Flat-Roll Steel Forecast

By Myra Pinkham, Contributing Editor

Excessive supplies of flat-rolled steel, worsened by rising foreign imports, put prices in question for 2015, even as demand improves.


Domestic sheet producers are moving to cut production capacity in response to slowing demand growth, inventory oversupplies and steel prices that have fallen to six-year lows. Much-publicized trade cases targeting hot-rolled, cold-rolled and coated steel products have had little effect on imports so far, say the experts.

Demand for hot-rolled sheet is “the ugliest” among the various forms of steel sheet, say executives and analysts, due to its exposure to the particularly weak energy and agricultural equipment markets. Production of energy-related pipe and tube products, which are manufactured from hot-rolled coil, has declined dramatically, along with the price of oil and gas. As long as oil prices remain below $50 per barrel, curbing any new drilling, OCTG is likely to remain weak well into next year, says Chris Billman, market research manager for Majestic Steel USA, Cleveland.

Carbon sheet demand overall could decline another 4-8 percent this year and will likely remain challenged in 2016, adds Brian Bergmann, chief operating officer for Esmark Steel Group, Chicago Heights, Ill.

Demand for cold-rolled and hot-dip galvanized sheet could see softness through early next year, as well, says Amy Bennett, principal consultant for Metal Bulletin Research. “With their sheet lead times just about as short as they can be, domestic mills need to bring their production capacity down.” Leading mills declined MCN’s requests for comment.

A few mills have already moved in that direction. In early October, Essar Steel Algoma, Inc., Sault Ste. Marie, Ontario, announced it would cut production by an undisclosed amount to match demand. The Essar mill primarily produces carbon plate, but also makes hot-rolled and cold-rolled sheet.

U.S. Steel Corp. also announced last month that it is considering a temporary idling of its Granite City (Ill.) Works, which produces hot-rolled, cold-rolled and coated steel products for the construction, container, pipe and tube, service center and automotive industries. The mill would remain idle until market conditions improve.

AK Steel Corp., Middletown, Ohio, plans to idle the blast furnace and steelmaking operations at its Ashland, Ky., mill for more than six months starting in mid-December. That idling is not expected to include its hot-dipped galvanizing line, which is used primarily to service automotive customers.

It isn’t just integrated steelmakers that are looking to cut production rates. Minimills are likely to follow suit, though they generally don’t make public announcements when they dial back their EAF output. “No one is buying much steel, so the domestic mills are getting desperate,” Billman says.

“These moves are not surprising,” says Lynn Lupori, managing consultant for Pittsburgh-based Hatch Management Consultants, given current mill operating rates. According to the American Iron and Steel Institute in Washington, domestic raw steel production was down nearly 9 percent for the year as of mid-October, bringing U.S. mills down to 70.1 percent of capacity, compared with the 76.5 percent operating rate a year earlier.

All of this reflects the general malaise in the sheet market over the past several months as support for spot purchasing has waned, says distributor Jim Barnett, president and chief executive officer of Grand Steel Products, Inc., Wixom, Mich.

Sales volumes at service centers industrywide were respectable through the third quarter, but activity in the fourth quarter has slowed due to a mix of seasonal influences and weakening business conditions, says Jeff Simons, president of O’Neal Flat Rolled Metals, Brighton, Colo.

End-use demand for steel sheet has become “tepid,” reflecting a general slowdown in manufacturing, says John Anton, director of steel analytics for the pricing and purchasing service of IHS, Inc. He points to the Institute for Supply Management’s September PMI of 50.2, the lowest reading for the survey of purchasing managers since May 2013. ISM’s New Orders Index fell to 50.1. Both indexes are barely above the 50 percent reading that indicates growth.
 
Christopher Plummer, managing director of Metal Strategies, Inc., West Chester, Pa., says U.S. consumption of flat-rolled sheet declined 3.8 percent in the first eight months of the year, including a 5.3 percent decline in hot-roll.

Domestic shipments of hot-rolled sheet and coil were down 13.7 percent year on year in August, while service center shipments were down 7.3 percent, Bennett says. Perhaps the largest impact on domestic shipments has been the combination of high import volumes and continued destocking by service centers. While the antidumping and countervailing duty trade cases have so far had little effect on imports, the volume of steel from foreign mills has eased due to the low domestic prices and efforts by service centers and OEMs to work down their existing inventories.

The surge of imports starting in fourth-quarter 2014 and continuing through much of this year oversupplied the market and drove down prices, prompting service centers to postpone purchases while they worked down their higher priced stocks. “But sometimes they waited too long,” says Lisa Goldenberg, president of Delaware Steel Co., Fort Washington, Pa. “Business got so bad that now companies are putting off any purchases until they absolutely need it, especially with lead times coming way down.”

Officially, mill lead times for hot-rolled sheet are two to four weeks. In practice, for some items, they are as short as the time it takes the truck to get to the customer, Anton says. Lead times for cold-rolled and galvanized sheet are similarly short—only about four to six weeks, estimates Billman at Majestic.

Service center sheet inventories were particularly high at those distributors that buy foreign steel on speculation as opposed to doing “back to back” deals based on actual customer orders, says Esmark’s Bergmann. Service center inventories of flat-rolled sheet were at 2.7 months of supply as of late August—down somewhat but still higher than desired. With service center shipments on the decline, distributors are struggling to work their inventories down further, he adds.

This oversupply is especially troublesome for hot-roll. Service centers continue to hold an average of 3.1 months of hot-roll stocks, compared with just over two months of supply for cold-rolled and galvanized sheet, Billman says.

In light of the tough market conditions, service centers are being very cautious about buying additional hot-roll, especially with the possibility of further price declines, says Bill Hickey, president of Chicago-based Lapham-Hickey Steel.

As of mid-October, hot-roll prices were down to $400 per ton from about $440 per ton in September and $646 per ton a year earlier. Similarly, cold-rolled prices had fallen to $530 per ton from $570 per ton in September and $790 per ton in October 2014. Hot-dipped galvanized was selling for $610 per ton, down from $660 per ton in September and $879 per ton a year earlier, according to various sources.

On the plus side, it appears as if imports have largely peaked. Based on the latest Commerce Department license data, September hot-rolled sheet imports were down 35.3 percent from September 2014. Likewise, imports of cold-rolled sheet saw a 17.2 percent year-on-year decline, while those for hot-dipped galvanized fell 23.7 percent.

The peaking is not necessarily because of the trade cases, but because the price differential between foreign and domestic has narrowed, says Goldenberg. For hot-roll, the difference is near zero, and just $50 to $60 per ton for cold-roll and galvanized products.

While trade case filings usually have an impact not only on imports but orders and product prices, such has not been the case with steel sheet, says Simons at OFR. To date, the trade case filings have largely been a non-event. “There was more of an impact from the initial chatter of the possibility of a case than on the actual trade case filings,” he says.
 
As with other trade cases, such as those for OCTG and reinforcing bar, there is no guarantee that any duties eventually imposed will be high enough to keep imports out, given the strength of the U.S. dollar and the attractiveness of the relatively healthy U.S. economy, says Bennett at MBR.

Growth in construction is one positive for steel. Plummer estimates flat-roll demand in the construction sector was up 13.2 percent in July, including a 16.6 percent increase in residential, a 14.2 percent increase in nonresidential and a 9.9 percent increase in public works construction.

Demand for hot-rolled coil also remains high in automotive, though its growth rate is moderating. Steel demand could slip further as aluminum sheet makes more inroads in the auto sector. The success of the Ford F-150 and plans by automakers to increase the aluminum content in other light trucks will undoubtedly affect auto steel usage in the future. Currently, aluminum substitution is limited, but that could change once aluminum makers add more auto sheet production capacity, Lupori says.

Several unknowns will affect the direction of the steel sheet market, says Bennett, including labor negotiations with major producers, how much domestic capacity is idled and whether eventual duties are high enough to discourage imports. While it’s possible these factors could tighten up the oversupply enough to allow for a slight price increase by the end of this year, it’s more likely steel prices will remain about where they are until the first half of 2016.

Any price increase is likely to be modest, says Anton at IHS. Continuing imports from countries not named in trade action will limit the upside potential for hot-rolled sheet to an average of $480-$490 per ton. “While operating rates will come up a little, imports won’t go away, even though their volumes will likely decrease.”

“Overall, flat-rolled steel supply is in a transformational mode,” says Esmark’s Bergmann, with weakness in global economies and steel overcapacity, especially China, remaining big question marks for 2016.



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Monday, November 20, 2017