We are in uncharted waters.
The key is not to panic.
Learn to separate fact from rumor. I repeat, learn to separate fact from the rumors that tend to envelope this industry.
For example: The “rumor” is the domestic steel mills are getting huge order cancellations. Is that a fact or is it conjecture based on the belief that things are going to get worse from here? There is a big difference, and how you react to comments about cancellations may color how you react to the spot market and your customers/suppliers.
I spoke to many steel mills on Tuesday regarding the rumors of large cancellations. I was reminded by one mill executive that there is a big difference between a customer coming to the mill and outright cancelling orders versus not taking the steel ready or in the process of being produced. This mill told me order cancellations were “not happening.” However, customers looking to move orders to accommodate changing market conditions is a different story, and that story could be quite different from industry to industry.
For example, the energy markets are getting crushed with oil hovering around $20 per barrel. The number of operating rigs in the United States has seen a significant drop. Fewer oil rigs equal less steel being used. On the other hand, the construction markets are still taking the steel ordered and operating on all cylinders. There will be an impact on the domestic steel mills with postponed projects and fewer operational rigs. The integrated steel mills are making moves by taking furnaces off line to adjust to the “new normal” in the energy patch.
Steel mills ship steel direct to the OEMs (Ford, GM, Nissan, etc.) and they also ship to the service centers who generally are supplying product to Tier 1 and Tier 2 suppliers. The mills are finding the automotive companies are not pulling from the inventory being held at the mills. Service centers, on the other hand, are pulling steel as the Tier 1 and Tier 2 suppliers are building inventories and safety stock for the OEMs when they come back online.
From the mill viewpoint, the key is to watch demand signals and inventories in the supply chain.
A second mill confirmed they were getting cancellations in the “hundreds of tons” and not thousands of tons as the rumor mill may have it.
A third mill also confirmed “a handful” of cancellations.
An interesting observation from an executive at one of the steel mills: “Have you ever seen the domestic steel mills proactively shut down capacity without a prolonged price war?”
Indeed, in my 42+ years in the steel industry I have never witnessed a time when the domestic steel mills took capacity offline without a long period of falling prices.
We are in uncharted waters.
Here is some of the things I am thinking about:
The integrated steel mills have taken about 20 percent of the flat rolled supply out of the market. This was done by idling blast furnaces (hot end of the steelmaking process). There may be more supply coming out over the next few weeks.
Trading companies and steel buyers are telling me to expect virtually no new import orders for flat rolled unless it is a product not produced here in the U.S.
Service centers and wholesalers are not building inventory and are not speculating on purchases (at least not yet).
There are signs of lower prices out of the domestic mills, most likely low enough to keep foreign out of the market.
One mill spoke about demand. As you look at your business, where do you see demand come July, August, September? What will the recovery look like for the steel industry?
Most of the blast furnaces taken down are in “hot idle” meaning they can be returned to service within one to three weeks.
Will we get a spike in prices later this year?
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John Packard, President & CEO
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