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Distributors taking inventory seriously

Keywords: Tags  U.S. steel distributors, Canadian steel distributors, U.S. aluminum distributors, Canadian aluminum distributors, inventory controls, Institute for Supply Management, Steel Buyers Forum,

The summer of 2012 might be long and hot, but inventories at service centers have been short and cold. With the economic recovery continuing to move forward sporadically, service centers’ outlook on profitability has a great deal to do with implementing efficiency improvements. As the year reached its halfway point, it became clear that steel buyers have been somewhat divided over where the overall economy is heading, the direction of steel production and the strategies needed to meet the demands of a volatile market.

“Without automotive, I don’t know if we’d be in business,” a source at a Great Lakes sheet distributor said in mid-July. “July is shaping up decently, but how long will automotive strength last?”

Buyers remained optimistic yet cautious amid relatively strong demand, but uncertainty clouds the market and they are sure of just one thing: with steel prices volatile this summer, no one plans to increase inventories dramatically anytime soon. Controlling inventory is one of the few variables in the market that is solely at distributors’ own discretion.

According to data from the Institute for Supply Management (ISM), 50 percent of Steel Buyers Forum members surveyed in June planned to reduce inventories in the second half of 2012, up from 31 percent in May even though incoming orders and backlogs showed little change month on month and shipments either held steady or improved for 75 percent of buyers.

Meanwhile, more than 33 percent of June’s survey respondents deemed their inventory levels too high for demand, up slightly from 31 percent in May. At the same time, one-quarter of buyers anticipated general economic activity stumbling during the next six months compared with a little more than 15 percent who made that prediction in May.

That pessimism weighed into the physical market at the time, sources said.

“We expect our incoming orders to be down for July. We aren’t having doldrums, but we are in a seasonal slowdown,” a southern service center buyer said. “Demand is still questionable, so we don’t want to be overextended on dollars or tons.”

Demand is “pretty good,” the purchasing executive for a national metals distributor told AMM. “It will probably have some bumps over the summer, but I expect it to hold up. We are watching inventories carefully, but you can’t sell out of an empty wagon.”

The president of a Canadian steel processor confirmed that some companies have reduced inventories this summer in the face of downward pressure on pricing, but said he expected the trend to be short-lived. “We have definitely been ordering less and reducing our position. It is inching down every week, and we will continue to do that,” he said. “Some of it is automotive shutdowns. Construction in Canada slows in July, too, and holidays mean lower industrial production. We expect to ship less. We hope prices will stabilize at a higher level in the fall, but the offers for July and August are close to the bottom of the price cycle.”

Market sources largely agreed that commodity prices would reverse direction in the fall. “They are now under negative pressure, but I think we’ll see some relief by the end of summer,” the purchasing executive for the national metals distributor said.

Until then, however, some buyers will continue to sit out. “As prices continue to erode, we are not speculating,” a source at a Mississippi Valley coil processor said. “The last price you pay may be the highest price you pay.”

A Midwest flat-rolled distributor source agreed. “There is still some room for prices to fall, but then we expect a strengthening in the August-to-September time frame,” he said, adding that other than the usual summer slowdown “we don’t anticipate a huge drop-off in demand. It’s pretty steady and we are keeping an eye on the market for (purchasing) opportunities that may arise.”

Flat-rolled and long steel product buyers appeared upbeat on the market, and while many said prices might still have room to fall they generally have shrugged off producer price cuts as a factor of seasonal trends and lower input costs rather than underlying weakness.

U.S. steel distributors’ inventories rose to 2.6 months’ supply at current shipping rates in June, the most recent month for which official figures were available, from 2.4 months’ supply the previous month, while Canadian stocks rose to 3.0 months’ supply from 2.9 months’ supply in the same comparison, according to Metals Service Center Institute (MSCI) data released in mid-July. U.S. steel product inventories totaled 9.02 million tons at the end of June, down 0.7 percent from 9.08 million tons May but up 13.7 percent from less than 7.94 million tons a year earlier.

Steel shipments by U.S. distributors totaled 3.51 million tons in June, falling 8.6 percent from 3.84 million tons the previous month to their lowest level since the start of the year, according to the MSCI data, while Canadian shipments fell 7.3 percent to 531,200 tons from 573,100 tons.

Combined shipments by U.S. and Canadian steel distributors reached nearly 25.4 million tons in the first half of the year, up 5.4 percent from 24.1 million tons in the same period in 2011, but with steel prices falling some 20 percent from January to June—devaluing distributors’ inventories—many said they were nonetheless struggling to make money.

Most people are “struggling to make profit margins,” one Midwest flat-rolled service center operator said. “With the downturn (in prices), anybody with inventory is feeling it.”

U.S. service centers’ inventories of aluminum products totaled 376,900 tons at the end of June, about 2.9 months’ supply at current shipping rates, down 2.3 percent from 385,700 tons (2.8 months’ supply) the previous month but up 7.3 percent from 351,200 tons (2.6 months’ supply) in June last year. June shipments were down 4 percent from a year earlier to 128,900 tons, but the year-to-date total of 793,100 tons remained 3.9 percent ahead of 763,600 tons in the first six months of last year.

“The real economy is consuming steel,” said Lourenco Goncalves, president and chief executive officer of Metals USA Holdings Corp., Fort Lauderdale, Fla. “Everybody is buying exactly what they need or less. The main reasons for destocking are short lead times at mills and the absolute certainty the service centers have that mills will not increase prices. When material is so readily available, why bother to carry inventory? Let the mills take the risk.”

“The sheet market is still going to drop. Inventories will be held as tight and low as possible,” an Illinois flat-rolled distributor source said. “We (saw) steady demand in June but the May figures were nowhere near our April numbers, so we are anticipating some middle-of-the-road demand and some purging” of material, even at original equipment manufacturing (OEM) customers.

Some of the concern is fueled by reports that economic activity in the U.S. manufacturing sector contracted in June for the first month since July 2009, according to a survey of the nation’s purchasing executives.

The ISM’s purchasing managers index (PMI) registered 49.8 percent in July after dropping to 49.7 percent in June from 53.5 percent the previous month; a reading below 50 percent indicates that the manufacturing economy generally is contracting. June’s sharp 3.8-point drop was driven by a 12.3-point decline in the new orders index to 47.8 percent and a 10.5-point drop in the prices index to 37 percent, the lowest reading since April 2009.

However, the picture wasn’t entirely gloomy. Metal producers and fabricators reported overall growth in June, including a rise in new orders, and both sectors were still hiring. Metal producers’ output was flat month on month, but fabricators increased production. Manufacturers and fabricators lowered their inventories last month even as their own customers reported increases in stock.

Survey respondents evinced a relatively sunny outlook. “Business is still strong,” a survey respondent in the machinery sector said, although he noted that “some nagging questions” remain about future growth.

Similarly, a metals fabricator said that “the economy and general business seem to be getting better, even though recent data say otherwise.”

A primary metals producer echoed that assessment. “Business continues to exceed forecasts in all markets.”

The orders backlog index registered 44.5 percent in June, down 2.5 points from May. Metal producers said their backlogs rose in June and fabricators reported growth in new export orders, but both sectors saw imports increase during the month.

Even as many metal buyers drew down inventories in May and June, they still pointed to steady demand for many of their products, contributing to the more optimistic view.

Contributing to the more upbeat outlook was the fact that imported steel didn’t seem to be making inroads into the Midwest region, the Midwest distributor source said. “Imports are staying on the coasts. It’s not worth the freight to ship it up here. With lead times so short at domestic mills and long lead times for foreign material, you can keep a leaner inventory buying domestically.”

Many flat-rolled carbon steel distributors are still holding off on committing large quantities to mill order books this summer as they wait to see whether spot pricing has actually bottomed out.

Steel buyers’ trepidation toward the market came despite steady demand from select customers in the automotive and truck/trailer manufacturing sectors, sources said.

“Our purchasing strategy for July and August remains consistent with (our) previous practice: We’ll purchase the tons we need when we need them. We’re not making any adjustments based on speculation of price changes,” said the purchasing executive for a North American truck components manufacturer. “With RG (Steel LLC) gone and ArcelorMittal (USA Inc.) in (labor) negotiations, it will be interesting to see how pricing develops, but service centers all have plenty of steel and mill lead times are still short, so I’m not confident this latest round of price ‘increases’ will stick.”

Announced price hikes “will likely get the number up over $600, and it could go to $640 before it starts to moderate again,” a Great Lakes flat-rolled distributor source said, calling any imminent run-up a “third-quarter thing.”

With buyers still unsure whether the announced increases will gain traction, many remained cautious with their purchases. But optimism could still be found.

The U.S. steel industry is likely to see steadily improving demand despite global economic concerns, according to Berlin Metals LLC president Roy Berlin. “Demand for tons has been increasing year over year, (and) I don’t see that changing,” he said. “Automotive and transportation—I see no signs of weakening there.”

Berlin Metals has been benefiting from steady demand from the transportation industry, including steel that feeds into automotive and earth-moving equipment, he said. “It’s been steady improvement since the valley of late 2008-09.”

And although the sectors that have been slower to rebound from the economic slump might not be experiencing much growth, they also show no signs of worsening, Berlin said. “Home construction (is) sort of flat. We’re in the middle of the season (and) I see nothing to make that worse. The inventory of unsold homes has to come down over the years, and at some point, with the low interest rates, people are going to be buying homes again.”

The Hammond, Ind.-based service center, which is celebrating 45 years under the family’s ownership, supplies cold-rolled and electrogalvanized steel, tinplate, black plate and stainless steel strip, and has several slitting lines.

But while Berlin said he anticipates no great shifts in demand from his company’s major end-use sectors, economic woes in Europe and a slowdown in the Chinese economy remain concerns. Global macroeconomic issues “can’t help but affect us in a negative way, but I guess the question is: will the policymakers here take steps to ... shield us from that?” Berlin asked, noting that he—like others in the steel industry—doesn’t anticipate any policy changes until after the November elections.

At the same time, one of the benefits of a still-struggling economy are low interest rates. “If you listen to the economic news, people are nervous about the future; understandably so, I guess,” Berlin said. “The one thing that makes it easier for people who need to grow is the cost to grow.” Low interest rates in the next couple of years will likely make it more attractive for business owners to make investments.

When it comes to the stainless steel sector, prices have been affected by a summer slowdown, and the falling prices themselves have helped further deter demand, Berlin said. “The continual drifting down of surcharges gives everyone a disincentive to buy.”

Still, Berlin described his outlook for the domestic steel sector as “gently optimistic. ... I see decent demand for steel going forward. Steel is very representative of the whole economy, (and) steel has been growing.”

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