SMU Data and Models

Steel Buyers Sitting on Hands, SMU Momentum Shifts to Lower

Written by John Packard

Service centers and manufacturing companies are telling Steel Market Update of softening demand, shortening lead times (may not be in the published numbers, but orders are coming out early), and negotiable pricing. Many buyers are sitting on their hands and only buying what they need. On top of this, SMU Service Center inventories appear to be balanced to slightly on the high side considering we are going into the slower side of the year, a traditional time to pare down inventories. The combination of these factors points toward lower spot prices on all flat rolled and plate steels over the next 30 days.

arrow downSMU Price Momentum Indicators Adjusted to Lower

Steel Market Update is moving our Price Momentum Indicators on cold rolled, galvanized, Galvalume and plate steels to Lower from Neutral. Our hot rolled Price Momentum Indicator was already at Lower from an adjustment made over one week ago.

The general manager of a large service center discussed the changes in market momentum with these words, “This particular downturn, which is starting now, has been highly expected given the current market dynamics that have been evolving over the last couple of months. We very well could see a repeat of what occurred in the summer, with a drop-off in price by mid-late fall, followed by a period of heavy orders at very low prices, and then lather, rinse, repeat.”

Demand is Soft

SMU spoke with multiple steel service centers today who reported demand as being “soft” at best. When asked if true demand is down or if buyers are sitting back and waiting to buy, we received mixed responses. One service center exec pointed to the ag (agriculture) industry as being representative of what they are seeing in the market. He reported layoffs at John Deere and prices for soybeans and other crops at all-time lows. Basically, the farmer has very little cash to invest in grain bins, tractors or other steel-intensive products. For this service center, there is no doubt. “Demand is down.”

The president of a service center put it to SMU this way, “Is there more of a problem on the demand side than we have been willing to acknowledge?” He reported sluggish shipments in August and September that are well off their expected shipping projections in sectors including agriculture, energy and heavy equipment.

When asked if placement of contract tons could come into the market to help offset some of the sluggishness, we were told by one large service center, “Buyers have already replenished and then disappeared.” This steel buyer was surprised at how fast the shift from higher to lower prices took place. “No one expected the market to turn so quickly.” At this point, he anticipates no new activity until the first or second quarter of 2020.

Executives pointed to lower scrap prices and the expectation for scrap to move even lower for October transactions as more proof of the pressures being put on pricing. Just about everyone we spoke with today felt the lows of the year will be tested in the coming weeks.

Another issue of concern to those who are buying cold rolled and coated products is the spread in base prices between hot rolled and those steels. The spread this week is $180 per ton, well above the traditional norm of $100-$120 per ton. Something has to happen to bring that spread back into line, and it doesn’t look like the HRC price is about to rise anytime soon.

Add in concerns associated with the General Motors strike and the potential for more spot tonnage to come flowing into the market if the strike goes on for too long. Here is what one service center executive had to say about the evolving GM strike situation: “If it lasts for greater than one week, it will have a negative impact. If mills do not make any adjustments in their current schedules, they ultimately will have to adjust at some point down the road. Depending on how long the strike lasts, restarting production can also be a sluggish and uneven process as the vast system comes back to life. Because of this, the ripple effects on the total supply chain are typically worse than just the actual days lost during the strike.”

So, there are many moving pieces that steel buyers need to watch carefully over the coming days and weeks. Stay tuned.

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