Steel Mills

HARDI Members in OK Shape as Construction Lags the Downturn

Written by Tim Triplett

Business remains surprisingly strong for wholesalers who sell galvanized steel products to the HVAC sector, considering the devastating impact of the coronavirus on the economy. In a conference call this morning, members of the Heating, Air Conditioning & Refrigeration Distributors International (HARDI) said the construction industry has dodged the worst of the virus’ effects so far, though that is likely to change in the coming weeks.

“Your business is about to change, and it may be more profound than you imagine,” said John Packard, president and publisher of Steel Market Update. Steel prices are moving lower, lead times for spot orders from the mills are shortening, and the American Iron and Steel Institute reported that the mill capacity utilization rate dropped by 10 percent last week to an average of 71.1 percent. Scrap prices are forecast to decline by a further $30-60 per ton in April, which will give the minimills room to lower finished steel prices further in pursuit of what demand remains in the market.

Steel Market Update has changed its Price Momentum Indicator to Lower in anticipation of continued declines in steel prices over the next 30 days. Steel prices are particularly difficult to gauge in the current environment because they are changing so rapidly and many buyers have put a hold on purchases until demand becomes clearer, Packard noted.

Steel Market Update’s Buyers Sentiment Index this week hit a reading of -9—on the negative half of the scale and at the lowest level since November 2010 when the market was just emerging from the Great Recession. That’s a 67-point drop from the +58 reading in early March—an unprecedented one-month decline.

Steel Market Update’s canvass of the market this week puts the current average price for galvanized steel at $715 per ton. That’s down from $770 two weeks ago and a high for the year of $800 in mid-January.

Construction typically lags a downturn as contractors finish up jobs, then lags again as work slowly ramps up when the recovery begins. One executive on the call noted that the fundamentals for commercial construction were strong prior to the virus, so the market is likely to respond better coming out of this crisis than it did following the last recession. “We are expecting a slowdown, but we are still buying steel, though at a much slower clip.”

As the HARDI members noted, some states consider residential and commercial construction to be essential functions. Other jurisdictions, such as Washington State, have deemed construction nonessential and have forced jobsites to shut down. Other state and local governments may follow suit. So, the impact on the HVAC market and galvanized steel demand is not uniform across the country.

“We have not seen a significant slowdown yet. Overall, our dollar volume is about the same,” said one HARDI executive in the South. “Our branches are all open and operating. We expect an inevitable decline in the market, depending on what happens with our contractor base over the next few weeks.”

“We still have a good workload, operating to the new normal. We’ve instituted lots of social distancing, modified lunch hours, how customers can go in and out of will call. Judging from billing and demand, things are still OK. But this could very well be a honeymoon period for us,” commented another.

“As we get further into this, more job sites and customer shops will close, which will affect our numbers at some point. We did not expect our March to be as good as it was. We expect April to be off maybe 30 percent from last year,” said one distributor. “We have not bought any steel and are in an inventory reduction mode on the expectation there will be some significant softening in prices. Cash is king in a crisis environment. We are keeping an eye on three things: accounts receivables, inventory and cash.”

HARDI members on the call were not totally pessimistic. Said one: “All our plant locations are open. We are being proactive on internal policies and protocols to keep everyone safe. We have diversified sources of supply and a diversified customer base, so we continue to operate as usual. Once the virus passes, we have a positive outlook for demand in all the major sectors we sell to.”

“We also expect business to be down about 30 percent in April. I am not as worried as some. Prices won’t go from the penthouse to outhouse, just from the fourth floor to the living room. The demand issue will be bigger than the price deflation,” predicted another exec.

A poll of the distributors on the call showed that the majority (58 percent) expect galvanized steel prices to decline by more than $2.00/cwt or $40 per ton in the next 30 days. Looking at galvanized six months down the road, two out of three expect prices to be flat or even up by as much as $2.00/cwt from where they are now.

SMU’s Current Sentiment Index is in negative territory, but Future Sentiment remains slightly positive at round +5, Packard pointed out. “People are more optimistic looking ahead, and that makes sense. If the virus is contained in some fashion, hopefully business will start the process of getting back to normal come July or August.”

Steel Market Update participates in a monthly steel conference call hosted by HARDI. The call is dedicated to a better understanding of the galvanized steel market. The participants are HARDI member companies are wholesalers who supply products to the construction markets, also on the call are service centers and manufacturing companies that either buy or sell galvanized sheet and coil products used in the HVAC industry and are suppliers into the HARDI member companies.

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