November 2017

Carbon Flat-Roll Hoping for Growth in 2018

By Jonathan Samples, Associate Editor

The first decline in auto auto shipments in years was offset by gains in other sectors, leading to a mixed bag year for carbon flat-roll products. The outlook for 2018 is equally uncertain.

The carbon flat-roll market has been on shaky ground in 2017. Despite increased imports in the first half of the year and uncertainty regarding U.S. trade actions, the market for sheet steel has been stable, albeit unimpressive.

“We expected a better year in 2017 on a demand basis, but it just really hasn’t materialized,” says Jim Bouchard, CEO at Esmark Steel Group, University Park, Ill. “I would say it’s been steady but sloppy. It really hasn’t gained any traction.”

Demand in the major flat-roll end markets has been a mixed bag, with the largest market for carbon sheet, automotive, down mid-double digits for the year to date. Those declines have been offset by strong underlying demand in the construction sector and a partial recovery in the pipe and tube sector, according to Christopher Plummer, managing partner at Metal Strategies Inc.

Meanwhile, sheet steel prices for the three major product categories in the U.S. are essentially where they were a year ago at this time. As of Oct. 15, the price for hot-rolled coil was $590 per short ton, cold-rolled was selling at $790 per short ton and hot-dipped galvanized at $875. Compared with average prices in December 2016, cold-rolled and galvanized are down $20 and $30, respectively, and hot-rolled is flat.

Overall shipments of flat-rolled steel are slightly higher through the first eight months of 2017, up 2.1 percent for all sheet products. And while tin mill and electrogalvanized products are both down more than 15 percent year to date, shipments of hot-rolled coil are up 6.1 percent. Similarly, U.S. sheet consumption is up just 2.6 percent from a year ago, with the biggest increase being cold-rolled steel at 5.5 percent.

One element of the flat-roll market up significantly in 2017 is import share. Total sheet imports are up 8.3 percent through August, with only hot-rolled coil showing a noteworthy decrease. During his company’s third-quarter earnings call, Steel Dynamics President and CEO Mark Millett said that increased levels of steel imports hindered the ability of domestic steel prices to keep pace with raw material costs in the quarter.

“Despite reported low levels of steel service center inventory, we believe steel traders built inventory at the ports ahead of potential domestic trade actions, which resulted in an overhang position for flat-roll steel during recent months,” he said. “This oversupply resulted in periods of weaker customer orders.”

Most in the industry credit the pending Section 232 investigation with driving up imports in the second quarter, as many buyers in the U.S. began importing steel products ahead of the initial June 30 deadline. “I think you saw all the service centers and all the OEMs building inventory, especially with the June timeframe, before any potential price increases in July,” says Bouchard. “I think that’s why you see service center inventories rising right now. Everybody’s preparing for 232.

Obviously, it didn’t materialize in the timeframe that everybody thought it would, and it built up short-term inventories at both the OEMs and the service centers.”

Curt Woodworth, CFA and director of equity research in U.S. metals and mining at Credit Suisse, agrees that the initial deadline for the Department of Commerce’s report on Section 232 affected many people’s buying decisions but thinks those effects have waned. “Clearly when 232 got pushed back this summer, it provided a window for consumers to bring in more metal,” he says. “But now you’re at the point where if you were to order an import today it’s going to come in in January, and the Commerce Department has to legally file its report by mid-January.”

One positive trend for the U.S. steel industry has been the international price premium for sheet steel. According to Plummer, the spread has dropped significantly for almost all products and in some cases turned negative. The U.S. premium per metric ton of hot-rolled sheet, compared with Europe and China, is $26 and $56, respectively. And Plummer says it’s getting tighter by the week. “That has huge implications for what the big buyers will do in terms of buying more or less foreign material,” he adds.

Recent trade cases filed and won by the U.S. on the three major flat-rolled products are also having positive effects on the markets, according to Plummer. But he adds that there’s still a lot of uncertainty regarding trade protections, citing claims that China has been circumventing antidumping and countervailing duties placed on cold-rolled coil and corrosion-resistant sheet products through Vietnam, and lingering questions on Section 232 and the future of NAFTA.

“There’s just a lot of uncertainty around Section 232 and the NAFTA renegotiations and what’s going to happen there,” Plummer says. “A lot of people recognize that there could be huge ramifications from doing either one of those, both positive and negative.”

Bouchard is one distributor who firmly believes Section 232 will be beneficial to the carbon flat-roll market. “If 232 is put in, we’ll see a good, solid market for both the producers, as well as the service centers in 2018,” he says. “Without a 232, I think it’s going to be a neutral to sloppy market.”

Additionally, he’d like to see any measures that come out of the Commerce Department’s investigation include an overall policy to improve manufacturing in the U.S.; not just protections for domestic steelmakers. “You can’t sit there and cut off foreign supply of flat-rolled products because foreign flat-rolled products are necessary,” he says. “However, there has to be a proper balance between quotas and tariffs to help rebalance the markets so you have an opportunity for manufacturing to return to the United States.”

Turning to sheet steel end markets, the automotive industry has been a major source of weaker sheet demand, according to Josh Spoores, principal consultant at CRU Group. “We’ve seen a pretty big decline in terms of sales and lower production,” he says. And while the market has been boosted somewhat by hurricanes Irma and Harvey, Spoores doesn’t expect the slight uptick in demand to have a significant positive impact on the market going forward.

U.S. automotive production is down 14.4 percent through August, according to Metal Strategies Inc. “Automotive, in our view, has clearly peaked and begun a downturn for this cycle,” Plummer says. However, this has been slightly offset by an increase in light truck production, which uses significantly more steel than passenger cars.

Bouchard of Esmark says his company’s automotive business has been performing well, and he expects the recovery from hurricanes Irma and Harvey to keep the automotive market stable in the new year. “Clearly there’s a hurricane effect on automotive, and we think it’s going to neutralize the oversupply of used cars and actually give new car shipments a push,” he says. “We anticipate new car shipments will be flat next year; maybe even up a little bit over 2017 due to the hurricane effect.”

Steel Dynamics is equally optimistic about the automotive market. The president of the Fort Wayne, Ind.-based steelmaker recently told investors he believes that macroeconomic and market conditions will benefit domestic steel consumption in 2018. “Although U.S. automotive production has peaked, we believe North American automotive steel consumption will be steady, and that there will be continued additional growth in the energy and construction sectors, especially for larger, public sector infrastructure projects,” he said.

That positive outlook is bolstered by some encouraging signs in a number of other flat-roll markets, including construction and energy. The pipe and tube market has grown significantly in 2017, driven primarily by the OCTG segment. Plummer warns that despite the nice recovery in the pipe and tube market in the first half of the year, it has started to flatten out in recent months.

Overall, the short-term outlook for the carbon flat-roll market is generally positive. Most analysts expect prices to increase through 2017 and into 2018. Both CRU and Credit Suisse project hot-rolled coil prices to climb to nearly $650 per ton in the first two quarters of 2018 before falling in the second half of the year. “The first half of next year is going to be the strongest industrial production growth we’ve seen since 2014, and that’s really driving demand,” says Spoores.

Alex Hackling, director and head of Americas metals and mining at Citi Research, is a bit more conservative in his price and demand forecasts. He says lower raw material costs, combined with softer demand, will keep the price of U.S. hot-rolled coil below $580 throughout 2018. “Our models show U.S. steel consumption up only about 1 percent next year, auto sales down about 2 percent next year, nonresidential construction we expect up only about 2 percent next year and energy demand we expect to be roughly flat,” he says. “So short term, we see prices roughly flat, then declining a little bit next year.” However, he notes that narrowing margin spreads on flat products could help make the case for a bullish outlook.

Dane Davis of Barclays is siding with the bullish view for coil prices in the near term. Additionally, he points out that the U.S. automotive sector has continually beat expectations and expects it, along with the appliance sector, to see continued growth in 2018. “I think you have a strong demand driven growth in the U.S. that is more likely to be sustained,” he says. “I’m more skeptical and concerned about the Chinese market.”

Despite slight differences in their forecast models, most analysts seem to agree that lingering trade actions will factor heavily in what ultimately happens in the carbon flat-roll market. “We think the markets will hold up relatively well into 2018, but it’s a little bit difficult to quantify because of the impact of some of the Trump administration initiatives,” Plummer says.

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Friday, March 16, 2018