"Use Your Own Eyes," Says Mill Commercial Team Member

Keep an Open Mind and Use Your Own Eyes

I have been saying for months that the market is a lot tighter than “conventional wisdom” indicated. It is simple math, observing how your own customers’ demand is behaving, and the understanding that we are operating in a RISING demand market. It is this last comment that gets the analysts and observers all aflutter – “rising demand.” What do you mean rising demand; 2020 will have 15 or 20 percent less demand than 2019? What do you mean rising demand; people are buying fewer cars than in 2019 and needing fewer pipes than in 2019? True, but demand is rising from a very low point. However, after virtually shutting down production for X months, the fact is that there is more demand than inventory, and mills are late at restarting production. “Rising demand” does not mean huge demand, it simply means more demand than previous months. In a low inventory environment, with production not hitting on all cylinders, it’s awfully hard to catch up.

Why are mills not starting up more blast furnaces? It takes dollars to do so. These are not decisions one makes for a two or three month imbalance. You have to be convinced there is some staying power and demand for your product. If you are a mill that is in cash conservation mode due to the pandemic and the balance sheet, then you have to be careful. Also, as we now know, one blast-furnace-based company has been busy analyzing its own USA strategy and positioning—maybe the risk of restarting furnaces too soon was not in their best strategic interest.

Look, this whole conventional wisdom thing of listening to the same old limited scope analysts pushing their narrative has an effect on buyers and CEOs of steel consuming companies. They think mills are not very intelligent and that overproduction is incredibly huge. Maybe it will be at some point, but we are in a cyclical industry, so last I checked things go up and down, and right now, during a pandemic that obscures the crystal ball, it is more important than ever to rely on your own eyes and not place so much weight on the analysis of some NYC-based people. My eyes tell me that imports are low into Q1, production will increase—not in leaps and bounds, but in measured steps—demand is increasing. Increasing, but not sexy. You know that auto sales reached a SAAR of 16.4M last month. And that inventories on light vehicles are only 49 days. That’s it…49. Auto companies are busy, and they will continue to be busy using steel until COVID shuts something down or an inventory build-up occurs. That could happen—in two or three months. But for now, there are enough examples like auto where end-users need steel. Believe your own eyes and be ready to adjust when too many tons come on, or inventories are rebuilt, or when COVID has more impact.

In my opinion, production “catches up” at some point from late-Q4 through mid-Q1. Inventories (of finished goods, construction jobs, etc.) will become “right” and the U.S. mill operating rates plus renewed imports will bring more balance to the market. Don’t think the runaway train is as extreme in total tons as your guy down below is saying [referring to Sunday evening article in SMU entitled: SMU Reader Lays Out Supply Side Concerns], but I agree with some of his premises.

Mexico? Mexico’s situation is similar to the U.S. right now. One important player in that space is not firing on all cylinders either. Canada could be a more relevant relief-pitcher, but Mexico and Canada have S232 concerns on that front. Not sure Canadians would ship a bunch of extra tons.

In the U.S., remember that slabs will be back on Jan. 1. I would think the rerollers are going to be bigger players starting in January, and you surely have heard that JSW is supposed to start their melt-shop up again. Perhaps to sell merchant slabs to rerollers as well.

That is why I think mid-Q1 is a likely inflection point. Lots of good things happening until then (demand improvement), plenty of actions to increase supply happening (slabs, expansion of BRS, another furnace surely will come up, restart of JSW, no more maintenance outages at the minimills), so it should all come together about that time.  

If you can tell me about COVID vaccines, elections, energy demand, then I could dare to predict more details, but nobody can predict that right now! My advice remains, keep an open mind and use your own eyes.