 3 major flat rolled trade suits… There is much to consider before we get an answer to the question asked.