SMU Price Momentum Indicator Adjusted to Neutral (and No the Sky is Not Falling)

Price Momentum has been supply driven, not demand driven, during this cycle and many steel buyers, especially in the OEM sector, do not believe steel prices can go much higher without a real increase in demand.

Steel Market Update’s opinion is many of the factors which have pushed spot hot rolled prices by $275 per ton (and even more on cold rolled and coated) over the past six months (from $360 per ton to $635) are still in force.

Steel Market Update does not believe the flat rolled steel market pricing structure is about to collapse.

However, our conversations with multiple steel mills as well as large OEM and service center buyers, leads us to believe that the market should see stable prices over the next 30 days and perhaps longer. Stable pricing is not unheard of in the market (although you may have to go back to pre-2008 data to find it) and we are well aware of the old saying: “If steel prices are not going up then they are going down.”

None-the-less, in reaction to the signs of stability we are seeing at this time, we are moving our SMU Price Momentum Indicator from Higher to Neutral.

We want to stop here and remind all of our readers that a Neutral reading is not our way of announcing the end of the current price structure or that a decline in prices is eminent. We are moving our indicator because we believe market prices have reached comfortable levels for the steel mills (not necessarily to the end users) and over the short term it is our opinion domestic mill flat rolled steel will trade within a fairly narrow range (+/- $20 per ton) from where they are today. Prices could move in either direction (or both) over the next 30-60 days and we believe any movement could vary by product, region and supplier.

Based on the conversations we have had with mill sources over the past few days our opinion is the domestic steel mills will not announce a price increase in the near term.

SMU is not forecasting lower prices at this time because we are in a supply constrained market. Supply is being managed through the idling of steelmaking capacity at US Steel Granite City and Fairfield (Fairfield blast furnace was actual permanently shuttered) and AK Steel Ashland. At the same time imports of foreign flat rolled (hot rolled, cold rolled and coated products) are being constrained through the use of the antidumping and countervailing duty trade cases.

On the flip side, we have seen reductions in ferrous scrap pricing to the domestic mills for June delivery and there is an expectation that the scrap market will trend sideways to lower from here. Lower scrap prices help the domestic steel mills improve their margins without going to their customers and asking for an increase.

Scrap is also at possibly historical spreads between hot rolled, cold rolled and coated steels. Many at the Steel Success Strategies conference believe this is not sustainable and there will be a correction in steel prices.

Service centers and end users are telling SMU there are no issues in getting supply. One service center executive told us this afternoon, “The word ‘allocation’ may be yesterday’s news.” What they have been telling their customers this month that has been different than past months is they don’t expect prices to be going up next month. This has taken the pressure off the end user to have to buy. “Our customers don’t need steel,” is what this distributor told us. “They already bought and they don’t want to double up their purchases.”

What we are hearing here in New York City is buyers are concerned about the lack of demand growth with the possible exception being the construction segment of the industry.

There is also a deep concern among larger service centers and OEM’s that purchase value added products regarding the approximately $200 per ton spread between hot rolled and cold rolled/coated products. The belief is over the medium to longer term these spreads cannot continue or the domestic steel mills risk losing more business to offshore sources. We have heard directly from large OEM’s this week of items being taken to China due to the size of the increases over a short period of time and the spread between steel prices in China versus the United States.

From most service centers we are hearing that business is “decent” and they are making money. Not everyone agrees with the service center executive quoted above and some report that their end users have not bought for their fourth quarter needs.

Whether the stability we are seeing now is for a short period of time (30 days) or much longer will depend on changes in the supply dynamic, any “Black Swan” events at a domestic mill (outage), the final ruling of injury by the International Trade Commission (which is expected to rule in favor of the steel mills) as well as any adjustments in demand over the coming months.

We welcome your opinions: John@SteelMarketUpdate.com