Steel Buyers Speak to Unsustainable Turnaround

The general manager of a service center told SMU earlier this week that he does not believe any price increase announced by the domestic mills would be sustainable. “Given that we’re now into a lower demand environment, the supply side takes on most of the burden in this market for now. We may continue to experience these ‘micro-cycles’ where prices drop, price increases are announced and a buying binge ensues, and then we’re back to crickets. As SMU has reported previously, we’ve wrung out all of the excess imports that were possible via tariffs, and the resolution of 232s with Mexico and Canada, our largest steel trading countries, cemented this phenomenon, putting in a fairly firm floor level of imports that will sustain. That leaves ONLY domestic output as the remaining lever that the mills can control. Unfortunately for them, it falls mostly onto the integrated mills to cut, since their structure is such that they cannot tweak output as easily as the EAF mills can.”

Another large service center told SMU of their concern that capacity that was recently cut, or is in the process of undergoing maintenance, is going to come back into the market—a market this buyer considers to be flush with steel. “U.S. Steel temporary outages…there is nothing structurally that is going to change on their part,” he said. “I don’t see anything that supports this market longer term. Sustainability is the question. Until something is permanently taken offline, the cycle of wash, rinse and repeat continues. Something has to buck this trend.”

By “wash, rinse and repeat’ he was referring to the cycles we have seen twice before during this calendar year where inventories start to draw down, the mills raise prices, service centers react with a buying binge that pushes lead times out, the mills announce more price increases, which are followed by what the service center executive quoted above defined as “crickets” – buyers sitting on their hands, lowering lead times, forcing mills to negotiate prices, which go lower and lower….

Another large service center told me there are a couple of steel mills whose order books are decent, and their need to go to the bottom of the price spread nonexistent. At the same time, other mills are “begging” for business as they try to fill their November order book, knowing December will be even more difficult.

An interesting comment was made to me on the floor of the Metalcon show in Pittsburgh on Wednesday. I was asked why a specific mill, which has a decent order book, continued to lower prices when on paper it doesn’t seem as though it is justified? The only response that can be assumed is market share. No mill is willing to give up market share. Especially when there is so much new capacity coming online over the next two years.

I read a report by KeyBanc analyst Philip Gibbs this morning that was originally published on Wednesday evening. The report was about Steel Dynamics, which is building a new mill in Texas. In the report, Gibbs discusses Big River Steel, which is now 49.9 percent owned by U.S. Steel, but controlled by David Stickler and his group of investors. “According to industry press and despite STLD’s launch into the Texas market, Big River Steel’s CEO David Stickler today indicated that BRS is undeterred in its organic growth efforts to also build a greenfield 3Mtpa carbon sheet mill in Brownsville, Texas,” Gibbs said. “Moreover, BRS underscored/indicated that growth efforts will press forward irrespective of X’s new equity ownership stake, as Big River is still the majority/operational owner of Big River Steel…the show must go on…”

Think about this, within the next 12 months Ternium Mexico will be producing an additional four million tons of flat rolled out of their new mill near Monterrey, Mexico, utilizing slabs from their slab mill in Brazil (the former ThyssenKrupp mill). Ternium Mexico CEO Cesar Jimenez spoke to me about their goal of putting those tons into the domestic Mexican market, supplanting foreign tons. There are no guarantees. I asked one of the automotive company steel buyers if they would be moving orders to Ternium Mexico and he told me they are taking a wait-and-see approach as they are not convinced in the ability to the slab mill to service slabs to the Mexican plant as needed by their company. Add to that the three million tons being built in Texas by SDI. The tons will need to go somewhere.

The large service centers are cutting deals and don’t think they can be hurt by buying at the low levels reported by SMU earlier this week. By this they understand they can bring material in by the end of the year, hope for a small bounce, get rid of the inventory and wait for the next decline, which most feel is inevitable.

For those who think the settlement of the UAW strike should tighten the market, here is what the general manager of a service center told us on Monday: “There’s been very little to no information on the impact on the steel industry from the GM strike. Have mills adjusted output at all as of yet? Are the warehouses of the north getting filled up with coils since GM is out? If the mills have done little or no adjusting, how will they adjust production moving forward to ‘right-size’ inventories? Same questions for the service centers that have supply chains tied to GM.” Good questions, and SMU will work to get answers.

There are a lot of moving parts to this market. I haven’t even mentioned Section 232 and other political issues that have impacted the steel market. The true impact of tariffs took time. It took a lot longer for imports to actually decline, and with exclusions the actual impact is less significant than what many in the steel industry thought when they were announced. Did anyone see sub-$500 hot rolled when 232 went into effect? Eighty-two percent of the 2018 SMU Steel Summit attendees responding to a polling question (464 responses) predicted hot rolled steel prices at the end of August 2019 would be above $700 per ton.

As I walk about Metalcon or speak to people visiting the SMU/CRU booth at the show, one of the main questions I am asked is where will prices go from here? As my readers know, I don’t forecast pricing. Our Price Momentum Indicator is pointing to lower prices for flat rolled and plate steels over the next 30 days. At the same time our Service Center Spot analysis, our Service Center Inventories and Shipment analysis and our Sentiment Index are pointing to a possible bottom in the next few weeks. It is possible that the flat rolled markets could see mill price increases prior to Thanksgiving. The question is not if the mills will make an announcement, but rather when. The real question being asked by steel buyers is what will support steel prices as we move into the New Year?