Are We Ready for a Wild Ride?

With the creation of AM/NS Calvert we are seeing ThyssenKrupp exit the domestic steelmaking market and the consolidation of the Calvert assets into an existing domestic steel mill supplier. According to recently published report by Goldman Sachs, ArcelorMittal now controls 31 percent of the flat rolled steel market in the U.S.

Steel Market Update (SMU) is aware of rumors attaching other foreign-owned mill assets in the United States as potential candidates for further consolidation. If this does happen the landscape from which many buyers and sellers of steel have been operating may be radically different in the future as with any new consolidation there will be changes to market fundamentals regarding supply and demand.

Steel Market Update is not alone in our view. On March 26, 2014, in a note to his customers, Goldman-Sachs steel analyst, Sal Tharani advised his viewpoint regarding the changing mill landscape, “We have been vocal for some time about our more bullish stance on flat rolled steel where we see a structural change in supply-demand fundamentals with closure of about 8mn tons of capacity in North America between RG Steel and US Steel Hamilton, consolidation through purchase of ThyssenKrupp Alabama by a joint venture of ArcelorMittal/Nippon Steel & Sumitomo Metal Corporation (NSSMC), and a pre-crisis level recovery in relevant end markets like automotive. We believe that new ERW OCTG capacities under construction in the United States would provide additional demand for HRC, which could potentially tighten this market. We also believe that there is potential for further consolidation in the industry if other foreign owners of the US steel producing assets (after ThyssenKrupp) decide to exit this
market.”

As mentioned above, ArcelorMittal (AM) controls approximately 31 percent of the flat rolled steel market. The next two largest mils are U.S. Steel with 23 percent and Nucor with 17 percent (AISI & Goldman Sachs). The three largest mills now control somewhere from 70 to 77 percent of the domestic flat rolled markets.

The flat rolled world is changing around us and companies need to continually evaluate their risk profiles.

The ability of the domestic mills to accomplish higher prices in spite of lower commodity costs (which Goldman Sachs pegged as down 18 percent on spot iron ore, 10 percent on scrap and 20 percent on coking coal so far year to date) and a relatively wide spread between domestic and foreign steel should be a message to buyers to remain aware of what is going on around you.

Going forward, scrap prices are poised to move higher in April. Steel Market Update understands that a number of mills have had very strong bookings over the past couple of weeks. Service center inventories continue to be lean. We will need to watch lead times but at the moment Steel Market Update believes prices will continue to move higher from here. Whether this next move will be a short mini-cycle or the beginning of a longer term move higher is not yet known.

A wild card which some of our sources suggest will be thrown into the mix shortly after the next round of earnings announcements, could be the long awaited filing of dumping suits on cold rolled and coated (galvanized and Galvalume) steels.

We spoke with one steel buyer earlier today who told us they were taking the threat quite seriously and they were operating under the assumption that any foreign coated imports after September arrival could be in jeopardy. This one buyer confided in SMU saying with spreads well exceeding $100 per ton on the coated products they are using they were making moves to protect themselves before any dumping suits get filed.

The countries being mentioned as potential targets are: China, India, Taiwan and South Korea on coated and China on cold rolled. Whether other countries will be added is not yet known. In the case of oil country tubular goods (OCTG) we saw the domestic companies going after some of the smaller players as well as the big fish (Korea).

Mr. Tharani mentions, in the quote above, that new OCTG pipe producers are being built in the United States with the expectation that they will use domestic steel mill production for their ERW (welded) pipe and tubular goods. This should create an expanded hot rolled market for the domestic steel mills.

There are many pieces of the puzzle flying through the air right now and our belief is that the domestic mills are gaining momentum.

As reported previously – and possibly missed by some of our readers – Steel Market Update did adjust our Price Momentum Indicator on Monday from Neutral to Higher.

Some of our sources believe this uptick in pricing will be short-lived only to fizzle out come May or June. Others are of the opinion that with dumping suits and a concern about doing business with Russia (particularly hot rolled coil) could push the market to heights not seen in awhile.

We anticipate our readers have many opinions on this subject and we would appreciate hearing from you. You can communicate directly with us at: John@SteelMarketUpdate.com. We will also probe this subject further in our next flat rolled market survey which is scheduled to begin early next week.