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 dont know if wed 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 Junes 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,
We expect our incoming orders to be down for July. We
arent having doldrums, but we are in a seasonal
slowdown, a southern service center buyer said.
Demand is still questionable, so we dont 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
cant 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 well 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
dont anticipate a huge drop-off in demand. Its
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
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 Junedevaluing distributors
inventoriesmany said they were nonetheless struggling to
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
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 nations purchasing executives.
The ISMs 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. Junes 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 wasnt 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
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
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 didnt seem to be making inroads into the
Midwest region, the Midwest distributor source said.
Imports are staying on the coasts. Its 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
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: Well purchase
the tons we need when we need them. Were 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 Im not
confident this latest round of price increases will
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
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 dont see that
changing, he said. Automotive and
transportationI see no signs of weakening
Berlin Metals has been benefiting from steady demand from
the transportation industry, including steel that feeds into
automotive and earth-moving equipment, he said. Its
been steady improvement since the valley of late
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. Were 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 familys 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 companys major end-use sectors, economic
woes in Europe and a slowdown in the Chinese economy remain
concerns. Global macroeconomic issues cant 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 helike others in
the steel industrydoesnt 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.