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Carbon Flat-Roll Report

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Do Steel Prices Have Staying Power? Will the latest flat-roll increases prove only temporary or do they foretell a stronger market in 2014? By Myra Pinkham, Contributing Editor The latest round of mill price hikes has lent at least temporary support to the U.S. flat-rolled sheet market, even amid the general uncertainty about the economy. But the mills’ ability to maintain the gains will depend on the discipline they display as several bring idled capacity back online, as well as whether the higher domestic prices attract more imported steel, experts say. Even though prices appear to be on the upswing, service centers remain reluctant to buy more than they absolutely need, especially with the seasonally slow year-end approaching. Last month’s standoff in Congress over the federal budget and debt ceiling did little to bolster the business and consumer confidence needed for sustained strength in the steel market. “Demand is not booming, but it is okay,” says Amy Bennett, principal steel consultant for London-based Metal Bulletin Research. “With the recent price increases there was a little pickup in activity, but mainly just to fill holes in inventories.” Business activity, and possibly prices, could dip again through the end of the year before rebounding in the first quarter, she predicts. Flat-rolled steel inventories reportedly are extremely lean, with just 45 to 60 days of supply on hand at many service centers. Companies are just buying what they absolutely need. “There is little if any speculative buying,” says Lisa Goldenberg, president of Delaware Steel Co., Fort Washington, Pa., who is also the current president of the Association of Steel Distributors. “All this latest price increase is doing is forcing people who were looking to buy steel anyhow to pull the trigger.” Pauline Malone, vice president of procurement for Klein Steel Service Inc., Rochester, N.Y., says she has seen some modest pre-buying in anticipation of higher prices, even though the end of the year is not a good time for service centers to build inventories. While most service centers are looking to keep inventories low, they also realize “they can’t sell off of an empty wagon.” In certain cases, the tight flat-roll stocks even benefit smaller service centers, she adds. “Because the inventories at some of the larger service centers are so tight, some OEMs for which we are a secondary supplier have been reaching out to us more.” There is little urgency to build inventories at this point, says Bill Hickey, president of Lapham-Hickey Steel Corp. in Chicago, with lead times “normal” at about four to six weeks for commodity grades and eight to 10 weeks for higher-value steels. Various mills announced several rounds of flat-rolled steel increases from May through August, causing the reported Midwest hot-rolled sheet price to reach about $655 per ton, up from a low around $570 in May. Lending support to the price hikes were several unplanned supply curtailments, most notably a furnace outage at AK Steel Corp.’s Middletown, Ohio, facility and labor issues at U.S. Steel Corp.’s Lake Erie mill in Nanticoke, Ontario, which tightened supply. Once those two issues were rectified and production resumed in September, hot-roll prices began to slip, dipping to as low as $630 a ton. That’s why price hikes of $30 to $40 per ton announced in late September and early October were met with skepticism. By mid-October, however, they had begun to take hold, sources say. Chris Billman, market research analyst for Majestic Steel USA, Pepper Pike, Ohio, reported that hot-rolled coil was selling for around $650 per ton in October, with some sales as high as $690. Cold-rolled and hot-dip galvanized sheet were generally selling for about $790 per ton, with some HDG deals as high as $810. Will these prices have staying power as the New Year begins? That’s the question on everyone’s mind. Phil Cavender, vice president of sales for O’Neal Flat Rolled Metals, Brighton, Colo., noted a 10-15 percent slowdown in average order levels last month, which he attributes mostly to the acrimony in Congress rather than any significant shift in market conditions. “I think it has more to do with what’s been going on in Washington. Companies are being very cautious. There has been a decline in consumer confidence. Our inquiries have fallen off,” he says. The Thomson Reuters/University of Michigan consumer sentiment index fell to 75.2 points in October from 77.5 points in September. The index reached an all-time high of 82.7 points in November 2012 and a record low of 55.3 points in November 2008. “All of the uncertainty in the marketplace is definitely not helping,” says Sheldon Tenenbaum, vice president of supplier development for Los Angeles-based Reliance Steel & Aluminum Co. “With companies unsure about the direction of the economy, many are holding back on buying decisions.” Economists agree the 16-day government shutdown will exact a toll on the nation’s recovery. While the shutdown has not had a direct effect on the steel industry, it is likely to impact the economy down the line, says Thomas Gibson, president and chief executive officer of the American Iron and Steel Institute in Washington. He points to estimates as high as a 0.6 percent decrease in fourth-quarter growth, leading to a 0.1 percent hit to full-year 2013 GDP. The eleventh-hour deal that reopened the government last month didn’t resolve the debate in Congress. It merely pushed the federal budget deadline to Jan. 15, and the debt ceiling deadline to Feb. 15, assuring that the market’s uncertainty lingers into next year. Jeff Redfield, a regional general manager for Ryerson Inc., Chicago, expects sustained demand for flat-roll leading into 2014. “There are always peaks and valleys. The question is how service centers adapt to the macroeconomics by working closely with their customers and suppliers and ensuring that they have the right inventories available and are able to deliver product on time,” he says. The mills are hoping their latest increase will bring flat-roll prices back to their previous level and set a floor for contract talks, observes Cavender at O’Neal. “That is important, given they are currently in 2014 contract price negotiations with a number of major OEMs.” “No one wants to go into contract negotiations with prices falling. If they can stop prices from falling, and even see some pricing gains, that is a better position to be in,” adds Bennett at MBR. Planned fourth-quarter maintenance outages announced by several steelmakers including ArcelorMittal USA, Severstal North America, Steel Dynamics Inc. and NLMK are unlikely to have much effect on pricing or lead times, say observers, as the mills put plenty of metal on the ground prior to the shutdowns. Meanwhile, most major mills are critical of CRU-minus pricing, saying it has restricted their revenues, says Christopher Plummer, managing director of Metal Strategies Inc., West Chester, Pa. Commenting on the subject during his company’s recent third-quarter earnings conference call, Nucor President and CEO John Ferriola said the commonly used pricing mechanism is not fully compensating the steelmaker for the quality, service and on-time delivery it provides. Nucor is likely to take a new approach to pricing, but Ferriola would not comment on specifics. “That is something we will discuss with our customers,” he said. Future demand is the key For prices to really stabilize there needs to be a more significant pickup in demand, Goldenberg says, echoing the sentiment of her peers. Apparent consumption of steel sheet in the U.S. declined over 3 percent through the first eight months of 2013, according to Metal Strategies. The rate of decline has slowed in the second half, however (see chart). Of the major end-use markets for steel sheet, automotive is the strongest, showing a 5.2 percent increase in demand year to date through August. Appliance is a close second with a 4.7 percent increase—thanks in large part to a 25.7 percent rise in new-home starts. Demand for welded pipe and tube, on the other hand, declined by 5.9 percent, while use of flat-roll by the construction sector dipped 0.3 percent. Flat-rolled steel consumption by the auto sector is expected to continue growing, though at a slower pace than in the 2010-13 period, says John Anton, director of the steel service at IHS Global Insight in Washington. The North American auto industry is forecast to produce 16.2 million light vehicles this year, up from 15.4 million in 2012. Lawrence Kavanagh, president of the Steel Market Development Institute in Washington, says auto output will increase to more than 17 million vehicles by 2015, and will approach 18 million by the end of the decade. Future vehicle designs will use more high-strength steel grades now being developed, which will offer weight savings once thought only achievable with much more expensive alternative materials. Nonresidential construction, steel’s largest consumer, has remained relatively weak this year, says MBR’s Bennett. In fact, the lag time between the pickup in homebuilding and the pickup in nonresidential activity could be longer this time around because of the commercial building boom prior to the economic downturn. “There is still a very high vacancy rate,” she observes. Nevertheless, Anton expects nonresidential activity to start accelerating soon. “In fact, by 2015 or 2016, it could return to near pre-recessionary levels for both plate and sheet.” One wildcard is whether higher domestic prices and improving demand will prompt a surge in imports. U.S. hot-rolled sheet imports declined 10.1 percent in August, following a 19 percent increase in July, according to U.S. Census Bureau data. At the same time, imports of hot-dip galvanized sheet and strip rose 49.6 percent and cold-rolled sheet rose 26.9 percent for the month, compared to August 2012. Those imports could likely be traced back to the steel price hikes earlier this year, Tenenbaum says, and it’s possible the latest increase could spur another surge. “Even though most service centers have been very careful about managing their inventories, if the spread between domestic and import pricing continues to increase, we could expect to see imports increase, as well. We are already the highest-priced market in the world.” The price differential between foreign and domestic flat-rolled sheet is currently about $100 per ton, assuming the mills can sustain their recent hikes. Plummer does not believe this is a wide enough spread to entice more foreign buying by either service centers or traders. In today’s business environment, most service centers are unwilling to take a chance on the long lead time of a foreign order unless the cost difference is at least $150 a ton, he says. Jim Barnett, president and chief executive officer of Grand Steel Products Inc., Wixom, Mich., agrees. “Service centers are not just looking at the price differential, but also delivery times. For all we know in 90 days the market could collapse.” This isn’t to say that there are no takers, he adds. “It all depends on whether companies expect to see increased demand for tonnage over the next few quarters.” “We are now past the point in the year that service centers want to make any large purchases,” says Billman at Majestic. “Imports could be more of an issue come January. It all depends on how the market holds up.” Whether the flat-rolled market will see its usual bump in January or suffer due to fallout from the political strife in Washington remains to be seen. Most forecasts for 2014 are somewhat guarded. “This year has been lackluster, only growing modestly compared with last year. Next year will be better, but only incrementally so, with the economy continuing to see painfully slow growth,” Goldenberg predicts.