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2014 Outlook: Flat-Rolled Steel

Keywords: Tags  Steel market, flat-rolled, outlook, producers, demand, CRU-minus contracts, U.S. Steel Corp., Severstal North America Inc. Nippon Steel & Sumitomo Metal Corp.

Steel market participants are expecting stability for much of 2014, particularly as demand looks set to grow at healthy levels and steelmakers expect to carry forward pricing momentum that began in the second half of 2013.

With U.S. steel producers pledging to move away from index-based discounting, a cautious but steady pickup in demand, razor-thin inventory levels and a change in the supply landscape due to a major acquisition, steel mill and distributor sources expect 2014 to be a positive year.

“Most of the signs I see look like 2014 will be better, and possibly significantly better,” one Mid-Atlantic service center source said. “We think commercial construction, which is a large chunk of our business, will come back significantly. We’ve had to make do without it or at very low levels for the past few years.”

Much of 2013 focused on U.S. steel mills moving away from contract discounting, also known as “CRU-minus” deals, a practice that mills claimed eroded sales margins. Mills are said to be sticking to their guns, with the majority refusing to offer index-based discounts, which means much of the 2014 flat-rolled landscape is expected to change.

On one hand, mills likely will get better margins, particularly as deals offering 5-, 6- or even 7-percent below index prices were causing many to sell at breakeven or below cost. With mills making more money, distributors expect better margins along the entire supply chain.

But one possible consequence of the end of index discounting could be an increase in imports as buyers wary of an uncertain steel market, coupled with cut-throat competition downstream, look to hedge with increased buying offshore.

In the summer, “it was hard for anyone to sell (foreign) steel,” one steel trader said. “But with the CRU-minus contracts going away, people got caught. Now they’re buying foreign with gusto. From what I understand, the mills are playing it tough and going strong on this game. We’re all happy to see the prices go up.”

Another possible result, sources indicated, would be that buyers could prefer to procure more of their stock inventory tonnage on the spot market rather than lock in a contract because the benefit has diminished greatly. If so, that could hurt mills that are less competitive and make the spot market much more volatile.

However, others expect transactions generally will be higher across the board with discounting off the table.

“It’ll all pan out depending on how much imports actually come in,” a Midwest service center source said. “Everyone says there will be a flood of imports, but whether that exists or not also depends on if it’s on time. For 2014, I don’t expect major movements up or down in pricing. But, on the whole, the bottom range will definitely move higher.”

The flat-rolled market also will be affected by changes in the top management at several domestic mills, including Dearborn, Mich.-based Severstal North America Inc. and Pittsburgh-based U.S. Steel Corp.

A second Midwest service center source indicated that the changes could mean a “different way of doing business.”

Those changes already seem to be under way, including U.S. Steel’s recent announcements to shutter the iron and steelmaking operations at its Hamilton Works in Ontario as well as two of its coke batteries in Gary, Ind., and a plan to dissolve its Double Eagle Steel Coating Co. joint venture.

More changes are expected in 2014 that likely will include mills shedding old assets in favor of new ones.

The new year also will bring Essen, Germany-based ThyssenKrupp AG’s shift away from the U.S. market with the pending sale of its Calvert, Ala., facility to a consortium of Luxembourg-based ArcelorMittal SA and Tokyo-based Nippon Steel & Sumitomo Metal Corp. The $1.55-billion deal, announced in late November, will mean a likely tightening in supply because of market consolidation, which should trickle through the rest of the market.

ThyssenKrupp’s Calvert deal could mean that U.S. hot-rolled prices will peak above $700 per ton in the first quarter, according to a note issued Dec. 1 by analysts at Cleveland-based KeyBanc Capital Markets Inc.

With inventory levels remaining razor thin and buyers continuing to sit on the sidelines wondering if pricing will fall in the near term, some sources said it can only mean higher flat-rolled pricing. But skeptics still wonder whether the upward momentum will last, particularly with so many participants still reflecting on the 2008 financial market crash. They said the best method is to be cautious.

“The steel market is like the stock market. When we were back in 2005, 2006 and 2007, everything was almost too good to be true,” a second Midwest service center source said. “Something is going to happen eventually—anything that goes up has to come back down. It’s just a matter of time. We’re all cautious and service center level guys are even more cautious because last time, when pricing went up, up, up like this, it didn’t come down gradually—it came crashing down.”

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