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Service centers fear a cloudy second half for 2012

Keywords: Tags  service centers, service center outlook, Metals Service Center Institute, Lourenco Goncalves, Metals USA




The voices of service center players have not been as buoyant in the second quarter of 2012 as they were during the first. Witness:

“Demand sucks; there is none.”

“Everyone is cautious right now.”

“The reality is that there’s decent demand and there’s too much capacity.”

“You have too many suppliers chasing too few orders.”

“The mills are saying they cannot afford to go lower (on prices).”

“The summer lull (came) early for us this year.”

“(Some) people loaded up in the first quarter and are working their way through that.”

These are all statements from service center executives during the second quarter, reflecting a growing unease with the direction of demand for carbon steel and stainless steel products.

As the second half of 2012 gets under way, recent falls in some steel prices and a still-stagnant construction market have some service centers worried that things might get worse—or, at best, remain relatively flat—before they get better, an idea they were not entertaining six months ago, when more robust times appeared to be on the horizon.

Domestic steel sheet prices east of the Rockies fell throughout May as service center customers sat out the softening market awaiting a new pricing floor. Sources largely attributed the decline to a continued excess of supply. A mill source described the sheet market as “well supplied,” thus pressuring prices, which began to slide early in May after stalling out in late April.

“There’s too much capacity in the market, and the price of scrap has been more or less stable,” a Midwest service center source said of the weakening prices.

Meanwhile, a falling-to-sideways ferrous scrap market has failed to lend support to steel prices, while concern grows that the European slowdown will affect the North American market.

Many market players said planned summer outages could give mills an opportunity to introduce price increases in July or August for new orders starting in August and September.

Distributors have said that they remain loath to build inventory, especially leading into the summer months, further putting downward pressure on prices. The fundamentals of readily available material and steady demand continue to hang over prices, with buyers saying they see little sign of change soon.

“The solution is the mills either cut back, or the economy bounces back and absorbs the tons,” one distributor source said.

Two other service center operators claimed some of their peers did buy extra steel ahead of anticipated price hikes. “Most people still have a lot of material,” an executive in the Midwest said.

A source at a Midwest flat-rolled processor suggested stocks were built up, in part, because mills misquoted delivery dates and steel arrived earlier than expected. “Some people anticipated price increases would stick and hedged, but they didn’t stick to the extent hoped for,” he said.

The Midwest processor source suspects there is additional, unaccounted-for inventory at the mill level. As a result, “it’s hard to judge a stock inventory order vs. a purchase order you have in house,” he said. “It will be interesting to see how long the (planned) maintenance outages last.” The big question is whether to continue buying regularly or “to go leaner and wait out the pricing war.”

The most recent numbers available from the Metals Service Center Institute (MSCI) show U.S. and Canadian steel shipments dipped in April to their lowest level in four months, helping spur a 2.5-percent rise in inventories from the previous month, even as demand continued to hold steady despite some erratic moves in spot pricing, market participants told AMM.

“Inventories did increase,” Metals USA Holdings Inc. chairman and chief executive officer Lourenco Goncalves said in mid-May. “But this is not a number to scare anyone. History will show numbers that are way above 10 million tons with very healthy dynamics in the marketplace.”

The MSCI reported that steel inventories at U.S. and Canadian service centers topped 10.84 million tons at the end of April, up from less than 10.6 million tons in March, while shipments fell 7 percent to 4.07 million tons in April from 4.38 million tons the previous month. On a per-day basis, however, shipments fell 2.1 percent in the United States and less than 0.4 percent in Canada.

Goncalves does not think distributors bought too much steel, but that their customers sat on the sidelines. “The biggest motivation to buy steel in a decent economy is when customers feel that steel will be more expensive within the next week or 10 days,” he said. Customers are replacing what they consume, but a “higher price is not part of the equation right now.”

As a result, mills are cost-squeezed and “we are starting to see high-cost players have trouble. I would not be surprised if the supply side starts to dry up,” Goncalves said.

Shipments by stainless steel distributors also fell in April after three consecutive month-on-month increases, according to MSCI data. Shipments of all stainless shapes totaled 144,200 tons in April, down 8 percent from 156,700 tons in March and marginally lower than 144,700 tons in April last year, putting the year-to-date total at 607,300 tons, 2.1 percent lower than 620,100 tons in the first four months of 2011.

One southern service center manager said that a restocking drive by his customers that started earlier this year had ended recently.

A market source agreed. “They (customers) feel they have enough, and if they don’t, they feel they can scramble and get it cheaper later” due to falling nickel prices, he said.

The West Coast flat-rolled steel market also has slowed as buyers become cautious about making commitments.





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