SMU Price Momentum Indicator Still Pointing Toward Lower Prices

The lowest numbers we collected go back to June 2009 when hot rolled coil averaged $380 per ton.

This week scrap prices in Detroit settled down $100 per gross ton for prime grades (such as bundles and busheling) and $80 per ton for other grades such as shredded. It is not yet known if scrap will retreat further but in a note to her clients Bank of America Merrill Lynch analyst Timna Tanners pointed out that the historical average for the spread between iron ore and scrap pricing is 2.8 times ore. Ms. Tanners told her clients, “Using a historical average ratio of 2.8x iron ore, scrap should be trading around $175/t and some substitutability between the two iron units has pressures scrap prices.”

We don’t know if scrap will move back to historical norms but, if they do the expectation is hot rolled prices will be pressured to move even lower than what we are seeing at this moment.

We heard from two service centers earlier today, one on the east coast and one on the Plains. The service center on the east coast told us, “It would not surprise me is the price came down another $60/ton. The real question is how much inventory is on the ground and are the domestic mills just reacting to the current price of Chinese steel?  That is where I think we are.  The domestics are not willing to lose any more business, so they have moved their price to the current Chinese pricing.  The future Chinese Cold Rolled price of $560 – $580/ton is not available until June/July.  If it gets to that price, lots of folks will be in trouble. If people had any memory of 2008 – 2009 they would not build their inventory past April.”

From our service center executive located in one of the Plains states we heard, “You’re correct on the import quotes. At $460 CIF, a buyer with any reasonable inland freight has to add $40-50/ton, making delivered prices around $500-510/ton. Assuming a domestic order size of 2-5,000 tons, which would be a typical quantity for a foreign order, a buyer today could easily get a delivered price in the $520-530 range. That’s not a huge premium to foreign, so I think we’ve currently reached a point where an inland buyer would likely decline the foreign offer, if price was the main consideration. The buyers closer to the ports would probably still choose foreign, since their spread would be higher vs. the domestic equivalent.
 
“Prices here are falling due to a) over-supply of inventory (driven by imports) and b) lower input costs for the mills. At some point, the over-supply will come back to balance, but I believe that the lower input costs for mills will be here to stay for a while. So, we will likely see the price over-correct lower until we get back to a supply and demand balance, and then it should recover back up to a level which reflects input costs and correlates to other global prices. My guess is that the low will be in the high $400’s and the future “balance” price will be in the low-mid $500/ton range.”

At this point in time Steel Market Update continues to have our Price Momentum Indicator pointing  toward a continuation in the slide in pricing. We will have more on why we continue to take this stance in Sunday evening’s edition of SMU when we review our survey results.