SMU Data and Models

Flat Rolled Price Momentum Continues to Point Toward Lower Prices (?)

October 9, 2018

We saw more erosion in hot rolled steel prices this week based on the responses we received from our data providers throughout the day today. Benchmark hot rolled dropped to an average of $835 per ton, while other flat rolled products saw mixed results. Cold rolled rose as the low-end numbers disappeared from last week. We saw galvanized and Galvalume both lower compared to one week ago. Our Price Momentum Indicator on flat rolled continues to point toward lower prices over the next 30 days. Having said that, we are picking up some signs of a bottom and that subject is being debated amongst the steel buyers we spoke with today.

A manufacturer reported to SMU today, “While we may be approaching a bottom, the futures market continues to be backwardated by $40 to $50 through Q1. That by itself suggests the market doesn’t believe we’ve gotten to the bottom. Domestic mills continue to appear hungry…what they’ll put in print and what they are saying in person are always two different things. They remain hungry and negotiable. Foreign offers are trying to hold a line and, realizing that they can’t, some have attempted to lose orders only to realize they should have listened. They are now listening. If the mills try pushing an increase, it will be to prop a floor under things and stop the fall. Perhaps they can use rising scrap prices as a lever.”

A service center was not buying that the flat rolled market had reached a bottom. SMU was told, “We need to see lead-times move out, I think, before mills can try to raise prices. Whether this occurs due to new mill outages, big spot orders or a pullback in production, it really doesn’t matter. The mills need to be back in a position of strength, and that seems to be lacking at the moment. As we discussed in previous emails, there doesn’t appear to be any notable drop in imports, and that by itself is providing a big cushion under the supply factor.”

The head of a large service center told us they believe we are close to a bottom. “We think we’re very close to the bottom as scrap has rebounded and would expect a domestic announcement soon. Imports continue to recede and lead times (with all the outages announced) will begin to approach the new year. I don’t think many people are intentionally building inventory, but inventory growth is a product of slowing demand.”

The head of another service center discussed the topic with us this afternoon. He is struggling to figure out exactly where the market was and what the next direction would be. “I don’t have a strong opinion. When you do you know what to do.”

Then we communicated with the head of commercial for a domestic steel mill and we were told, “The ‘weakness’ is seasonal, but the perceived weakness started about a month early. Why? Three reasons. Two of which are no-brainers. First, price was going down, so the typical reaction is to buy less and drive down inventories. Second, too many carried extra inventory (import) on the ground and on order and felt the need to liquidate in the face of falling prices plus year-end approaching. But, most importantly by far, is that two domestic mills seized an opportunity to spike their usual Q4 operating rate and came to the conclusion that due to the 25 percent duties they could implement the old ‘import fighter’ approach. These were not true spot tons, but types of multi-month contract agreements that cover the seasonal slowdown period. The end result is that the usual pattern was upset by this action and the usual go-to buyers of seasonal tons rode on a different horse in 2018. Essentially, what is seen as ‘weakness’ by one party was seen as a boon for another party… The traditional import game is changing.”

Interesting comments all.

From SMU’s perspective, we are watching lead times and negotiations as well as listening carefully to what buyers and sellers are telling us in the marketplace. The mill quoted above told us they were not lowering prices, their order book for December was good and they would wait out any perceived weakness.

Right now, SMU has our flat rolled Price Momentum Indicator at Lower. Our belief is prices will slide from here. However, based on the comments made above, we have to agree with the service center executive who was struggling to figure out what the next move will be. When you know that, “…you know what to do.”