Supply Noise Behind Us? Pricing is Now All About Demand...

One very large hot rolled buyer told us, “All of the supply noise is behind us.” Yet at the same time this same buyer went on to say there are a lot of outages scheduled at the domestic steel mills and this will most likely impact lead times and availability going forward.

Another buyer who purchases all of the flat rolled products agreed that the OEM’s (end users) who are trying to wait out the market may be in for a surprise. When asked if prices would soften from here we were told, “No, no I don’t think it is going to soften. People think the market is going to soften and they are going to wait.” This buyer, like the one referenced above, mentioned outages at a number of the Nucor mills and then this buyer said, “Prices are not going to crash. I can’t understand why they would.”

Another large service center told us they thought the next few weeks could be problematic, “I expect downward price movements to ensue now, until mills get August HR put to bed, and then they may take a pause to see where things stand. I’m having a hard time reading the market reactions to the HR final rulings, with wide opinions abounding. I think we have a slippery 4-6 week period ahead, but still not anticipating a wholesale collapse since inventory levels would seem to preclude that from happening. I guess I’m still overall positive for sheet through October, but it gets pretty murky after that, especially if we see imports rise in reaction to the huge spreads in prices we’re seeing.”

We did hear from a couple of mills who told us that their order books (coated products) were still strong and there was no need to cut prices. One mill told us, “My take actually is that smart buyers are locking up reliable supplier tons. Trying to get the best price possible, and pulling the trigger. I have a feeling that some buyers are going to play too cute and will be in a bind come January 1st.” The mill then went on to tell SMU that they were not going to go under a $40.00/cwt base.

A trading company also weighed in on the subject with, “I also think those customers that are waiting for the year end special deals are going to be disappointed this year.  The special deals are the mills trying to fill a hole in their schedule.  I think some of those customers who historically have heavy inventory which allow them to sit on the sidelines for up to 60 days to reduce inventory, this year will not be able to sit it out but will need to continue to place orders with the mills.  I also think the mills have been full out and have postponed some maintenance until the end of the year so their outages may be a little longer this year.  Hopefully the domestic mills don’t panic and revert to what they have done in the past and actually take time to study the market.”

The question continues to be lead times and if the mills can load their mills either with orders (or take maintenance outages) in order to keep prices firm. The mills (in SMU opinion) have been doing a very good job of managing not only their order books but their sales teams as well.

SMU wants to wait and see if the latest ruling on hot rolled imports will having any impact on the market. The biggest impact would most likely be on the west coast but those needs could bleed east and affect the mills on the east side of the Rocky Mountains.

For now SMU is keeping our Price Momentum Indicator at Neutral. It is our opinion that the market is a little too pessimistic believing steel prices will crash from here. This is not to say that we won’t see some erosion in pricing – as we have mentioned in the past we are concerned about the spread between hot rolled and cold rolled/coated base pricing and we are concerned about the weakness in the domestic hot rolled market.

The $200 per ton spread between hot rolled base prices and those of cold rolled and coated is probably not sustainable in the longer term unless the domestic mills go after more foreign mills in order to pressure supply further.

We need to watch the market closely from here as there are many moving items such as demand, maintenance, imports and the risk of an unplanned outage. Stay tuned.