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 dont see anything
super-exciting going on. I would say its 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 Managements
(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 ISMs 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
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
Its 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 were
purchasing. Material we bought three to four months ago,
were not buying that now.
Steel demand is increasing, but
only slowly, the chief executive officer of a major North
American sheet processor said. You dont have to buy
much steel. Given the short lead times, you dont 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
We need mills to have a
(price) increase and have it stick, a Great Lakes
distributor source said. Service centers dont want
to pay X amount and then see prices drop. Margins are so thin
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 weve got falling
scrap prices, that puts everyone on the defensive and no one
wants to place an order, one mill source told
AMM. If theyve got work, theyre
taking material, but if they dont have work theyre
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
(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 dont, a distributor source in the
The markets been
kind of slow. Its 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
didnt see the normal cycle at the beginning of the year
as we did last year, the second mill source said,
so who knows whats going to happen?
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.
Everybodys hoping that some of the flat-rolled
mills will take out some capacity, one Midwest
distributor source said.