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Steel, scrap prices and demand cool off in summer

Jul 31, 2015 | 07:00 PM | Fastmarkets AMM staff

Through mid-summer, a number of signs have continued to point to challenges and potential further struggles for some sectors of the steel and scrap industries. Falling prices, lower demand and global economic concerns are all contributing to ongoing problems.
Distributor selling prices for line pipe plunged to new lows in the summer, weighed down by a sagging energy market and a downturn in distributor sentiment.

“The energy sector carried the flag for a long time. But predictably it requires energy demand to be increased, and that’s not happening,” Paul Vivian, principal of St. Louis-based Preston Publishing Co., told AMM.

The market now sees a global oil glut after considering black gold to be in short supply for most of the last decade, Vivian said. “Demand has to do something crazy to catch up with supply,” he added.

U.S. economic growth, in particular an expansion in industrial production, would spur that demand, according to Vivian. But industrial capacity is shrinking as the country becomes a smaller economy, from a manufacturing standpoint, and increasingly reliant on the service sector for jobs and growth, he said.

Exports of oil or liquefied natural gas (LNG) could have bolstered demand, Vivian said. However, oil exports—unless that oil is refined into products such as gasoline—are forbidden by government regulations, and the LNG permitting process is almost as onerous as that for a new nuclear power plant, he noted.

“All that stuff is coming home to roost,” Vivian said.

Another headwind for oil prices and production is a potentially “imminent” nuclear deal with Iran, in which a pact could see exports surge and push out a recovery in U.S. oil prices and production for six to 12 months, New York-based Morgan Stanley & Co. LLC said.
Oil prices are already nose-diving, largely because producing nations aren’t responding like they typically do to a market glut by cutting production, Chris Kuehl, managing director and co-founder of Lawrence, Kan.-based Armada Corporate Intelligence, told AMM.

“In past years, you could count on Organization of Petroleum Exporting Countries (OPEC) members to take oil out of circulation,” he said. “But instead of reacting like oil companies, they’re reacting like burger joints and trying to hang on to market share no matter what.”

It’s not just OPEC that is producing too much oil, so are Russia, Canada and the United States as each looks to protect local markets, Kuehl said. High supplies are also colliding with a market that may have reached “peak demand,” he added.

“That’s the point where we are never going to have the kind of demand for oil that we did in the past. And there may be some truth to it,” according to Kuehl. “I’m not going to drive an extra 300 miles to work just because oil is cheap.”

Hot-rolled steel coil prices fell in July for the first time since April on a global commodity glut, summer doldrums and questions about the direction of domestic scrap tags, market participants said.

“When everybody is the same spot, that’s usually a breakout point,” one mill source said. “Either the bigger buyer starts getting something extremely cheap soon, or they keep the old price and the little guy sees it shoot up.”

Mills are pushing hard to keep prices from sliding back further, market participants said, although hot-rolled lead times are largely unchanged at around two to four weeks. “Prices have held up pretty well in the United States, and that’s a big win. So when the inventory goes away, things should get righted,” the mill source said. “But we can’t ignore the whole global market—so if hot-rolled is $300 per ton somewhere, it’s hard to have $500-per-ton steel here.”

Chinese hot-rolled coil is as low as $300 per ton ($15 per cwt), according to AMM sister publication Steel First. China sells little hot band directly to the United States, but Chinese prices influence tags elsewhere.

Also casting doubts over hot-rolled coil gains is potential fallout from the Greek debt crisis and collapsing commodity prices across the rest of the world.
“U.S. demand is strong but pricing isn’t going anywhere,” one steel buyer said. “We’re hovering along the bottom waiting for some good news, but there is nothing imminent to turn this (market) around.”

Another headwind to higher steel tags is that scrap prices were sideways or down in July and potentially even lower in August, market participants said. But mills aren’t in a mood to give back hard-won price gains, which means a drop in scrap tags may not translate into lower steel prices, they said.

A lone bulk ferrous scrap sale to Turkey in mid-July at sideways numbers has sent East Coast dock prices into freefall, prompting exporters to move inventory inland to domestic mills as offshore offers dry up. East Coast docks have been steadily lowering their buying.
A large exporter warned its suppliers in a memo to be cautious when pricing scrap due to rapid price erosion resulting from the “extreme deterioration of global markets,” one seller into Boston told AMM.

With a lack of offshore prospects on the horizon, exporters have been selling shredded scrap into the domestic market, which is creating an oversupply that is working to lower prices in the Southeast.

“A large exporter dumped a lot of shred and that has been the catalyst of uncertainty for the domestic market. Only a few can handle buying that large of a quantity and they (domestic mills) are using it as leverage for their monthly buys,” a Tennessee source said.
The U.S. domestic ferrous scrap market also was weaker in July as oversupply issues hit the Southeast while the Midwest was down slightly less. The size of the price correction caught most by surprise. “Early last week we were gearing up for an uptick of what most believed to be a minimum of up to $10 (per ton),” a broker in the region said in early July.

A lack of export activity resulted in a large exporter unloading large quantities of shredded scrap into the market, which quickly sent prices lower. Early sales of shredded scrap in Alabama were at $285 per ton, but quickly eroded to $275 to $280 per ton July 7 from $297 per ton in June.

“The numbers in the South were so big and they were springboarding at big numbers, but Chicago and Detroit won’t feel the brunt,” one Midwest mill buyer said.

The Southeast is struggling to find its floor as mill buyers try to make sense of all the confusion among frustrated sellers. Alabama, which boasts the strongest numbers in the country, seems poised to take the biggest hit as weakening order books and an oversupply of shredded scrap are working to lower everyone’s expectations.


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