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SMU: Many Mystified by Steel Price Decline

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If you are mystified by today’s steel prices, you are not alone. Forty percent of the service center and OEM executives responding to Steel Market Update’s May 6 survey admitted they are confused by the current steel market and price direction. Said one service center exec, expressing a common emotion: “I simply cannot get a feel for where I should buy or sell. There is no consistency, rhyme or reason.”

What’s causing all the confusion are the conflicting signals in the marketplace. The American economy is the envy of the world, with record low unemployment and a GDP that continues to surprise. There’s little competition from steel imports, thanks to President Trump’s Section 232 tariffs. Domestic mills are cranking out tons at more than 80 percent of their capability, and many have announced plans to spend last year’s record profits on new capacity in the next few years. Some have even termed this a “golden era” for the U.S. steel industry.

But look closer at the factors that affect steel prices. Demand is not as good as the GDP numbers might suggest. Steel’s major end-use markets, construction and automotive, show signs of slowing compared with last year. The looming threat of a trade war with China is weighing heavily on market sentiment. Fear and uncertainty are keeping many buyers on the sidelines, including service centers that are keeping inventories lean as they wait for prices to find a bottom. Ferrous scrap prices have declined in four of the first five months this year, an unusual turn of events, adding to the downward pressure on finished steel prices. Are mills, operating near full capacity, oversupplying the market?

SMU Steel Price Data

Steel Market Update gathers real-time pricing data from steel buyers every week. SMU’s Price Momentum Indicator was pointing to Lower on all products as of mid-May, meaning prices were expected to decline further.

Hot-rolled steel prices have declined by about 30 percent since peaking at $915 per ton in July 2018. This year alone, the price has dropped by around $90 from the $730 per ton level in early January, despite two price increase announcements from the mills. The average price for hot-rolled coil was $640 per ton ($32.00/cwt) as of May 6 (FOB the mill east of the Rockies). Lead times for hot-rolled were down to 3-6 weeks.

Likewise, cold-rolled saw a high of $1,015 per ton last June, began this year around $825 a ton and averaged $790 per ton ($39.50/cwt) in the first week of May—a 22 percent decline from the peak. Cold-rolled lead times ranged from 4-8 weeks. 

From peak to trough, the magnitude of the decline has been about the same for galvanized steel products. The benchmark price for galvanized 0.060-inch G90 was $868 per ton in early May with a lead time of 5-8 weeks.

Even steel plate, which has been the strongest steel market for the past year, showed signs of weakening, with the average plate price down to $940 per ton ($47.00/cwt) from well over $1,000 and lead times as short as 3-6 weeks.

Where’s the bottom for steel prices? No way to tell for sure. One frustrated steel buyer points his finger at the mills: “The domestic mills have failed to create pricing credibility in a captive market. By letting prices swing wildly they decimate service center margins and create uncertainty in end-user’s minds, keeping them on the sidelines. A unified commitment to price stability would help all sectors in the chain—producers, distributors and end users. Will the mills ever learn?” 

Is “Steelmageddon” Coming?

Looking more long term, some analysts foresee an overcapacity that could oversupply the market and devastate steel prices. Capital investments announced recently by the domestic mills could add more than 20 million tons of steel capacity to the U.S. market over the next few years. Without a corresponding increase in demand, the market could be flooded with steel looking for buyers at almost any price. 

“There’s going to be a glut that will shake up the industry,” predicts Timna Tanners, metals and mining analyst for Bank of America Merrill Lynch. She estimates this “Steelmageddon,” in the worst case scenario, could drive hot-rolled steel prices as low as $500-550 per ton by 2022.

Of course, the steel mills dismiss this theory and contend the boom in investment will lead to a stronger, more modern, more competitive domestic steel industry. Paul Lowrey, president of Steel Research Associates, supports that view. He sees the new capacity as more overdue than oversupply. “Recent announcements of new flat-rolled capacity have caused some to speculate there will be an oversupply in coming years.  Solid fundamental analysis shows this is not the case. After years of uncertainty and net capacity reduction, domestic producers are responding to an improving supply/demand picture and a better business and manufacturing environment.  They are investing in the future with new technology, expanding product offerings, and geographically positioning plants closer to regional demand centers,” Lowrey commented in a recent issue of Steel Market Update.

Tanners and Lowrey are scheduled to share their perspectives on steel supply and demand as panelists at the 2019 SMU Steel Summit Conference Aug. 26-28 in Atlanta. More than 1,000 industry executives are expected to show up for the steel industry’s premier educational and networking event. For more information on the program, speakers, costs and how to register, visit: www.SteelMarketUpdate.com/Events/Steel-Summit 

John Packard is the President and CEO of Steel Market Update. Tim Triplett is SMU Executive Editor. Steel Market Update’s mission with its newsletters, website, conferences and educational programs is to inform, educate and motivate those in the flat rolled steel industry. For more information, visit www.SteelMarketUpdate.com.