SMU Data and Models

SMU Market Trends: Are Steel Prices Close to the Bottom?

Written by Tim Triplett

Except for a brief uptick this summer, steel prices have been on the decline since March and breached the $500 per ton level this month—a psychological line in the sand that leaves steel buyers wondering how much further prices can slide. Steel Market Update estimates the average price for hot rolled is now down to $480 per ton. Does that mean the market is close to the bottom? Views on that question are mixed.

Following are some (anonymous) comments from service center and OEM executives this week:

• “Are we close to the bottom? I don’t think so. I think some capacity needs to come out of the market. Demand does not have the legs to push prices up.”

• “I’m not sure if we are close to the bottom. It seems like there might be more room to go. For prices to rise we need further supply reductions and raw material prices to move higher.”

• “We’re not yet at the bottom, but close. We believe we’ll test the $470 level before seeing a bottom. For prices to rise again, the high-volume buyers will come in near the bottom, place huge blocks of tons, lead times will move out, and the mills will raise prices. Our third cycle this year. Will an increase be sustainable? Absolutely not without an increase in demand.”

• “We are close to the bottom, but how close? It’s ugly today and maybe for another 4-6 weeks. For prices to rise again, we need a market shaker. Maybe the tariffs going back to 50 percent on Turkey? The mills will need an increase soon. If there’s no recession, prices will go up after the December order book is mostly filled.”

• “A reasonable person would have to believe we are close to the bottom, but stranger things have happened and with reports of discounting to $23-24/cwt, it suggests that input costs and profitable sales are not the current mill objective. For prices to rise we need to have trade deals in place that won’t continually change like the situation in Turkey. The laws of supply and demand trump all. The mills would have to remove enough tons to gain the upper hand with buyers in order to have any effect on prices.”

• “It’s very confusing. The mills are talking about a price increase coming, but I hear from one mill they won’t make the same mistake as last year. The increase needs to be in December. Demand is horrible, however, so I expect prices to keep falling into November. For prices to rise, the recession talk needs to subside and demand needs to pick up. The economy not as robust as expected and that is affecting all aspects of our business. Demand is the key driver [behind a price increase] and it’s truly in the dumps right now.”

• “I think we are likely close to a bottom. I would expect pricing to start to rebound in February. It really depends on the trade and political environment. Should things settle down, prices will rebound. Impeachment is taking all the oxygen out of the room, with trade wars contributing to the uncertainty. I foresee additional uncertainty as we move into 2020.”

• “Service centers are holding back and not ordering much. This is keeping lead times shorter than normal. Demand has stayed relatively steady. I think service centers will have to jump back into the market after the holidays. We might see pricing start to rise again in late Q1.”

• “Yes, we are close to a bottom. I think a little movement south is still possible, but not much.”

• “Close [to a bottom], but no cigar. We see a further drop for December. The mills will only be able to raise prices if they stick together, which rarely happens.”

• “Yes, prices are close to the bottom. For prices to rise, we need certainty in the economy.”

• “Based on current scrap prices and no change in the same for November, I think the HR index could fall to $470-ish per ton, with extremes to $450 and lower. There’s literally only one solution to get to HR price to sustain and hold above $550/ton: reduced domestic output. Given that we’re now into a lower demand environment, the supply side takes on most of the burden in this market for now. We may continue to experience these micro-cycles where prices drop, price increases are announced, and a buying binge ensues, and then we’re back to crickets. As SMU has reported previously, we’ve wrung out all of the excess imports that were possible via tariffs, and the resolution of Section 232s with Mexico and Canada, our largest steel trading partners, cemented this phenomenon, putting in a fairly firm floor level of imports. That leaves only domestic output as the remaining lever that the mills can control. Unfortunately for them, it falls mostly onto the integrated mills to cut, since their structure is such that they cannot tweak output as easily as the EAF mills can.”

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