Steel Buyers Believe Cycle Has Peaked but No Rush to the Exits

The steel mills we spoke with are reporting solid order books and no reason to panic. There has been some pull-back on hot rolled lead times in particular, but we are seeing more availability in most products as controlled order entry/allocations have disappeared from a number of mills. Many service centers are reporting orders are arriving early which is a sign that lead times may be slightly exaggerated at some of the mills.

Our SMU Price Momentum Indicator continues to point to Neutral, meaning prices could move in either direction over the short term. Longer term we are not yet convinced that the market will fall apart but, we will need to see where demand goes from here.

We (SMU opinion) are concerned about the long term damage being done to the end user markets. During our conversations with end users we heard from a number of them that the spread between domestic and Asian numbers is too dramatic. They also spoke about the run up in coated prices which have decoupled from hot rolled.

Here is an example from a manufacturing company located in the United States, “It is increasingly difficult for our company to compete in the U.S. market as many of our competitors are taking advantage of lower raw material costs as well as lower labor costs in Asia and Mexico and don’t have to pay duties on the finished goods coming into the US.  Our strategy is shifting to move more volume to domestic mini-mills which have very good cost structure right now, increase volume of foreign steel from countries not named in trade cases and moving more tier 1 stamped components to Mexico with plans to utilize Asian steel sources, transforming the parts in Mexico and export to the USA. The last item mentioned is a slow process, but will likewise be just as slow to move the parts back to the U.S. if something changes down the road.”

Here are some of the comments we received from buyers and steel executives over the past 24 hours:

A Texas based service center told us, “…Demand is good but only with a few industries we are focused on.  Oil/gas is still in the toilet but showing signs of improvement.  I keep less than 2 months on hand and always have something inbound.  I’m actually building inventory but it’s almost always sold before it gets here.  I’m not in major build mode as pricing has obviously topped out but still no reason to believe it’s falling thru the floor.  Election cycle and typical 4th quarter drag will keep me conservative but seeing signs of improvement on the demand side from all angles.  I’m a buyer of foreign steel but pricing is not much of an incentive to buy heavy.  Just picking my spots where I can improve margin with little risk of basis risk.  All in all, I feel that we are gaining momentum in the demand cycle.”

From a service center executive we heard, “I am quite surprised I am not seeing the softening I was expecting.  The mills if anything have seemed to firm up a bit more on the $31.50 number.  picking up a few rumors that the mini’s are going to try hard to “de-couple” the HR price from the scrap price as I believe if not in July for sure in August we should see some softening in scrap.  With not a lot of good import offers the mills may have a chance to hold this together a little longer if they can show a little bit of discipline.  Next couple of months will be interesting.”

An end user spoke about their customers “bringing orders forward” due to the number of price increases that have been put into the market place. Their business is 30 percent ahead of last year’s pace and this company did not feel demand has grown by 30 percent. There is always a price to pay when markets get ahead of themselves. Here is a small piece of what was shared with us earlier today:

“I ACTIVELY buy coil every month. We have a supply that we have to maintain for our customers. This talk I read about folks sitting on the sidelines never made sense to me. I have cut back my orders to mills for Aug and Sept delivery because I know I will not need the amount of steel I need earlier in the year. There are a lot of inexperienced buyers out there that got caught short by either not anticipating the increased demand or were aligned with the wrong supplier. I am sure they have been looking in their rearview mirror the last 3 months and ordering way more steel that they will actually need for the upcoming 3 months of demand. This will cause the order books at the mills to be light for Sept and especially October. October is the month I predict we see the first decent drop in price domestically.”

The general manager of a large national service center chain provided SMU some insight’s from his perspective, “Mills are caught up and/or early on orders. I think we’ll see some erosion in pricing of down $20-30 in HR over the next few months, and possibly in CR and Galv if lead-times move back. However, I think scrap prices will move higher in late fall, production at mills will be lower, and normal seasonality should provide enough cushion/foundation for mills heading into winter.”

Once again SMU is of the opinion that our Steel Summit Conference is well timed as we wait to see what will move the market as we move into 4th Quarter lead times and into calendar year 2017.