Steel Products Prices North America

It May Not be Sexy But It's Got Legs...

Written by John Packard

Manufacturing companies are questioning the run up in steel prices with some wondering if now is a good time to pull back and wait out the market. SMU, with the help of a few of our manufacturing and service center sources, will try to put a historical perspective into the market in an effort to assist steel buyers in their evaluation of what to do next.

Steel Market Update received the following email on Friday, “Let’s talk about the legs this market has. When do you gurus of steel feel that we will see prices pull back. I was trying to buy for 2Q17, and I was quoted almost $180/ton slit and delivered over what I bought at when the market was at the bottom. I don’t think I am going to pull the trigger. I think that the domestic mills’ order books are filled with a long delayed restocking and buyers like [company name removed] will soon be content for the market to settle and wait for another buying opportunity. Your thoughts?”

A couple of weeks ago SMU had a conversation with the owner of a manufacturing company which has been buying foreign (and domestic) light gauge galvanized steel for decades. Over the past few months the price of .012” G30 galvanized has gone from just under $30.00/cwt to $40.00/cwt. His steel costs were raised by just over $200 per ton.

When asked if the $40.00/cwt number frightened him he told me that the average price that his company has paid for .012” G30 galvanized over the history of the company was $40.00/cwt. He did not say he was a big buyer right now at that number because he understood the true “value” of the low $30.00/cwt steel and bought in line with his long-term understanding of the market and market prices.

Out of curiosity SMU went back in our records to see what flat rolled steel prices have averaged since we began indexing pricing in January 2009. The results may surprise you:

Hot Rolled = $597.38 per ton ($29.87/cwt)

Cold Rolled = $708.10 per ton ($35.41/cwt base)

Galvanized = $35.42/cwt base

Galvalume = $35.59/cwt base

All of the items shown above are base price prior to extras and freight (FOB Mill).

We shared the comments above and our averages with the manufacturing company who asked if the market has “legs” and for our thoughts on the subject. We received the following response:

“Thanks for sharing this. While agree with his sentiment, just like a service center, I can’t always buy on that long of an historical perspective. I sell a highly commoditized product. If I buy wrong, I could not only eliminate my margins, but I could be selling at a loss for a long period of time. This could be catastrophic for a business like [business name removed]. My selling prices move with the market, if I went this long and guessed wrong, I could suffer from much more than margin compression. Make sense?”

Other Opinions:

A large national brand service center told SMU on Friday:

Depending on which product is being described, at +$180 up from the bottom, the individual is basically being offered today’s most recent spot offer price, good a year from now. So it sounds like the buyer believes he’ll be able to buy at the same or lower price one year from now, vs. today.

This is pretty simple, in my view. We have a supply-side driven up market, caused by reduced imports, reduced domestic production, and rising input costs (Scrap). Assuming a stable demand scenario, the only way to get prices to stop moving higher or to even stop, is to add more supply until it reaches balance with demand. It’s worth reviewing MSCI March data:          

There were 2,228,300 tons shipped (96.9K tons/day), down 6% vs. Jan/Feb ave, and down 11% from March ’15 (** note: Some believe it’s not appropriate to use the full 23 days for March, since many facilities (suppliers and en-users were closed for Good Friday. If one adjusts down to 22 days, then the difference vs. Jan/Feb is only slightly lower around -2%). Ending FR inventory was 4,992,900 tons, down 161K from March or -3.1% from Feb, and down 15% from March ’15. So, despite flat to lower FR shipment levels, inventory is still declining for the 6th month in a row, to 2.2 MOH. There’s no sign that the Supply will/can grow, since a) domestic production is flat and b) imports are much lower and maybe will still fall further.

With Global steel prices rising at the same rate as the US (per your graphs), there does not exist enough spread between domestic and foreign prices to cause imports to rise. For that to change of course either the US prices need to keep rising while the global prices need to go flat or down, until the spread becomes attractive. However, even if the spread becomes attractive, since the available # of countries that are able to ship into the US has been curtailed via the early trade case rulings – especially for HR and CR, we will likely see a much less robust import impact than we have in the most recent years. The impact of growing imports would not be felt until well into the 3rd Qtr, if it got turned on today. The other factor involved is scrap prices, and it’s possible they stabilize, but it’s hard to see them falling anytime soon.

The few caveats to the above would be normal summer seasonal easing, which might freeze the market for a month or so, but then what? I keep coming back to “how do inventories grow, and when do mill lead-times come back as a result?” Assuming the outlook for the import info above is correct, growth in supply is not possible without domestic production re-starting. Lastly, what happens if we see any pickup in demand? What happens if we get a serious unplanned outage at a US mill? If this scenario continues, I think we’ll see pressure from end-users, who not only will be paying higher relative prices for steel, but in the case of ultra-light gauge coated, simply can’t buy enough of it to satisfy demand. Prices should get to the point ($550?) where a USS and AK feel comfortable restarting furnaces, but as pointed out in the case of USS-GC, they need OCTG back to justify a re-start.

This is a particularly unique set of circumstances, and maybe is our first glance at life in the “post-consolidation” market for FR, with the mills’ ability to truly control the market becoming clearly evident.

A lot can happen in one year, but your friend might be smart to take the deal…”

A second service center also responded to our query:

Not to sound repetitive, but even with the current run-up in pricing I still do not think the street understands the severity of this market. We have a serious supply disruption on the horizon for manufacturers. In reference to this customer’s “up $180 comment”….since coated CRU bottomed at $23.90 it has risen to $31.75. Might sound like a lot, but mills are already pretty firm at $35.00 base. So up $9.00 is a lot better than up $12.10.”

So, from our perspective when asked if this market has “legs” we believe the market could well reach or exceed the averages shown above before correcting. Secondly, if and when the market corrects we do not believe it will go back to the low to mid $300’s for hot rolled coil. We could see a bottom develop that is closer to $400 or higher.

Since we are in a supply-side driven market the correction would be stimulated by more supply being made available into the U.S. market. This would most likely include one (or both) of the facilities currently not producing steel (Granite City and Ashland) bringing their furnaces back online. It would also include increasing foreign steel offers at lower prices. At the moment, we are not seeing either of these scenarios over the short term (next 30-60 days).

We are watching the situation in China as they bring back capacity to take advantage of the higher selling prices. China could be the tipping point that starts a flood of foreign offers around the world. Stay tuned to Steel Market Update in the coming weeks and months.

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