Steel Buyers Skeptical About Price Increases

With the big move by the CRU HRC index this week, it appears the steel mill price announcements are an attempt to stop the slide. They are looking ahead to the next monthly or quarterly contract price adjustment, which will be based on the second week of July CRU HRC print. Many contracts are tied to the second week CRU price movement coupled with whatever discount was negotiated between the mill and the end customer. If CRU HRC comes in below $500 per ton, coupled with the discounts, the third-quarter contracts could be very painful for the domestic mills.

However, steel buyers are skeptical and are already pointing to weaknesses in the mills’ move. One being the anticipated $10 to $30 per ton drop in scrap prices for July. Second is based on supply and demand as many buyers still believe there is too much supply for the actual demand. As we mentioned in earlier articles, the mill order books and lead times will be the determining factor to see if they were able to encourage enough tons off the sidelines and onto their books. Then, will the mills have the discipline to keep supply off the market in order to keep the books full and lead times extended?

“We’re not going to answer our phones,” said one large service center buyer this morning. “The worst time to buy steel is right after a price announcement. We are not going to answer our phones for the next three days and see what happens.” This same service center told us they were going to “buy short this increase,” feeling they could hold orders until supply overwhelms demand forcing prices back down once again. “July and August numbers may be higher, September and October are less certain.”

We did hear from a few large service centers reporting they were booking tons in order to protect themselves. If the orders were in hand and were sitting on their desks waiting for a signal that the price decline was in peril, then the wise move is to book those tons.

We do understand that one of the reasons prices have dropped so precipitously lately is because a number of large buyers bought hot rolled in the $460-$480 per ton range from a variety of steel mills. We were told by one to expect HRC numbers to potentially move lower next week before stabilizing.

A medium-sized service center CEO told SMU that the increase would be “mildly successful,” but certainly was not a “slam dunk” by any means.

The CEO of one of the largest public service centers told SMU, “I’d be surprised if the first price increase sticks.” He went on to say he thinks the mills will try a second and a third time and “maybe an increase sticks sometime in August.”

A service center specializing in coated products told SMU they did place some tons that were at risk. However, they feel there is “no imminent threat for huge price increases.”

It is still early in the process, and we will be carefully watching to see if customers are getting off the fences and begin placing serious orders over the next couple of weeks.

Going forward, Steel Market Update is watching foreign steel imports. We are seeing import numbers dropping for steel being received in the ports now. These are for orders that were placed in first-quarter 2019, and the prices at which they are arriving are not competitive. Traders are telling SMU there is virtually no foreign being booked. One trader told SMU foreign hot rolled delivered into the port of Houston was approximately $560-$580 per ton, which is above the domestic offer price (even with the price increase).

With U.S. Steel and ArcelorMittal taking furnaces off-line for maintenance or other reasons, coupled with a lack of imports come September…well, there is a scenario where the market could tighten more than what steel buyers are thinking right now.

For now, the SMU Price Momentum Indicator continues to be at Neutral on all flat rolled products and Lower on Plate.