Service Center Spot Pricing Collapsing

The service centers, who were questioned separately from the manufacturing companies shown above, reported their company as lowering spot prices by an even greater percentage than their customers. We had 72 percent of the steel distributors responding to our questionnaire reporting lower spot pricing compared to 32 percent during our mid-April survey and 7 percent at the beginning of the month of April. The 72 percent puts distributors at levels not seen since late November and into December 2018.

The history of our analysis of the service center spot pricing to their customers finds that when 75 percent of the steel distributors (or higher) are reporting declining spot prices to their end customers, the service centers reach a point SMU has termed “capitulation.” By this we mean sentiment becomes so negative at the distributors and the pain of consistently lower spot prices provides an opportunity of desire for the steel mills to announce price increases and to boost market sentiment.

We normally need to see a prolonged painful period where service centers are dropping spot prices and potentially squeezing margins before full capitulation is realized.

Steel Market Update recently attended the Metals Industry Boy Scout Dinner in Chicago and found a large number of service center executives complaining about weakening order books, contracts that were not being released as promised and lower spot pricing squeezing margins.

Steel mill base pricing has dropped from July 2018 highs of $915 per ton, based on the SMU HRC index, to $640 per ton this past week, a $275 negative move over the past 10 months. Domestic mill prices are now below those of foreign producers (partially due to the Section 232 influence on foreign pricing).

SMU is carefully watching the data we are gathering from manufacturing companies and service centers regarding spot pricing, inventory levels and demand as clues to how far flat rolled and plate prices can fall, and how soon we may see a rebound in pricing. Stay tuned. Our next market trends analysis will be conducted the week of May 20.

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