Wolfe Research's Tanners cautions on sheet storm’s darkening clouds

“This one we’ve been talking about for a while, and we feel like the theme is coalescing here,” she said.

Tanners warned that softening demand, excess inventory, and rising supply would hit steel margins. And she predicted it could force some steel producers to cut production.

Considering this, she said Nucor’s decision last week to cut prices significantly was “really interesting” and “a huge shock to the market.”

“It is a conundrum, but I do think it’s Nucor’s efforts to really be honest with customers about the true state of the market,” she said.

Supply up, demand wobbly

And what is the true state of the market? It’s not particularly good from what Wolfe Research has been hearing, with Tanners noting that market conditions are “a bit soft.”

Tanners referenced SMU’s buyers’ sentiment indices, which are showing “a pretty clear picture here that demand is worsening pretty steadily.” While sentiment is “not terrible,” she pointed out that the proportion of respondents reporting deteriorating market conditions has been growing in recent surveys.

Additionally, “plenty of inventory” exists in the sheet market. And yet most mills have been talking about keeping production steady or raising output in the current quarter. She also noted that Steel Dynamics Inc. (SDI) and U.S. Steel are adding galvanizing capacity while also ramping up hot band capacity.

“This keeps us pretty cautious, especially as we head into the second half,” she told clients on the webcast.

Mind the gap!

Another gust in the sheet storm? The “unsustainable” premium galvanized sheet has been holding over hot rolled.

The HR vs. galvanized price spread was $320 per short ton (st) as of last week, according to SMU’s pricing archives. That’s 60% higher than a post-pandemic norm of approximately $200/st. Before the pandemic, the spread was typically $100-150/st – less than half what is is now.

“That’s a big deal,” Tanners said. That’s because a ~$200 reduction in the premium, for example, would significantly impact producers’ profitability, she added.