The Sky is Not Falling, Just Some Nuts Rolling on the Ground...

There is another new kid in town, well almost in town, Acero Junction is beginning to produce hot rolled off the old Mingo Junction mill on the border of Ohio and West Virginia. In the not too distant future Acero Junction will be looking to gain market share from someone (probably NLMK, Nucor, SDI Butler).

Fear is running rampant (at least in the financial community) and the sky is falling! The sky is falling!

No, the sky is not falling. But, some of the nuttiness that exists in the steel industry continues.

Flat rolled steel prices rose $160 per ton since the mills first started announcing price increases in late October 2016 (hot rolled was averaging $470 per ton) until late January when it hit $630 per ton. That is a pretty good run over a 13-week period. The domestic mills collected $160 per ton of the $180 per ton announced and, I bet there are areas where they collected the full $180 and maybe even more depending on where a customer was when the increases started flowing.

Now it is the first full week of February and hot rolled has come off its $630 high by $20 per ton to $610 per ton. Still a pretty good number compared to the $470 we were reporting in late October 2016.

It is even more amazing when you consider that a brand-new 1.6 million ton, steel mill (when fully operational) came to life in December and in its first full month of production set a record (according to SMS, the equipment manufacturer for the mill) of 63,000 tons of hot rolled coil. Soon Big River Steel (BRS) will begin running cold rolled and galvanized as well as hot rolled. Yet, our sources are advising the offer prices for tonnage out of BRS is $600 per ton on hot rolled and $810 per ton on cold rolled… They are within our SMU index HRC steel price range and they are fighting to gain market share.

The market was all aghast when reports of lower than expect ferrous scrap prices were being suggested/negotiated for February. A week later we are finding the demise of the scrap industry was a bit premature… How will these now less than expected decreases coupled with the expectation of a flat to higher March scrap market affect the steel market?

Yes, some of the steel mills are out looking for business. They need hot rolled tons and, in some cases, they may need some cold rolled and coated tons. But, I am not yet hearing of any panic at the steel mills.

Big River Steel and Acero Junction will create some natural competition between the various mills. No one wants to lose market share – especially in hot rolled which has been the weakest product. But, I keep hearing from manufacturing companies and service centers that, “demand is not too bad.” There is a little worry about auto inventories (but service centers are telling me their auto customers are not yet cancelling orders) and energy markets are taking some time to come back (but they are coming back).

Foreign steel imports will shrink and we are seeing that in hot rolled. So much so that the new tons coming out of Big River Steel and Acero Junction may do nothing more than make up for the limitation on foreign HRC tons.

Traders continue to tell SMU to expect flat rolled imports to be down 25 percent this year. We will see.

So, for now SMU is keeping our Price Momentum Indicator at Neutral. A couple of weeks ago, we were sensing prices would move lower (the question was how much). Now, we are sensing that the market will go through a balancing of pricing as we wait to see if the mini-mills decide they want to push market prices lower in order to “show up” Big River Steel and not allow them to take market share.

A steel buyer today told me that he spoke to Big River Steel and told them the $600 per ton hot rolled was not good enough. The mini’s have gotten aggressive. We will see how BRS responds.

In another article in tonight’s newsletter I quoted a conversion mill who told us about the steel market and prices, “It is what it is, and well, gotta battle and outdo your competitors anyway. This is not patty-cakes!” At the same time, they told SMU they were not lowering prices to their customers, “Not us – yet – $41 is a pretty good customer price [base price on coated] and is OK with our current costing. Scrap may not have gone down as much as we were thinking. Things are hanging on….”

We will see what happens in the weeks to come. When new mills come to life it is always an interesting time, but SMU continues to be optimistic as does most of the flat rolled buyers and sellers based on the SMU Steel Buyers Sentiment Index 3MMA at +69…

The most pessimistic we have ever seen the SMU Price Momentum Indicator was -85 (-100 was the lowest number possible). That was in March 2009 and the sky was falling.

The sky is not falling today, just some nuts rolling on the ground.