It is About to Get Ugly

A Southwest service center told SMU in an email, “CSI’s price increase announcement is a harbinger of things to come.  It is only a matter of time before they must decide to serve West Coast customers to the detriment of other geographic locations due to the fact that Asian imports are cut off.”

Steel buyers are reporting that some mills “smell blood in the water” and have already started talking about allocation of tons, or as buyers like to call it, the “A” word. This is part of the “unknown” as it is not clear how much supply is actually available on a monthly basis out of the domestic steel mills. (CSI helped muddy that water pretty good.) How many foreign orders have been “cancelled” and will not arrive in the United States over the next one, two, three or four months or more? How much inventory is actually being held at service centers and end users? How quickly have end users reacted to changing market conditions; are they protected? Are there any contract tons at risk? What foreign mills (and U.S.-based trading companies) are willing to take the risk of a pending Section 232 decision? What will that decision be and how quickly will it be made? (SMU was told today that Trump will be in Pittsburgh in a couple of weeks…)

When the steel market is not transparent, you get excesses, and that appears to be where we are today.

SMU was told today by a manufacturer in the Southwest, “Domestic mills are in a bidding war for spot tons. Yesterday, I was told I had to move to a $40/cwt price to beat out another buyer in order to get the 2,000 tons of spot HR. It makes me sick to my stomach to be treated this way. Buyers will not forget how we are being treated by domestic mills. One day imports will be back.”

By the way, SMU has been involved in the steel industry for over 40 years and the threat of future foreign steel and retribution is not new (and is usually carried out to the detriment of the domestic steel mills).

Another service center was quite blunt in their accounting of the current situation: “No orders placed yet at these numbers [$800 hot rolled, $930 base cold rolled and coated], but I am told they are real and to ‘let them know’ if we need some tons (multiple mills). The mills say the order books are very strong. Nucor stopped publishing their lead times last week, but they were solidly into May then. Techs and Metal One lead times are “CLOSED” and not accepting orders at the moment until they figure out where their pricing will be. We are entering a ‘can you get it’ market, and I am told the increases are not due to the pending Section 232. In other words, they will likely go up again if that comes to pass as expected. North Star Bluescope is down for a week in April and therefore the order book has been reduced.”

A Midwest service center told us, “It appears SDI (Butler) is not even quoting at the moment. All products on the website note “closed” or “inquire.” Given the cloud of 232 hanging over the market, I hear foreign mills and trading companies are evaluating current orders. Seems to me if many foreign orders get cancelled, and/or if overseas mills decline to quote shipment for late spring, it just adds more fuel to the fire. Unless Trump issues a watered-down ruling on 232 soon, I think this market will only [move] higher near-term.” 

Another Midwest service center echoed those thoughts, saying, “You know it is going to end ugly.”

We were told this market could last a lot longer and go a lot higher than anyone expects. SMU was reminded of July 2008 when prices hit $1,070 per ton (on our index, higher on some of the others) and then the market collapsed, dropping some $690 per ton over the next 11 months. 2008 ended “ugly” and remained ugly until the bottom ($380 per ton in June 2009).

The history of markets like this, prompted by “Black Swan” events as opposed to the true laws of supply and demand, shows they virtually always end up ugly. But the ride up can be quite thrilling (to some) and nauseating (to others). There are always two sides of the street.

Stay tuned. We will have much more.