SMU Data and Models

High Prices, Unpredictable Conditions Keep Steel Buyers Cautious

Written by Tim Triplett

August 7, 2018

Most steel buyers are keeping inventory levels steady or even lower believing that, with steel prices so high, the risk is to the downside for the rest of this year. As one steel executive commented: “We are running inventories lean based on the elevated cost and our opinion that there is a greater chance for prices to decrease than increase.”

Steel Market Update canvassed the market this week. Following are other buyers’ (anonymous) comments on market conditions:

  • “The market is unpredictable with the current level of government intervention.”
  • “We don’t believe there is any play in having extra steel right now, so our goal is to get our inventory down to two months. Some of our competitors are talking down the market.  We believe it will be strong through September and then very slowly begin to drop.” 
  • “We had our best shipment/margin in July in recent history. However, it is a very nervous market right now, and our perspective is that customers are buying just what they need. We are in the group of the nervous buyers and only buying what we have committed. Our thought is that NAFTA and EU tariff situation will be settled in the next month or so. The differential between the U.S. price and global price is too great. There seems to be a lot of consolidation going on in the U.S. market with rumors of BRS up for sale, CSN, etc. How this will play out if tariffs are removed is uncertain, but should put contractual buyers in a tougher position.”
  • “We’re slightly overstocked, but not concerned based on our lower-cost inventory. The steep backwardated futures curve is causing concern and confusion versus the regular market commentary trumpeting strength and expected consistency.”
  • “We are decreasing stock levels. Demand is slowing. Our July was better than normal. August should be good. The September forecast is down compared to last year.”
  • “In plate, we have a few holes, much like most people judging by the increased levels of service center inquiries we are seeing. We probably will not materially change our inventory level in the next couple months. We see demand pretty steady and no real advantageous buys out there. The domestic mills are full, with 10-12 week lead times, and they still have good order-entry rates. They don’t have to make deals. The biggest challenge is for service centers to realize that the mills have moved. They have at least a 50 percent baseload in non-service-center project/OEM business. Given that, it is less likely the mills will offer service centers ‘specials,’ as they don’t need the service center base like they used to. Service centers are not going to be able to ‘buy their margin’ like they used to, so they are going to have to learn how to sell on something other than low price. The biggest concern is margin compression on resale.”
  • “The current USA price vs. the rest of the world is a concern. The raw material cost increase makes up about 20-25 percent of the total price move from November 2017 to today. Tariffs going away, while good, would hurt as our prices would drop back down to a lower sustainable level. There’s potential for a recession in 2019.”
  • “We are moving to decrease our inventory as we head into the fall due to the high cost of steel and inventory carrying costs. Trucking inbound and outbound continues to be a big problem. And now rail is becoming the same type of issue with late deliveries and not enough railcars as more companies try to move away from trucking. We had to announce our fourth price increase in the past 12 months. Never in the 54 years of our company have we announced more than one price increase in a year, much less four. The White House is oblivious to how Section 232 this is affecting manufacturers and our economy. Demand is starting to slow due to the high steel prices. We had our slowest July in the past three years. The number of customers with stretched credit lines who can’t pay their bills on time is at an all-time high.”
  • “We have a reasonably balanced inventory, yet we typically try to reduce inventory to bare bones to be in a position to take advantage of any year-end deals, as well as to reduce some end-of-year taxes. We are seeing some slight softening on the street for finished good transaction pricing, but I think it’s due to unfounded fears. I see nothing that should cause any precipitous drops in mill pricing.” 
  • “As has been the case, Section 232 variables keep people guessing. I think there is going to be a ‘psychology’ factor for the coming months. Many are trying to talk the market down. Some think we will remain flat and others foresee shortages. Rarely have I seen this much divergent thinking in the market. July was below average volume for us. August is starting a bit tepid. I think with scrap expected to fall, buyers will be wanting price reductions, so we see pricing pressure in the near term. We will see if the mills have the strength to withstand the test.”
  • “Order entry has been very brisk these first few days of August as I believe many are expecting (hoping) that prices will begin to soften, and they are shopping around for the best (cheapest) spot pricing. We are remaining firm with spot pricing and, based on the spot buy order entry level, we don’t believe others are lowering pricing yet, either. It does give me the sense of walking on thin ice, though.”  
  • “There is the potential for the tariffs and retaliatory tariffs to impact economic growth in a negative manner. July was a good month even with the July Fourth holiday week. We are expecting August to be very strong, as well.”
  • “Prices and lead times have slipped a touch at some mills. The question is, will planned outages, north of a million tons, and lower imports, firm the market back up, or will imports rally and/or demand slow and foster a softer period to come? Mill contract volumes, as in customers buying min versus max monthly volumes, could have a meaningful impact in the coming months, too.”
  • “Lead times are shorter, which takes much of the pressure off the market as buyers can wait longer to make buying decisions. On top of this, scrap prices have weakened, so things feel considerably looser, generally speaking. It will be interesting to see how the mills react with prices in this environment. They likely can avoid dropping the price much if they are patient and let the market run its course, as demand typically rises in the fall. Also, the USW contract expiration is a few weeks away. Because they took nine months to settle the last contract, nobody is really even paying attention to the expiration date or any update on the negotiations. The assumption is that neither side wants to have an interruption caused by a lockout or strike. Having said that, the USW finally has market conditions and circumstances that are being served up on a platter, giving them a strong premise to go on strike. I would find it hard to believe that the president would side with the companies, given all that’s been done on their behalf.”
  • “We expect a strong August and will stay the course regarding inventories for now.”
  • “We are aggressively trying to reduce inventory as we believe the market is unsustainable at these levels and that the price volatility going into the end of the third quarter is questionable. I am hoping to have inventory down another 10-15 percent by the end of this month. Therefore, we are only buying for orders in hand and not speculating on purchases, no matter how good they may look. That’s the strategy today, but who knows what tomorrow will bring?”
  • “Inventories are actually very low vs. normal July trends. Everything concerns us about the market, especially the seemingly unsustainable USA price premium. However, demand in July surprised on the high side, imports are trending down, and mills have significant outages planned in Q3 and Q4. Plate mills look to be sold out through year-end. Of course, many are trying to talk the market down because, as an industry, we are conditioned to believe if prices are not rising then they must fall. The reality is Section 232 is forcing us to navigate uncharted waters where prices may very well remain stable at elevated levels for an extended period of time whether we like it or not.”

Tim Triplett

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