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Steel market faces a turning point in fourth quarter

Keywords: Tags  U.S. service centers, Canadian service centers, steel, Supply Management's Steel Buyers Forum, metals shipments, service center inventories, Metals Service Center Institute, AMM Staff

As the fourth quarter gets underway, U.S. and Canadian service centers continue to buy steel products on an as-needed basis due to squeezed margins and changes on the supply side.

Competition at the service center level also has been increasingly tough, causing some to reconsider loading up on extra steel. U.S. service center operators cite slow economic growth for the uncertainty permeating the domestic steel market. Some recent price increases on hot-rolled, cold-rolled and coated coil are not going to hold, sources told AMM, and there is concern that domestic prices will drop.

Several sources pointed to oversupply, short mill lead times and erosion in scrap pricing as factors placing downward pressure on flat-rolled prices for the fourth quarter.

The latest survey by the Institute for Supply Management’s Steel Buyers Forum showed forward order trends up, backlogs up slightly, improved shipments vs. the previous quarter and a 13-point jump in the percentage of respondents expecting an upturn in sales and production in their industries over the next six months.

Yet some sources told AMM that lower scrap pricing, returning capacity at AK Steel Corp., West Chester, Ohio, and Pittsburgh-based U.S. Steel Corp.’s Lake Erie Works in Nanticoke, Ontario, and imports will pressure domestic hot-rolled and cold-rolled coil prices into lower realms this fall.

“I don’t think anyone has a lot of inventory,” an East Coast flat-rolled distributor source said. “We’re OK busy, not great busy. We’re collecting our increases, but definitely not all of it. Competition is hard.”

Others aren’t so sure. “I think people came back from the (Labor Day) holiday to see that their inventories were low. There are lots of whispers of another price increase to shore up demand,” a Mid-Atlantic distributor source said. “It’s too late to bring in imports. If your boats haven’t left the docks of Asia, they won’t be here until Thanksgiving. So you have a window of opportunityÑif you did purchase importsÑto beat the domestic increase. But if the domestic price falls apart, that’s not good.”

A third argument for stable domestic flat-rolled pricing is that mills are standing tough, sources said.

“We are not seeing any side deals being made. People are buying for today’s business and not going further out. They don’t have the cash to (buy large volumes and) keep inventory high. Banks are not lending much money,” an eastern Great Lakes service center operator said, noting that both the consuming markets and steel pricing were stable.

Some sources said inventory levels are unlikely to change due to stable but lackluster demand. Demand “has been status quo,” a Detroit-area sheet buyer said. “Nobody is overwhelmingly optimistic or pessimistic. Some products are selling better than others. Defense work tailed off quite a bit, but the solar business is coming on strong. Automotive is the same.”

Steel shipments during the first half of September were fairly even with the pace of the previous 60 to 90 days, but pricing had become less certain, according to U.S. service center operators.

“Our shipments (in August) were on par with the last three months and are about the same through mid-September,” a source at an upper Great Lakes flat-rolled distributor told AMM. “If there’s a good deal on steel I’m going to buy it, (but) prices are flat.”

A cold-rolled and coated sheet distributor source predicted that the fourth quarter won’t be very strong. “I think prices will drop off. They are already showing signs of weakness in spite of tightness in cold-rolled,” he said, citing Fort Wayne, Ind.-based Steel Dynamics Inc.’s inability to roll that material until November due to a technological setback at the company’s Butler, Ind., facility.

Customers are not able to forecast very far ahead. “They’re going hand-to-mouth and everyone is still keeping inventories pretty low and buying as they need,” he said.

U.S. and Canadian service centers shipped more than 4.11 million tons of steel products in August, up 4.8 percent from 3.92 million tons the previous month but down 1.2 percent from 4.17 million tons a year earlier, according to the latest Metals Service Center Institute data. U.S. inventories totaled 7.94 million tons (2.2 months’ supply at current shipping rates) at the end of August, up 1.3 percent from 7.84 million tons (2.3 months’ supply) a month earlier but down 11.3 percent from 8.95 million tons (2.5 months’ supply) in August last year, while Canadian inventories of 1.39 million tons (2.9 months’ supply) were down 5 percent from 1.46 million tons (3.2 months’ supply) in July and 14.4 percent below 1.62 million tons (3.2 months’ supply) a year earlier.

Year-to-date steel shipments by U.S. and Canadian service centers totaled 32.06 million tons, down 3.8 percent from 33.32 million tons in the first eight months of last year.

With the economic recovery continuing to move forward sporadically, service centers’ outlook on profitability has a great deal to do with improving efficiency. As the year passed its halfway point, it became clear that steel buyers were divided over where the overall economy was heading, the direction of steel production and the strategies needed to meet the demands of a volatile market.

“It’s just so much uncertainty,” a source at a Missouri River Valley sheet distributor said. “Mills are pushing (the increases) but the market is not quite as strong as they would like.” Due to competition, service centers aren’t passing price hikes along to their customers “at the same speed” as they’re implemented by producers, he added.

“We have paid up on the flat-rolled increases, but not all of them,” a southeastern full-line distributor owner told AMM. “Nor do we believe they will all stick and, if so, not for long. BusinessÑat least in our areaÑis not good enough to sustain it.”

A Great Lakes coated coil buyer agreed with the others’ assessments. “The price increases have somewhat stuck. It has helped people to get off the fence and buy a little,” he said. “But I’m not optimistic about (improved volumes) continuing on more than a month-to-month basis. They are not buying long.”

Spot quotes and lead times on coated sheet vary widely, he said. “There is a lot of uncertainty, but it’s good that steel users are not sitting on the sidelines anymore.”

“Summer is never a boom time,” the Missouri River Valley distributor source said. Among steel distributors and their customers, “everyone is running lean. The new normal is definitely lower inventory.”

A Mississippi Valley sheet distributor source said that even though his orders are steady, “our strategy now is to wait and see (if the latest) increase sticks. That is a departure; normally we bought a month’s worth of steel at once to fulfill a customer’s quarterly needs. Now we’re buying one week at a time.”

A Great Lakes distributor source is “upbeat about prices sticking and holding. Yet there is no question the market is still supply driven, which leads me to question the longevity of higher pricing,” which might see some erosion by October, he said.

Orders have risen in the past few months, and prices seem to be sticking, one Midwest warehouse sales executive said.

However, a second Midwest source said deliveries have arrived ahead of officially quoted lead times. Supply is plentiful, “so how the mills are justifying another increase, I don’t know. Warehouses should be very wary of this.”

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