Price Volatility Blurs Demand
Demand for steel sheet has improved, but volatile prices are keeping many buyers on the sidelines.
By Myra Pinkham, Contributing Editor
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While underlying demand for carbon flat-roll continues to improve, albeit slowly, fears about the staying power of U.S. manufacturing are exerting downward pressure on steel prices. The market’s uncertainty is causing many buyers, service centers and OEMs alike, to remain on the sidelines rather than invest in inventories that may lose value.
“It’s still the same demand picture—slow and steady—but it isn’t strong enough to support the recent price increases,” says Amy Bennett, principal steel consultant for London-based Metal Bulletin Research. “Early in September, the mills’ price announcements brought some buyers to the market [ahead of the increase] and the mills were able to get some of their increase through, but now prices have backed off again.” She attributes the recent weakness to the widespread pessimism that remains the prevailing sentiment in the steel sheet market. Indeed, this negative attitude has actually overshadowed the true demand.
“Flat-roll demand is actually stable, though at a somewhat mediocre level” because service centers and their customers remain so cautious, says Sheldon Tenenbaum, senior vice president of supplier development for Los Angeles-based Reliance Steel & Aluminum Co.
Buyers can hardly be blamed for being so tentative in an economy that’s still so tenuous. Talk of a possible double dip recession in the U.S., the effects of the euro zone’s sovereign debt crisis on global trade, strife in the Middle East and political gridlock in Washington all weigh heavily on the American psyche.
“The U.S. economy continues to struggle to emerge from the Great Recession,” says Daniel R. DiMicco, chairman and chief executive officer of Nucor Corp., Charlotte, N.C. “It has been unable to move to a path of vibrant and sustainable growth, but this is not surprising. Our nation has failed to implement real solutions to eliminate the structural imbalances that are driving our economy deeper and deeper into a hole.”
“What our economy needs most is jobs, jobs and more jobs,” he adds. “This can be accomplished with a multi-pronged plan for the United States to achieve new energy independence, enforce rules-based free trade, rebuild our crumbling infrastructure, reform and simplify the tax code and reduce the burden of excessive regulation on our economy.”
Bill Jones, vice chairman of O’Neal Industries Inc., Birmingham, Ala., doubts the U.S. economy is headed for a double dip. “From our experience, and from feedback from our customers, it appears business is better than what we are reading. While still weaker than we would like, end-use demand has actually been improving,” he says.
Christopher Plummer, managing director of Metal Strategies Inc., West Chester, Pa., forecasts a 4 to 7 percent net increase in flat-roll consumption this year, with comparable improvement in 2012. August’s U.S. apparent consumption of steel sheet totaled 4.8 million short tons, up 26.6 percent from a year earlier.
“The flat-rolled market actually got off to a good start during the first six months of 2011, spurred in part by auto builds,” notes Scott Gosselin, general manager-commercial of the northern region for Severstal North America, Dearborn, Mich. Automotive’s strength actually has been surprising, he adds, especially considering the parts supply issues earlier this year caused by the Japanese earthquakes and tsunami.
“I don’t think the Japanese-owned new domestic automakers will truly make up for that lost production until the first quarter of next year,” says Dave Howard, chief commercial officer for RG Steel LLC, Sparrows Point, Md. “But the supply chain has now been restored and production has begun to ramp up.”
Plummer estimates that NAFTA passenger car and light truck production will approach 12.8 million vehicles this year, up 7.5 percent from the 11.9 million made in 2010. And the industry could produce an additional million units in 2012—quite a comeback from the 8.6 million vehicles produced in 2009 during the depth of the recession.
Flat-roll consumption also has gotten a boost from the strong demand for heavy-duty trucks, Howard says. Truck replacement is high due to the aging U.S. fleet and carriers seeking to buy before the next step-up in government fuel efficiency standards raises the cost of engines.
Gosselin points out that a lot of hot-rolled steel is used by the oil and natural gas industry, not just for oil country tubular goods used in down-hole applications, but also for spiral-weld line pipe. “Even though energy prices have fallen recently, exploration, especially in the Marcellus and other shale plays, continues to be quite strong,” he notes.
According to Baker Hughes Inc., Houston, 2,013 rigs were drilling in the United States as of Oct. 21, up 20.6 percent from a year earlier and more than double the low of 876 rigs operating during the recession.
Also trending up is demand for carbon sheet in the industrial equipment market, especially for construction, agricultural, mining and other off-highway heavy machinery. “This sector is generally a mid-cycle performer, but this time they are doing well early in the economic cycle, driven largely by exports,” Plummer says.
The only two flat-roll markets that are down significantly are nonresidential construction and drilling in the Gulf of Mexico, which has been a victim of the political and regulatory tug-of-war ever since the BP oil rig disaster, says Lourenço Gonçalves, president and chief executive officer of Metals USA Holding Corp., Fort Lauderdale, Fla.
Commercial construction, which is a large flat-rolled steel consuming industry, remains in the doldrums, down 5 to 7 percent in 2011, says Plummer. “We expect it to flatten out next year, but not be strong for a while.”
Home appliance shipments have been hurt by the ongoing weakness in the housing market. Production of refrigerators, ranges and other kitchen equipment is up about 3 percent year on year, according to the Association of Home Appliance Manufacturers, mostly due to home remodeling.
Even though steel demand overall has steadily improved this year, flat-roll pricing has experienced a roller coaster ride. “Prices were ridiculously high midyear. Everyone believed they would fall. So no one was buying more than they needed and were keeping inventories at bare minimum levels,” says John Anton, director of the steel service of IHS Global Insight in Washington D.C.
Hot-rolled coil prices peaked at nearly $880 a ton in April, then plunged by almost 25 percent over the next five months to about $664 a ton in August. After two price increases by the mills, one for $60 followed closely by another for $40 a ton, prices regained some ground to over $680 a ton last month, Plummer reports.
“Despite initial resistance, the mills essentially got the first price increase once they announced the second,” MBR’s Bennett says. “That lasted about two weeks before prices started falling back.” Currently, she adds, hot-rolled coil is selling for as low as $650 a ton.
“Steel service centers and OEMs are maintaining low inventory positions and do not wish to purchase material in excess of their immediate needs. Short lead times from the mills make this possible,” she says. As of late September, U.S. service center flat-roll inventories remained at a relatively lean 2.4 months of supply on hand, despite a 7.9 percent month-on-month shipment decline.
“The fact that service centers are watching price and inventory levels isn’t anything out the ordinary,” says Richard Teets, executive vice president for steelmaking at Steel Dynamics Inc., Fort Wayne, Ind. Mill backlogs are back to where they were at the beginning of the year, so lead times are relatively short. “Service centers are buying for need, trying to keep their inventories at their 2.2- to 2.4-month sweet spot.”
Tenenbaum at Reliance expects service centers to reduce their flat-roll inventories even further. “We usually like to do that toward the end of the year.”
RG Steel’s Howard believes the fact the supply chain is running so lean could help the market in the long run. “With such low inventories, it won’t take much of a change in demand to have an immediate impact on replacement activity, and that could cause a surge in flat-rolled shipments. Such restocking, however, is not generally expected to happen before early next year.”
Mills needed to seek the price increases this fall to protect their margins, Plummer says. “Domestic flat-roll mills have been burdened in the last 24 months by soaring raw material prices [largely as a result of Chinese demand], while the economy, end markets and steel pricing here were still generally weak.”
But the cost of raw materials declined sharply in September, which caused a big jump in steelmakers’ margins in October and may set the stage for further discounting late in the year, say the experts.
“North American mills are struggling to both gain and maintain market share, leading to price discounting as they strive to fill order books,” Bennett says. “With raw material prices poised to decline further in the coming weeks on reduced demand from global steelmakers, we expect to see flat product prices continue to decline.”
Gonçalves at Metals USA would like to see the mills hold the line. “After announcing price increases, the mills have been accepting downward pricing pressure too fast. The market isn’t that bad. A lot has to do with perception. The mills shouldn’t be so eager to drop prices,” he says.
One factor that remains in question is the impact of new flat-rolled production capacity set to come on the market. Adding to the steel supply are ThyssenKrupp Steel USA’s new mill in Calvert, Ala., RG Steel’s restart of Sparrows Point, and flat-roll expansions at Severstal North America’s Dearborn, Mich., and Columbus, Miss., facilities. Some competitors contend this new capacity could lead to an oversupply of steel and depress prices even further (see related article on page 17).
Steel Dynamics has also considered building a greenfield hot-roll mill, which it calls Black Beauty, to take advantage of growing demand for flat-roll in the nation’s shale plays. SDI has put the project on hold until the economy improves, however.
Meanwhile, service center executives expect the year to finish up on a positive note. “I think we will see pretty much a typical fourth quarter,” says Jones at O’Neal. “It will be a little weaker than the third quarter, but from a demand standpoint not bad.”
As for 2012, the consensus is less clear. Most expect the gradual recovery of the economy and steel demand to continue—but their predictions lack a certain confidence.
“No matter what, it won’t be an Armageddon like in 2009,” Jones says. “It won’t be anywhere close to that.”
Too Much Capacity Cause for Concern?
With ThyssenKrupp, Severstal North America and RG Steel bringing new flat-rolled capacity on line in a market where demand remains questionable, is there cause for concern about pricing? Views are mixed among customers and competitors.
“What’s driving pricing in the marketplace is a massive overcapacity that’s being created by additional new capacity coming on stream, increased imports from overseas and demand that isn’t growing at any measurable rate,” says Dan DiMicco of Nucor Corp.
While he has seen some discounting or “protect my market share” pricing, Keith Busse, chairman of Steel Dynamics, is not alarmed. “I wouldn’t say it has been an overly aggressive environment at this point.”
The new capacity is being brought on stream incrementally over a number of months, “so perhaps it’s slowing the market’s recovery rather than having a real adverse effect,” says analyst Christopher Plummer of Metal Strategies Inc.
Dave Howard of RG Steel contends that the new capacity will change the mix of the domestic flat-rolled market, lessening steel imports and shortening the supply chain. RG’s upgrade of the Sparrows Point mill is already complete, he adds, but the company will only restart production “as the market requires it, not before.” RG is also looking to build upon its domestic slab sales and to rebuild its customer base.
ThyssenKrupp executives could not be reached for comment, but the company has previously stated that it believes much of its new mill’s capacity will displace imports.
While that could work in theory, in reality the U.S. will continue to attract imports as long as prices remain competitive, says Amy Bennett of Metal Bulletin Research. “In the current market, with domestic prices falling, the new capacity could displace imports. But it could be different once domestic prices rise.”
Severstal North America is bringing more galvanized capacity to the market, as opposed to commodity products, notes Severstal’s Scott Gosselin. “Our customers have been saying they are looking for further value-added product support,” he maintains.
Both Howard and Gosselin say their companies are also looking to focus on exports.
“I’m really not concerned about the additional flat-roll capacity,” says distributor Lourenço Gonçalves of Metals USA. “It isn’t as if they are making wide flange beams.” Indeed, the end-use markets for flat-roll are on the upswing, while construction continues to lag.