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2012 scrap prices have made distributors anxious

Keywords: Tags  ferrous scrap, ferrous scrap prices, steel distributors, NLMK USA, Nucor Corp., AK Steel Corp., steel sheet, steel plate ArcelorMittal USA Inc.

The relationship between ferrous scrap prices and service center orders and inventories isn’t always the first factor market participants consider when assessing steel sales, but recent pricing activity has highlighted the important role that it plays.

As scrap prices fell in September and early October, distributors kept a close eye on raw material negotiations, looking for signs of how steel prices and overall steel demand could be affected.

During that period, steel prices did not rise, despite some manufacturer statements that hikes were on the way, and steel shipments fell in both August and September.

But then, amidst a market consensus that scrap prices had bottomed out in October, NLMK USA, Nucor Corp. and AK Steel Corp. increased prices mid-month for all sheet products by $40 per ton. Those decisions to raise prices followed an apparently leading move by U.S. Steel.

The moves immediately prompted some ordering, mill and distributor sources said.

“No one can believe it,” one Midwest service center source said. “Everybody we’re buying for, they know the price is going up so they’re trying to beat the price.”

But some buyers weren’t able to get in and place orders ahead of the hike, a mill source said.

“It’s interesting that this (price rise) has occurred a couple weeks earlier than last year. I think it’s caught some distributors and OEMs (original equipment manufacturers) off guard, which from a mill perspective is a good thing,” he said.

Some distributors reported buying large quantities following warnings from mill sales representatives that hikes were on the way. “The belief is that prices won’t go down anymore, and they’ll see how much of the $40 will stick,” a second Midwest service center source said.

Prior to the October increases, the market had looked rocky. U.S. steel plate prices had resumed their downward trend in late September as scrap input costs fell and minimal spot orders exacerbated a sense of oversupply in the market, sources told AMM. “The announced increasesÑnone of that stuck,” one service center source said at the time. “With scrap sliding, prices stayed the same or came down in some cases.”

The price decline came as spot buying hit a lull. Sources had told AMM that inventories were more than meeting demand. “The service centers, the big chains, are the drivers of the spot market, and many of them are in a ‘no-buy’ mode,” one mill source said in September.

Mills’ efforts to capture price increases often had been undermined not just by depressed demand, but also by downward scrap markets in September and early October, sources said.

“Scrap falling marginally--that does not help,” a mill source said.

Steel prices had maintained strength throughout the traditionally slower summer season as the market awaited a possible strike at Chicago-based ArcelorMittal USA Inc. or Pittsburgh-based U.S. Steel Corp., where labor agreements were set to expire Sept. 1. However, with both integrated steelmakers successfully negotiating new deals with the United Steelworkers union, sources said the sheet market’s run-up had little staying power.

“There (was) just not a lot out there to support (the price),” one mill source told AMM, noting that falling scrap prices and lower-priced imports of cold-rolled and galvanized sheet in particular started to eat into the mills’ price-hike efforts.

AMM’s consumer buying price for shredded automotive scrap in the Chicago market--a key component in many steel mills’ raw material surcharges--fell more than 18 percent to $335 per ton in October from $410 two months earlier.

“Everyone knows scrap is going down,” one Midwest service center source said. Both mill and service center sources agreed that they saw little on the horizon to support the summer’s price increases into the fall. “It’s dead and over now,” one southern service center source said of the rising hot-rolled prices seen previously. “It’s petered out.”

“Our customers are all busy,” another Midwest service center source said. “They’re not setting the world on fire, but they are doing fine.” Nonetheless, the source noted that mills’ lead times are shrinking. Falling steel product prices will keep people from buying unless they absolutely must, he added.

“I will only fill (orders) when I need to fill the pot,” a source at an East Coast manufacturer said.

Although North American service centers expected to see little change in steel shipments following summer levels that were down from a year earlier, September steel shipments decreased again, another sign of the fragile state of the scrap and steel sectors.

“We’re not seeing a whole lot (of demand) other than the energy side of the business, which continues to be fairly strong, while there’s a lot of uncertainty in the other markets,” a source at one national steel distributor told AMM.

Service center sources said that overall demand has remained relatively unchanged so far, even as a few segments experienced slight upticks in recent weeks.

“Automotive used to drive the steel industry, and now it’s recovered. We’ve seen production at pre-crash levels,” one northern service center source said. Still, automotive growth is “not enough to pull up the slack for construction.”

The slowdown in shipments from 2011 levels, which began in August, continued in September. Steel shipments declined approximately 10 percent in the United States compared with the 1-percent fall in August.

U.S. service centers shipped nearly 3.08 million tons of steel products in September, a decrease of 9.5 percent from September 2011. For the year to date, steel shipments totaled more than 32.11 million tons, an inacrease of 3.3 percent from the same period last year.

Steel product inventories totaled nearly 8.77 million tons at the end of September (2.8 months’ supply at current shipping rates), according to the Metals Service Center Institute (MSCI), down 2.1 percent from more than 8.95 millions tons (2.5 months’ supply) the previous month although up 3.1 percent from 8.5 millions tons (also 2.5 months’ supply) a year earlier.

Shipments by U.S. steel distributors totaled more than 3.65 million tons in August, up 11.1 percent from nearly 3.29 million tons in July but down 1 percent from 3.69 million tons in August last year. Meanwhile, domestic distributors’ inventories were on the rise in August, according to MSCI data. Steel inventories held by U.S. service centers totaled more than 8.95 million tons (2.5 months’ supply at current shipping levels), up 0.2 percent from 8.93 million tons (2.7 months’ supply) in July and 5.8 percent above 8.46 million tons (2.3 months’ supply) in August 2011.

It’s not just a domestic issue. Japanese steel distributors have joined the growing number of voices warning that steel demand likely will slow significantly in the fourth quarter.

There is evidence that distributors are focusing on reducing stockpiles. Tokyo Steel Manufacturing Co. Ltd. said that steel inventories have already begun to fall, and it left October selling prices unchanged from the previous month despite a sharp drop in scrap prices. While construction demand will continue to improve as reconstruction work moves ahead, the level is lower than had been expected, distributors said during the latest quarterly meeting between Japan’s Ministry of Economy, Trade and Industry and the Steel Products Distributors’ Association. Japanese distributors also expressed concern over a likely drop in demand from other sectors.

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