Final Thoughts

Final Thoughts

Written by Michael Cowden

Steel Market Update has adjusted our steel pricing momentum indicator for hot-rolled coil lower. That’s not something we’ve done since July 21, 2020 – and it’s not a decision we took lightly.

But the evidence is hard to ignore. Our hot rolled coil price now stands at $1,910 per ton ($95.50 per cwt), down $10 per ton from last week and down $45 per ton from $1,955 per ton in early September.

gearsAnd price is hardly the only factor we took into consideration. Lead times – a leading indicator of pricing moves – have been falling for even longer.

You can chart HRC prices and lead times together in SMU’s interactive pricing tool. If you do, you’ll see that lead times peaked way back in mid-May at 10.81 weeks. They bounced around 10-11 weeks into early August, but have since fallen significantly and now stand at about 8 weeks on average.

That would be a very strong lead time in any other market. And it’s roughly double the 3-4 weeks we recorded in the spring and summer of 2020. But it’s the first protracted downtrend we’ve seen since the early days of the pandemic.

And it’s not just prices and lead times that are falling. As Tim Triplett highlighted in Final Thoughts earlier this week, respondents to our surveys report that mills have more tons available, that they’re more willing to negotiate on prices, and that service centers are having more and more trouble passing along high fob mill prices to their customers.

Also, and as our premium members already know, service center inventories were up in September compared to August, while shipments were down.

Another chink in the armor, buyers have increasingly shifted purchases toward lower priced foreign steel. So that’s what the data says. What am I hearing in the market?

Long story short, if a mill offers you $1,940-1,960 per ton ($97-98 per cwt) for hot rolled, you can probably ask for a slightly lower price and get it – something that would have been unthinkable earlier this year.

Why? For starters, we continue to hear rumors that tube mills are buying hot rolled coil around or a little below $1,850 per ton ($92.50 per cwt). And last week’s big buyer price is often everyone else’s price a month or so later. In a normal market, that wouldn’t be big news. Big end users typically get a discount for buying big volumes – thousands of tons – compared to smaller spot orders of a few hundred tons. But that hasn’t always been the case this year. There were periods earlier this year when large buyers didn’t get a discount and might even have had to pay a premium to get big tons.

That’s just one example, among many, of things returning to something resembling a normal in the steel market.

Here’ s another: Late last year and throughout much of this year, price was a secondary concern to availability. That is no longer the case.

“It’s reverted back to how it’s always been,” one service center executive told me. “We have options. Price determines whether they (the mill) get the order, and availability is secondary.”

His explanation: “The fear of not having steel is gone.” My interpretation: The new fear might be of having too much steel.

Why do I suggest that?

The declines we’ve seen in fob mill prices are nothing compared to what’s going on in the resale market – where we’ve heard of prices being down as much as $150-300 per ton ($7.50-15 per cwt).

Let’s say a domestic mill is offering $2,100-2,200 per ton ($105-110 per cwt) for cold rolled coil. And let’s say you’ve got material on the ground that you purchased for $1,600-1,700 per ton ($80-85 per cwt) – which you could have done as recently as early May. Guess what? If you decide you want to move inventory, you could sell that material slit and delivered to your customer at below fob mill prices and still make a tidy profit.

“One of the real problems for the mills right now particularly in the coastal areas is the resale numbers are really getting hammered,” a second service center executive said. “We had a wonderful dynamic where the mills were raising prices, and we could raise prices too – but that party is essentially over.”

That’s in large part because of pressure from lower priced imports. And sure, imports from certain nations might be late. But the tons are still coming – from Vietnam, Brazil, South Africa, Serbia, Pakistan, the United Arab Emirates (and Canada and Mexico) – and not all of them will be late.

Also more tons will be coming from domestic mills not only as new hot rolled capacity comes online but as more coating capacity is added to the market as well.

So why didn’t we change the momentum indicators for cold-rolled, coated and plate to lower this week?

That answer is not very complicated. Prices for those products have been a little stickier. They’ve been flat, up modestly or down modestly in any given week for the last month or so, whereas hot-rolled coil prices have been more consistently lower.

That’s what you would expect. Hot-rolled coil is a higher volume market and so tends to be more fluid and quicker to react to price moves. Smaller markets like tandem products and plate have fewer spot transactions. They also tend to be more consolidated. That allows them to be more “disciplined” and better able to absorb some of the bumps we’ve seen in HRC.

But, at the end of the day, the flat rolled steel market is on the same road. And the writing appears to be on the wall for other flat-rolled products too. If those prices drop, then it won’t just be the momentum indicator for HRC that shifts lower, so too will the momentum indicator for all products that’s on the top right-hand side of our homepage.

By Michael Cowden,

Michael Cowden

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