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Service centers remain optimistic for 2017’s markets

Feb 17, 2017 | 03:23 PM | Grace Asenov

Tags  hot rolled coil, service centers, distributors, energy, construction, automotive, Donald Trump, president Metals Service Center Institute

Weak demand from the energy sector weighed heavily on the steel service centers through 2016, though it eased towards the end of the year.

Service centers dealt with a “very tumultuous” market in 2016 in terms of pricing and demand, though the overall results were positive and remain bright heading into 2017, according to Association of Steel Distributors (ASD) president Andrew Gross.

“Finally we had a year that the service centers industry didn’t get crushed,” Gross said. “Most people made good money.”

Hot-rolled coil prices kicked off the year at $18.5 per hundredweight ($370 per ton), increasing steadily through July, where they hit a peak of $32 per cwt ($640 per ton), according to AMM’s assessments. Prices then dropped continuously throughout the third quarter and fell back to a low of $23.5 per cwt ($470 per ton) in late October, before spiking again and hitting $30 per cwt ($600 per ton) in December.

Inventories were relatively high in the beginning of 2016, but moderated heading into the middle of the year, according to Gross, who is also president and chief executive officer of Alliance Steel LLC, Bedford Park, Ill. “As prices kept diminishing, so did the inventory,” he said, adding that by the end of 2016, as steel prices were back on the rise, inventory levels began to grow again as service centers bought into the increases.

Meanwhile, weak demand from the energy sector weighed heavily on the steel service center sector throughout 2016, though it eased up a bit towards the end of the year, according to Gross.

“The energy market was definitely very depressed in the beginning of 2016, but as we trailed throughout the year, the oil rig count increased and the shale industry became more healthy,” he said.

Indeed, last year began on a “very rough note” for the manufacturing industry amid plummeting oil and gas prices, followed by economic uncertainty from the political primary and election seasons, according to Metals Service Center Institute (MSCI) president and chief executive officer M. Robert Weidner III. That overall industry weakness was reflected in MSCI’s service center shipments data, down 6.3 percent in 2016 vs. 2015, on top of a general decline over the past decade. 

“(Last year) was not a great year for manufacturing and the industrial metals supply chain,” Weidner said. “Many businesses were making the minimum amount of investments in terms of their capital budgets.” 

However, some industries provided steady demand for service centers last year, Gross said, citing home-repair products such as shelving, toolboxes and lighting, as an example.

Construction also was relatively positive.

“Residential construction improved for us on the coated (steel) side,” Gross said. “The non-residential business also was steady; we didn’t see a big increase in demand, but in 2017 it should improve.”

“Most end markets were positive last year, with the exception of the energy sector and agriculture,” he added. “I don’t expect a tremendous recovery in agriculture this year.”

In terms of market consolidation, 2016 was fairly quiet, according to Gross. “Last year, we didn’t hear of many companies going of business,” he said.

In 2015, for example, probably about four to six service centers closed their doors, according to Gross. However, in 2016, he knew of just one service center that was forced to shutter.

Service centers learned their lesson from 2015, Gross said. “Don’t get yourself in an uncomfortable inventory position,” he added. “Make sure you can sell what you have.”  Another notable theme for steel service centers in 2016 was the move away from foreign steel, according to Gross.

“If there was a common thread through the service centers industry in 2016, it was trying to find the right trading companies,” he said. “We had to find the right vein in supply from foreign sources to make sure they weren’t going to be hit by duties.”

“All of the major players purchased foreign material at what they felt were strategic moments in order to help them get through the lean times of 2016,” Gross added. “Knowing when to pull the foreign trigger was key.”

Even today, it’s still hard to find foreign suppliers for certain products, such as hot-rolled coil, according to Gross.

“Cold-rolled and coated products are now coming from countries that we haven’t heard from so much in the past,” including Vietnam and Egypt, for instance, he said. “It’s a whole different ballgame now, and service centers are readjusting their supply routes.”

However, Gross rejected the notion that U.S. trade cases have gone too far in the direction of protectionism. In fact, in some cases, anti-dumping and countervailing duties have not been strongly enforced, particularly for cold-rolled and coated imports, and possibly also for hot-rolled coil shipments, he said.

“For my nickel, I would prefer that (the trade cases) be extrapolated and enforced to the furthest extent possible to help the domestic steel industry,” he said.

“The strength of the dollar offsets the difference of the countries worried about the duty they might have to pay,” he added. “Are we just spitting into the wind here? It’s simple math.”

Lastly, the election of President Donald Trump in November was a pivotal moment for the steel service center industry and metals market in general in 2016, according to Gross. Steel service centers greeted the news with “euphoria,” Gross noted.

“There was a sense that the steel industry would rise again,” he said.

“I’m more optimistic today than I have been in a long time,” Weidner said. “The mood of the industrial heartland is clearly much more positive, and the voices of many are being heard.” 

However, metals service centers and the entire industrial supply chain are facing a pivotal moment, according to Weidner. Oil and gas prices have stabilized—though they remain well below recent prior-year highs—and the U.S. presidential election is over. 

“Now is the time for bold action,” Weidner said. “We will be advocating very strongly in Congress as well as with the Trump administration for truly comprehensive pro-growth tax reforms.” 

MSCI also plans to advocate for the approval of free trade agreements; enhanced scrutiny of regulations and regulatory systems; a stable and affordable energy policy; expanded infrastructure investment; health care and immigration reform; and an improved education and training system to ensure a reliable workforce. 

“I’m not advocating throwing out all regulations, but there are some that have been passed in the last year that have put a damper on economic growth, and in particular manufacturing,” Weidner said. 

For example, after the 2008-09 recession, the lending practices of major U.S. banks were rightfully placed under scrutiny, he explained. However, “the swinging of the pendulum can get too extreme.” 

“The ability to access capital is more critical than ever now,” particularly for family-owned service centers and their customers, Weidner said. “If the economy is truly coming out of a decade-long slumber, and if (gross domestic product) growth is hopefully going to reach 3 to 4 percent, then businesses in the industrial supply chain will need access to capital.” 

Weidner also is hopeful that infrastructure spending will increase under the new administration. 

“We need to see shovel-ready infrastructure projects, not just political commentary,” he said. “All of us were frustrated in 2008 with the stimulus package; only a very small amount actually went into infrastructure.” 

Furthermore, although the U.S. Commerce Department made rulings in early 2016 that addressed some of China’s excess steel supply, those rulings did not address indirect imports of steel products, according to Weidner. 

“Unfortunately in the past, we have attempted to look at trade through silos,” he said. “We need to look at trade as what it really is: a supply chain.” 

Weidner is particularly optimistic about President Trump’s selection of Robert Lighthizer to be Trade Representative, Peter Navarro to direct the National Trade Council and Wilbur Ross to be Commerce Secretary, as well as the appointment of businesspersons into positions such as Secretary of State (Exxon Mobil Corp.’s Rex W. Tillerson) and Secretary of Labor (CKE Restaurants Holdings Inc.’s Andrew Puzder). 

These businesspeople will look at U.S. issues through a unique lens that will lead to richer discourse, according to Weidner. 

“We’ve been given this moment in time where the country has so many business leaders now involved in setting public policy,” Weidner said. “The stage is set now where the business community’s voice will be heard more than it was ever heard in the last eight years.

So far in 2017, “demand is not insane, but it’s comfortable,” according to Gross. “The business climate is good.”

Indeed, U.S. steel prices are expected to be higher this year vs. last year, though relatively low mill capacity utilization rates and the likely continued growth of Chinese steel production will cap gains, according to a Metal Bulletin Research (MBR) analyst.

“Prices are rising globally, largely due to the raw materials crunch,” according to MBR principal consultant Amy Bennett. “Going forward, we may see declining imports (into the U.S.) not due to rhetoric from the new president, but due to higher raw material costs in China and Europe.”

Crude oil prices and domestic hot-rolled coil tags show a “strong correlation,” and in 2016, there was a recovery in both markets, according to Bennett. However, the most recent increase in coil prices, which started in late 2016, shows that steel prices are now “getting ahead of themselves” by outstripping crude oil prices significantly, she said.

“This is a serious issue within the U.S. steel industry,” Bennett said. “When steel mills have the opportunity to increase prices, they go for it just a little too much and end up sabotaging themselves. We expect that prices will overshoot sustainable levels once again in the second quarter (of 2017) onwards.”

Still, Bennett predicted that hot-rolled coil prices will average $610 per ton ($30.50 per hundredweight) in 2017, compared with an average of $522 per ton ($26.10 per cwt) in 2016. Hot-rolled coil prices stood at $31 per cwt ($620 per ton) Feb. 9, up from $24 per cwt ($480 per ton) three months ago, according to AMM’s latest assessment.

“(Coil at $610 per ton) would be the highest average price for the year since 2014, but still remaining well below the pre-2014 strong years,” Bennett said.

Steel prices this year will peak below pre-2014 levels partially because domestic steelmakers are stuck in a struggle to increase average utilization rates above 75 percent, Bennett continued. U.S. mills operated at an average capacity utilization rate of 73.3 percent in the week ended Jan. 28, vs. a rate of 68.7 percent in the same week last year.

“Every time (the mills increase utilization rates), any pricing recovery disappears,” Bennett said. “It could be a hindrance to prices going forward.”

The addition of new mill capacity—via Big River Steel LLC, for example—as well as China’s ongoing overcapacity situation, are other deflationary factors for U.S. steel prices, she said.

China has vowed to cut 100 million to 150 million tonnes of its steel production through 2020, but the elimination of just 100 million tonnes is the more likely scenario and won’t be enough to reduce its net output, Bennett said.

“We will see continued growth in Chinese steel production,” she said.

Imports play another “huge part” of the story of U.S. steel prices, Bennett added. Imports are rising in particular in the cold-rolled coil and hot-dipped galvanized markets, which “is pretty funny considering those are the products where China has been hammered with duties of 400 to 500 percent,” she said. Yet that is why cold-rolled coil and hot-dipped galvanized prices have been performing “extremely well,” she continued. “No wonder that we’re seeing imports into this market rising,” she said.

“We are more optimistic that we will see stronger growth,” Bennett said.

The depressed energy market also appears to have bottomed out and could receive further support from the Trump administration, which is pro-pipeline, she added. That is also good news for steel prices in the coming months.


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