HARDI: Long-Term Construction Demand a Concern

Wholesalers of HVAC products have weathered the pandemic surprisingly well so far and are more concerned about construction demand months from now than they are about their near-term prospects.

Consider what has happened since April as a result of the market’s response to the virus: Steel mills are operating at just above 50 percent of capacity; the U.S. oil rig count is at 339, down from more than 800 at the beginning of the year; service center inventories have inflated to more than 3.5 months of supply due to the drop in demand; and the base price for galvanized steel has dipped to the low $30s/cwt, among many other factors at play as the economy stuggles to recover.

In a conference call this morning, members of the Heating, Air Conditioning & Refrigeration Distributors International expressed concern about the direction of galvanized steel prices. The HARDI wholesalers sell galvanized steel products to contractors and other customers and are vulnerable to swings in the price of coated steel.

The base price of galvanized steel has been erratic in the past few months. Galvanized prices averaged $770 per ton in March prior to the coronavirus shutdowns, plummeting to $650 by late April before recovering slightly to the current $660 per ton ($33.00/cwt). Looking at the past decade, to give those figures some perspective, galvanized hit a low of $455 per ton in May 2009 during the Great Recession and a high of $1,015 during the boom economy of June 2018, according to Steel Market Update data. SMU has kept its current Price Momentum Indicator at Neutral until prices establish a clearer direction.

Some of the HARDI members bought steel prior to the mills’ recent decision to reduce their coating extras due to declines in the cost of zinc. The reduction in extras has been offset by a small increase in the base price of the steel, making for relatively little change in the delivered price.

With coating extras down and demand picking up as the economy recovers, “from a business perspective, you may want to consider buying steel,” John Packard, president and publisher of Steel Market Update, told the wholesalers on the call.

Lead times for delivery of spot orders from the mill have moved out to nearly six weeks, which suggests the mills are getting busier. “As the integrated mills start to bring back idled blast furnaces, we will have to see what that does to the availability of galvanized steel. My gut is we may see lead times flatten at around six weeks for the next few months,” Packard said.

Comments from the HARDI members were surprisingly upbeat, given the tenuous state of the economy.

“Our demand remains fair in terms of pounds sold, all things considered. We’re tracking at about the same rate we have all year. Our June sales are slightly softer than the previous five-month average, but not too concerning,” said one exec on the call. He is concerned about leading indicators such as the Architecture Billings Index, which forecasts a coming slowdown in construction activity as current projects are completed and new projects lack funding.

“There are still a lot of new projects kicking off that will sustain much of construction. It’s a question of how much damage has been done and what we will see six months from now,” said one wholesaler.

Another HARDI member reported that residential construction in his region continues at a good pace, while commercial construction has slowed a bit. “Customers say many projects are being postponed or pushed out to late 3Q and 4Q creating a level of uncertainty among large commercial contractors.”

State and local governments are being forced to cut their budgets, which will have an effect on public construction projects all over the country in the next year, said several HARDI members. “Colleges and universities will look differently at their campuses as they anticipate enrollments to decline. Anything state funded will likely be impacted, though we have not seen it yet in terms of volume,” said one executive.

“Our demand has not fallen off to the degree we expected based on the initial reaction to the virus. The question is: Will the mills get greedy and start up furnaces or stay the course and keep inventories tight to move lead times out and try to push the price up a bit?” asked one exec.

Ferrous scrap prices are expected to decline in July and August as the restarted automotive production generates more prime scrap and loosens the tight supplies. “I see [the price of galvanized] bouncing within a narrow range over the next few months,” said Packard

A poll of the HARDI members on the call shows the majority expect galvanized pricing to be flat for the next 30 days but higher by $2/cwt six months from now.

Steel Market Update participates in a monthly steel conference call hosted by HARDI. The call is dedicated to a better understanding of the galvanized steel market. The participants are HARDI member companies are wholesalers who supply products to the construction markets, also on the call are service centers and manufacturing companies that either buy or sell galvanized sheet and coil products used in the HVAC industry and are suppliers into the HARDI member companies.