Steel prices had their ups and downs in 2018. Service centers, and the value of their inventories, are mostly at the mercy of the market’s price swings. Yet, service centers also have some surprising leverage when it comes to price increases.
Due in large part to the Trump administration’s Section 232 tariffs
, which added 25 percent to the cost of foreign steel, imports of steel sheet products have declined by more than 10 percent this year. With less competition from foreign mills beginning last year, domestic steelmakers took advantage of the situation and raised prices. The benchmark price for hot-rolled coil in the U.S. peaked in 2018 at around $915 per ton. But since July, prices have dropped by more than 14 percent. Hot-rolled averaged $785 per ton in late November, according to Steel Market Update
Why the decline? A combination of factors. Steel prices are a function of supply and demand. With imports down and domestic mills cranking out steel at more than 80 percent of their capacity, supplies are on the increase. Steel demand has weakened a bit in a few key sectors, such as construction and automotive. Weakness in global economies has reduced both demand and steel prices in other parts of the world, prompting more lower-cost imports to be directed to the U.S. Seasonal demand in the first quarter could give U.S. prices a small boost, but sheet prices will be limited by import offers during the course of the year.
One other often-overlooked factor is the mills need the support of service centers to raise prices. On Oct. 10, in an attempt to stop the price slide, Nucor
announced a $40 per ton price increase on flat-rolled and plate steel products. Other mills followed suit the next day. But buyers refused to pay and the price hike “failed to stick,” falling flat on its face. Steel prices continued to erode.
The phenomenon can be seen in Steel Market Update data. SMU canvasses the market twice each month, asking various questions of steel buyers, primarily service centers and manufacturers. About 73 percent of the manufacturers polled in November said they saw lower spot price offers from their service center suppliers at the end of the month than at the beginning of the month.
Corroborating that trend, about 63 percent of the service centers reported they were lowering spot prices to their flat-rolled customers.
None of the manufacturers or service centers pointed to rising prices (the green bars). The service centers’ lack of support for higher prices doomed the Nucor-led price increase from the start.
Based on a long history of analyzing steel trends, Steel Market Update has identified a point of “capitulation” when the pendulum swings the other way and service centers begin to support higher prices. Historically, that figure is about 75 percent. Thus, if at least three out of four service centers are lowering prices at the time the mills announce an increase, the market is likely to begin supporting that increase. Enough of the distributors will decide it’s time to consider the value of their inventories rather than just offering the lowest price to win the next order. In other words, while it seems counterintuitive, steel prices don’t typically go up until a very large percentage of service centers have finished bidding the market down. As shown in the graphics, the percentage of distributors reporting lower spot prices has not reached 75 percent at any point in calendar year 2018.
In Steel Market Update’s opinion, the distribution channel does not just play a critical role in the steel supply chain, but also in setting steel prices. Service centers have some pricing power. Without the support of a strong majority of service centers, it’s very difficult for domestic steel mills to capture higher spot pricing.
Will steel prices rise in the first quarter? Steel Market Update will be monitoring the market to see if service centers reach and stay above that point of capitulation. That will be a good indicator.Steel Market Update’s mission is to inform, educate and motivate buyers and sellers of flat-rolled steel through its website, newsletters, events and training programs. SMU’s annual Steel Summit is the best-attended flat rolled steel conference in North America, and will take place next on Aug. 26-28, 2019, in Atlanta. For more information about attending the conference or becoming an SMU subscriber, email info@SteelMarketUpdate.com.