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US distributors’ attitudes are reflected in inventory levels

Keywords: Tags  service center steel shipments, Metals Service Center Institute, Institute for Supply Management,

Despite a pickup in service center steel shipments to start the second quarter, many distributors have reported little change in what so far has been a tepid year. “I don’t see anything super-exciting going on. I would say it’s flat,” a distributor source said in May.

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 approaches its halfway point, it has become clear that steel buyers are 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.

The first quarter ended on a sour note for the overall service center market. Shipments by U.S. distributors totaled 3.37 million tons in the first quarter, down 4.4 percent from the same period last year, according to Metals Service Center Institute (MSCI) data, and inventories of 8.49 million tons at the end of March, equivalent to 2.5 months’ supply, were down 0.2 percent from a month earlier and 4.2 percent below a year earlier.

Buyers remain optimistic yet cautious as demand remains relatively strong but uncertainty clouds the market. They are sure of one thing, however: With steel prices expected to be volatile this summer, no one plans to dramatically increase inventory levels anytime soon. Controlling inventory is one of the few variables in the market that still is solely at distributors’ own discretion.

Steel buyers faced softened demand, excess supply, short lead times and weak pricing in April. According to an Institute for Supply Management’s (ISM) Steel Buyers Forum survey, more respondents cut inventory in April, with the proportion of those holding more than 60 days of steel falling some 7 percentage points from March. Meanwhile, the number of survey respondents deeming their inventories “too high” fell about 16 percentage points, and as a result fewer purchasing managers felt the need to cut inventories further. Half said they would shed steel over the next six months, down from about 55 percent who said so in March. More buyers expected the next three months to bring fewer orders (17 percent vs. 9 percent in March), while those forecasting an upswing in new orders fell by nearly half. Meanwhile, the proportion of those predicting rising backlogs dropped 20 percentage points, those predicting a decline in economic activity over the next six months more than doubled to 22 percent and those expecting a rise in activity shrank by about 10 percentage points.

“The market is improving,” particularly with spring construction season under way, a source at an East Coast flat-rolled distributor said. But with the oversupply, “mills have to realize they cannot continue to pump out tons.”

The ISM’s April survey showed that steel service centers were sitting out of the market amid concerns about building inventories as business remained slack after registering mixed shipping results in March.

U.S. steel service center shipments totaled 3.63 million tons in April, up 5.9 percent from the previous month, but inventories of 8.31 million tons were down 2.1 percent compared with the end of March, MSCI data showed.

“It’s very quiet out there. People are afraid to take positions on inventory. ... When business was at least halfway decent, customers bought for this month and next. Now they are just buying for this month or on a weekly basis,” a source at a Great Lakes flat-rolled distributor said. “(Our company is) not afraid to take a position, but we are very selective on what we’re purchasing. Material we bought three to four months ago, we’re not buying that now.”

Steel demand is increasing, but only slowly, the chief executive officer of a major North American sheet processor said. “You don’t have to buy much steel. Given the short lead times, you don’t need your inventory to be longer than mill delivery: four to six weeks and, in some cases, two weeks.”

The consumer trend has been to boost buying ahead of a predicted scrap price increase and hold back on purchasing ahead of a predicted decrease, causing increased volatility in the market, Mark D. Millett, president and chief executive officer of Fort Wayne, Ind.-based Steel Dynamics Inc., said in April. “Consumers are keeping inventories tight while taking advantage of short mill lead times.”

“We need mills to have a (price) increase and have it stick,” a Great Lakes distributor source said. “Service centers don’t want to pay X amount and then see prices drop. Margins are so thin already.”

A drop in scrap prices usually brings down mills’ selling prices, which in turn devalues their customers’ inventories. If the market anticipates a drop in scrap prices, buyers are less likely to hold inventoryÑand less likely to buy at all if they think prices could have further to fall.

“If we’ve got falling scrap prices, that puts everyone on the defensive and no one wants to place an order,” one mill source told AMM. “If they’ve got work, they’re taking material, but if they don’t have work they’re not interested in putting (steel) in inventory.”

Rising scrap prices can have the opposite effect, sources conceded, but volatility in general is often more a hindrance than a blessing, they said.

Sentiment remained subdued in the pipe and tube market, with tepid demand and more-than-adequate stock levels leading to pressure on margins.

“(Market conditions) are weak. Business is weak and margins are being pressed because people have inventory. We all thought that we would have good business and we don’t,” a distributor source in the South said.

“The market’s been kind of slow. It’s been flat and nondescript, and people look for clear direction. With clear direction, people can make decisions,” another mill source agreed.

The slow start to the year has made forecasting the rest of the year challenging. “We didn’t see the normal cycle at the beginning of the year as we did last year,” the second mill source said, “so who knows what’s going to happen?”

U.S. distributors’ shipments of carbon tube and pipe totaled 236,900 tons in April, up 5.6 percent from March and 3 percent higher than a year earlier, according to the MSCI.

Pipe and tube distributors say they would welcome a move by flat-rolled steelmakers to take capacity offline in order to prop up pricing for the substrate. “Everybody’s hoping that some of the flat-rolled mills will take out some capacity,” one Midwest distributor source said.

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