NEW YORK Stuck in a rut.
Spinning your wheels. One step forward, two steps back. Pick a
phrase, any phrase: Virtually any combination of words that
communicates the inability to move in a deliberate direction
Late last month, Timna Tanners,
senior research analyst at Bank of America Merrill Lynch
covering the metals and mining sector, opted for the phrase "up
the creek without a paddle" as the title of a presentation she
delivered at an Association of Steel Distributors (ASD)
regional meeting in New York. Addressing an audience of some
60-plus steel distributors and financial types, Tanners took
only seconds to zero in on what she considers the overarching
theme for steel sector participants the past couple of years:
"There is too much steel," she
said. "We are swimming in steel. How do we maneuver in an
industry where there is just too much supply?"
Before addressing that question,
Tanners touched on topics ranging from the coming revolution in
domestic direct-reduced iron (DRI) capacityshe is
predicting 29 million tons of annual DRI production capacity in
the United States by the end of this decadeto the Chinese
super cycle, which she thinks is over.
It didnt take long,
however, for Tanners to return to the topic du jour.
"We really think it is more about supply than demand right now
with imports and excess production," she said. "And you
dont get much pricing power until you get utilization
above 80 or 85 percent." Average capacity utilization in the
week she spoke was pegged at 76.9 percent by the American Iron
and Steel Institute, although it has since inched up to 77.5
Five days after Tanners
addressed the ASD meeting, U.S. Steel Corp. tested her theory
by hiking its base prices for all carbon flat-rolled steel
products by $50 per ton ($2.50 per cwt) effective immediately,
the second sheet price hike attempt this year (
amm.com, Feb. 27). AK Steel Corp., NMLK USA and
Nucor Corp. quickly followed suit, with ArcelorMittal USA LLC
and Severstal North America Inc. sounding a variation on the
theme by setting new minimum base prices for April
A quick trip through
AMMs pricing archives shows that domestic sheet
mills made a total of 16 price movements in the 14 months from
Jan. 3, 2012, through late February 2013. An overwhelming
majority (14) of the moves were keyed to lifting prices, while
one action "set a floor" under sheet prices and another
actually "retracted a hike in a well-supplied market."
Over that same period,
AMMs market price for hot-rolled sheet hit a
high of $750 per ton ($37.50 per cwt) f.o.b. Midwest mill in
mid-January last year and a low of $580 per ton ($29 per cwt)
for two weeks in mid-October 2012, with some uncharacteristic
deals reported well above and below that spread.
The jury is still out as to
whether and/or to what degree the latest hikes will stick. But
if Tanners and a sort of "thermometer approach" shes
developed to call the top and bottom of the steel market is on
track, gaining traction is pretty much a matter of simple
"This is how to tell what is
going to happen to the steel market," she told the ASD meeting.
"It is kind of what I learned over the years." What Tanners
learned is not rocket science, but it does delve just deep
enough into the psyche, culture and documented history of the
domestic steel sector to suggest that the existing lack of
pricing power will not soon disappear.
"I think steel prices are going
to fall to the top marginal cost of the domestic producer who
is willing and able to shut capacity," she said. "Not the one
who should cut capacity, the high-cost producerthose guys
might keep running at a loss(but) the large integrated
producers, for example. Im trying not to name names. We
know from public information that they post losses. They keep
running their mills even when they lose money. But there are
marginal-cost producersmini-millsthat will shut
capacity. It is a lot easier to shut a mini-mill than a blast
furnace. And they (the mini-mills) will close capacity when the
price gets to their cost of production."
Tanners pegs the scrap-based
mills cost of production at roughly the price of shredded
scrap plus $150 to $180 per ton. "I havent checked the
shredded price but lets say its somewhere between
$350 and $400 per ton. So $500 to $550 is about the lowest the
price should go for a ton of hot-rolled coil," she said. "Below
that, you should see mills start to shut capacity. They are not
going to produce at these losses anymore."
The peak price, "assuming a
relatively balanced market, which we dont have, rises to
a level you can import to," Tanners said. "If you start to see
import offers come in at least $100 or 10 percent lower than
domestic offers, interest in imported material is piqued and
order levels climb."
Tanners 2013 hot-rolled
coil forecast$610 per tonis admittedly cautious for
reasons tied mostly to oversupply but also to an anticipated
softening in raw material costs and cooling in Chinas
Looking ahead, she counseled the
audience to curb its enthusiasm on the auto production front.
"U.S. auto demand has been the shining star everyone is talking
about. But the fact is its hard to see a lot more
improvement in builds from recent levels. A lot of auto
suppliers are running pretty full tilt," Tanners said. "Now
well wait and see if heavy equipment and energy are
turning, which we are starting to hear. And the big question is
when is nonresidential construction going to recover? We still
think it is 2014."
Returning to the core theme of
her presentation, Tanners pointed out that the United States is
not the only nation "swimming" in steel. "(South) Korea is a
net exporter, Turkey is a net exporter and we expect that when
India can get its iron production back in order they, too, will
be a net exporter," she said. "So it begs the question we are
always asking: whos left to import?"
Although Tanners allows that the
second quarter could see a little less imports, she
doesnt expect any sudden strengthening in flat-rolled
steel prices until the industrys capacity utilization
rate increases more than a few percentage points.
"What we have seen lately,
unfortunately, is a lot of price hikes that dont
necessarily stick," she said. "(The mills) have a credibility
problem, perhaps until we get to 80-percent utilization or
higher. The credibility is enforced by the fact that there are
mills that will shut down when they get to the marginal cost of
"We have an oversupplied
industry, someone needs to cut, (and) no one seems to want to
step up and take one for the team, which is understandable,"
she said. "For now, it is a big challenge."