Steel Buyers: “I Am Nervous About 1Q Pricing…”

One of our steel mill sources advised us this afternoon, “Yesterday, some mills woke up 1) with a bit of hunger to either sell leftover November and December tons or 2) realizing that global pricing had moved south and people were buying import. In any event, I feel that pricing gave back $.50/cwt in coated and cold rolled….”

Lead times are an important part of the equation when mills go out with a price increase. The expectation is for lead times to move out (extend). As lead times move, steel buyers are forced to place orders, which helps solidify the price increase. However, as NLMK pointed out to SMU a couple of weeks back, if your lead time is two weeks, your mill does not have the luxury of walking away from orders. Steel buyers are reporting lead times as mixed, but no one is reporting any significant extension of lead times, which means the support for the price increases has been tepid at best.

As we worked through the gathering of market price information this week, we found a weakening (or perhaps a better way would be to say we uncovered more evidence of lower prices existing without significant tonnage being attached). One service center told us they went out this week with an inquiry for 100 tons of generic commodity grade hot rolled and received quotes from non-traditional suppliers at $800 per ton ($40.00/cwt). They told us the spread in pricing from their normal suppliers is $770 to $800 per ton (37.50/cwt-$40.00/cwt).

We did collect some sub-$37.50/cwt ($770 per ton) numbers, but they were reported to be slab rollings out of JSW Ohio or traders converting slabs through AK Steel. At the moment, SMU is not factoring these tons into our pricing calculation. However, it is only a matter of time before the JSW Ohio electric arc furnace is in operation and producing a regular supply of substrate. At that time, JSW prices will become part of the prices used by SMU to calculate our range and average.

An end user who advised they were still in negotiations for 2019 pricing reported they were seeing more foreign steel offers. SMU was told, “It’s still cheaper to purchase foreign steel with a 25 percent adder than paying the ridiculous pricing that domestic steel [mills] continue to ask for.”  They went on to prognosticate that flat rolled steel prices would drop in first-quarter 2019. “We believe that Q1 will continue to fall in price as the tariffs in NA should be finalized and mills will have more available tons to offer. Although contract pricing seems to be up and mills are not negotiating on contracts, for quarterly spot market opportunities they seem to be willing to negotiate and cost-reduce steel to quite aggressive pricing….”

Many service centers pointed out their concerns that pricing will be flat to down in first-quarter 2019 due to lower demand and increases in domestic mill capacity. Over the next couple of months, we will see expansion of production out of U.S. Steel Granite City with the re-start of its two blast furnaces, as well as the refurbishing and re-start of the electric arc furnace (EAF) at JSW Ohio (Mingo Junction). Add on top of that traders converting slabs through AK Steel and NLMK USA’s tolling agreement with ATI, and there will be plenty of hot rolled supply as we move into 2019.

The domestic mill increase has not stuck. The next question is, did the mills shoot themselves in the foot with the early announcement, thus opening the door for foreign to come in at a perceived wider spread, or will the mills be able to make a go at higher prices in early first quarter? An end user told us this morning, “It seems the $40/ton announcement did not stick, but it did put a floor to the bottom. I believe the mills will try to increase prices in the first quarter with the scrap going up. Demand doesn’t seem to have changed and buyers don’t seem to be in a panic to buy. I think the mills will have a hard time increasing prices with the already current spread from foreign. It doesn’t seem that foreign prices will increase given the softness in world demand.”

Here are some of the comments made to Steel Market Update during the course of the day today as we canvassed the flat rolled and plate steel markets:

Service Center: “I am getting mixed messages from other service centers and customers, but not hearing much of anything from the mills. I think we are in a bit of a staring contest between the service centers and the mills. And honestly, I am not sure who blinks first. We have only placed a couple of small POs this week at $42 on the hot rolled side. Lead times are out a little from two weeks ago, but not that much. Foreign offers on cold rolled and coated are reasonable, hot rolled ones are in line with domestic offerings. I am nervous about Q1 pricing.”

Wholesaler: “The spot market has been falling a little bit each week and did .50 yesterday. Made a 900-ton mill purchase at a discount [to] last week [pricing].”

Service Center: “I believe we will stay in a tight range from $780-820 through Q1. Much of that will depend on if tariffs are dropped on NAFTA steel.”

End User: “Mills are willing to negotiate. Terms for 2019 contract offers are also coming in more aggressive than for 2018. Foreign mills are hungry for orders and quite negotiable. We expect short-term strength/stability followed by a slow steady price retrace. Watching mid-terms next Tuesday…a Blue day will obviously be problematic for policies of the current administration. Also watching Fed signals and agree that they may have jumped the shark in September after seeing housing start data. Also waiting to see GDP growth on Nov. 28 and watching the balance against core inflation and wage growth rates.”

Service Center: “[Steel prices will] remain about the same or move slightly lower. I don’t see that there will be any support for moving prices higher.”

Service Center: “Deals are out there on HDG. Very attractive, but we just don’t need the tons. Mills are being more disciplined with HR and CR. Spread between HR and HDG base is within $70/ton.”

Service Center: “I’m thinking more flattish [steel prices], unless scrap climbs higher by $40 or more, above where November is expected to settle. If scrap does climb, mills may be able to recoup some/most of the increase, at least temporarily. While there’s no sign of any potential resolution with the EU on Section 232, the chatter about something breaking with Mexico and Canada tied to a new agreement is increasing. There seems to be only one outcome resulting from a resolution of 232 tariffs with Canada and Mexico: more competition across the three countries–even if quotas are agreed to, which will increase price competition. This either helps push prices lower or prevents them from rising, in my opinion.”

Plate Comments:

Service Center: “No negotiations with the mills on plate. Sticking to their guns.”

Service Center: “First quarter should be strong. My key point in all this – at least for now, there is a new reality for larger SCs – the mills don’t need you nearly as much, and they are taking back some of your customers.”

Service Center: “We’re not seeing any negotiating with the mills. Firming up across the board. Q1 will be stable to higher. It really all depends on Mexico/Canada tariffs at this point.”