SMU Data and Models
Service Centers Take Another Step Closer to “Capitulation”
Written by John Packard
December 10, 2018
Flat rolled steel service centers who responded to last week’s SMU flat rolled and plate steel market trends questionnaire are reporting in increasing numbers their service center as lowering spot prices to their customers. One month ago (early November) only 32 percent of the flat rolled distributors were reporting lower spot pricing to their customers. Now, we have seen that percentage grow to 72 percent. This is within a hair of what SMU has identified as the point of capitulation. In the past we have suggested that when 75 percent or more of the distributors advise their company as dropping steel prices, that was the inflection point or capitalization point. This is the point in time when so many service centers are dumping inventory at ever lower prices, thus devaluing inventory, that the process is putting the company at risk. It is the point of pain that can only be relieved by a change in pricing direction, which inevitably comes from the domestic steel mills raising prices.
What SMU does not know is how the markets will react when the U.S. government is so involved in setting pricing through tariffs, along with antidumping and countervailing duties.
With 93 percent of the manufacturing companies reporting their service center suppliers as lowering spot prices, in their minds the distributors are already at an inflection point. However, SMU does not rely solely on the comments of the manufacturing community alone; our capitulation indicator is based on the responses of the distributors themselves. It is the distributors who have to cry uncle (Uncle U.S. Steel, Uncle Nucor, etc.) and let the steel mills know they are willing and able to raise spot prices should the domestic mills go on the offensive.
SMU expects that as long as domestic mill spot prices, along with international prices, continue to drop, the flat rolled steel service centers will continue to follow and lower their spot pricing. Our readers should also note that capitulation may not be universal the moment our index hits 75 percent. Many times the distributors have to experience pain for some time before pushing for price increases by the domestic steel mills.
John Packard
Read more from John PackardLatest in SMU Data and Models
SMU Survey: Buyers’ Sentiment Indices slip, but optimism remains
SMU’s Buyers’ Sentiment Indices both declined this week but remain strong. This indicates buyers are still optimistic about their companies' ability for success.
SMU Survey: Mill lead times extend, buyers question sustainability
Buyers responding to our latest market survey reported longer lead times this week on all of the sheet and plate products SMU tracks.
SMU Survey: Very little wiggle room on mill pricing, buyers say
The majority of the steel buyers responding to our latest market survey reported that domestic mills are not open to negotiating prices on new orders this week.
SMU’s February at a glance
SMU’s Monthly Review provides a summary of key SMU steel market metrics for the previous month, with the latest data updated through February 28th.
Steelmaking raw materials more expensive in February
Prices for six of the seven steelmaking raw materials SMU tracks are increased from January to February, according to our latest analysis.