SMU Data and Models

SMU Price Momentum Indicator Moved to Higher from Neutral

Written by John Packard

Steel Market Update (SMU) has adjusted our Price Momentum Indicator to reference spot prices as moving higher from this point over the next 30 days. Our decision to move our indicator is due to the continued high prices for steel mill inputs, such as 62% Fe iron ore fines in China being sold at $91.50/dmt CFR Tianjin Port, China. We also believe ferrous scrap prices will be +$30 per gross ton or higher once negotiations have been concluded with the domestic steel mills. The higher input costs will help motivate the mill commercial departments to hold the line or to increase flat rolled steel prices.

We are being cautious about our change from Neutral to Higher as we are unsure whether there is enough wind at the sails for the steel mills to continue moving prices above the $640 per ton hot rolled and $850-$860 per ton cold rolled and coated that we are seeing as the high end of the offers in the market currently.

We will need to watch to see where scrap negotiations ultimately settle for the flat rolled mills and then we will have to watch lead times. For now we are of the belief that prices will begin moving higher and will continue to do so over the next 30 days.

SMU knows there is an ongoing debate within the steel mills themselves. The head of commercial for one mill shared some thoughts on the subject with SMU this morning, “All I am doing is arguing with my commercial teams. Their pricing feedback tells a different story than the order book says. A subgroup of customers are skeptical of increases and/or are holding very competitive offers from newcomers who are desperately trying to establish themselves [foreign mills]. At the same time costs are going up, bookings are strong, and we feel steel will be very tight in Q2.” He went on with, “We are moving our price up to keep up with alloys, ore and upstream products.”

The steel buyers Steel Market Update spoke with today (Tuesday, February 28, 2017) are reporting the most as holding asking prices in the $620-$640 level on hot rolled and $820-$860 levels on cold rolled and coated for late March (HR) and April (CR/Coated) lead times.

However, a number of mills are not quoting prices at this moment. One buyer told us, “I have been having a hard time getting anyone to quote at all. It seems Nucor has little spot to offer. Arcelor is not quoting galvanized….”

From the east coast a buyer told us, “We have seen only three mill announcements and none of them have increased their prices to us as compared to our previous communications [with SMU about two weeks ago].”

A large service center headquartered in the Midwest told us, “I don’t think we have purchased anything at the new base pricing as of today. Eventually we will all be paying higher prices, unless we endure a correction in the near future. Which as you know isn’t a question of, if it happens, it’s more of a question of when. With the majority of the service centers running on a 2.5-3 month inventory, each of us we will be forced to restock at our own pricing levels. Some of my customers are saying, they don’t think the new increases will stick, actually I think they said that about the last three increases.  It’s just about that time when the next increase is announced, firming up the last announcement.”

Another service center group told us they were seeing new spot price offers at $630-$640 on hot rolled, $830-$840 on cold rolled and galvanized and $840 on Galvalume. They also told us, “Note:  On competitive situations we have seen mills willing to negotiate or “adjust” Grade Extras, T&W Extras, Coating Weight Extras and Equalizing Freight – but NOT change Base Price (obviously due to the indexes).”

A Southeast buyer shared the following, “Now that March is pretty much closed out I think the pricing on CR/HDG will be at the $42.50 number, I really do.  HRC – who knows?  Yes, there is resistance from customers as there usually is.  You know Wilbur [Ross] got voted in at Commerce last night and our President gives a speech tonight – we all have to factor in what the political landscape will be and buyers who are not considering that are uninformed. I have not bought at the new numbers yet and will resist as long as possible.”  

A national service center chain told us that the new offers on HR, CR and coated were “in line” with the announcements: $640 hot rolled, $840-$860 cold rolled and galvanized, $800-$460 Galvalume and $740-$760 delivered for April plate. They went on to say, “Not a buyer at this prices but we can always negotiate modest discounts for specific orders in hand. We will increase import purchases and/or lower inventories further before consider paying these higher prices. Although, I think they will go through temporarily based on scrap. Note: we are heavily contractual and really a small buyer on the spot market.

“Resistance is constant but we are slowly raising our resale numbers. With prices rising so quickly, there is significant gap between avg. cost and replacement price, which creates a disconnect/lag on how fast we can move resale (frustrating). Also, the significant gap between import and domestic (CR/Galv) also inhibits ability to raise price depending on specific competitive situation (eg. does our competitor have a heavy import mix etc.  Contract customers will absolutely push back on higher Q2 Zinc and will soon begin demanding an immediate shift towards import for H2. Any OEM with a H1 only deal is in for a shock….”

SMU opinion is for flat rolled steel prices to rise modestly from the $605 hot rolled reported last week as well as the $830 per ton cold rolled and galvanized base prices and $835 per ton Galvalume base pricing.

With scrap poised to increase and the mills about to move HRC into April and other products in late April and into May…we are of the opinion at least one more price increase is on its way and Momentum will be with the steel mills over the short term.

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