Mill Accidents Further Exacerbate Supply Issues

Written by John Packard

If things weren’t tight enough there have been a couple of accidents at steel mills, one in the United States (North Star BlueScope) and one in Brazil (CSN), which are impacting the domestic flat rolled steel order books.

CSN (Brazil) Affecting Galvanized Markets

About two weeks ago, CSN in Brazil had a breakout with their lone working blast furnace. The furnace has been down since then costing the company close to 200,000 tons of lost production. Brazil has been a major exporter of galvanized steel averaging 40,777 net tons per month for the first four months of this year.

We understand that the blast furnace may come back online as early as this weekend. However, it generally takes anywhere from a few days to a few weeks to get a furnace back up and running at capacity.

To date, CSN has not been able to provide their customers specifics as to the status of many of their orders. This is creating frustration amongst their customers as they need to determine if they are going to get delivery or if they will need to replace the steel at most likely much higher costs from other sources.

With all of the domestic steel mills on allocation and the US Department of Commerce about to make Final Determinations on the corrosion resistant antidumping suit, the question becomes where does one find an extra 25,000 to 40,000 tons per month of galvanized?

North Star BlueScope Affecting Hot Rolled Markets

This past Saturday North Star BlueScope suffered a breakout at one of their electric arc furnaces. The parent company is reporting they will lose approximately 38,000 tons of production.

We understand from the conversations we had with North Star BlueScope customers that the mill is asking their customers to cut their orders back over the next month. We are hearing contract customers will take precedence but even contract orders are being asked to be cut by 20 to 25 percent and in some cases even higher.

Since the mill was running at 100 percent of capacity the tons lost cannot be replaced. They will need to be absorbed by other mills or through service center inventory adjustments based on the amount of steel they have on their floors.

One service center told us they are still in the process of determining how exactly the cut back in tonnage will affect their customers. They are researching how contract customers are doing in relationship to their forecasts. They want to make sure that a customer isn’t trying to increase their tons in order to beef up their inventories or try to escape the inevitable price adjustment coming at either the end of the month or quarter depending on what kind of contract negotiation they have.

Service Centers Reacting to Tightening Market are End Users Prepared?

 A southern service center told us earlier today that end users are, “just beginning to see the severity of the situation and many are caught with their pants down.”

Another service center located a couple of states north told us, “It takes the OEM awhile to get their heads on right.”

From the east coast we heard from a service center, “…We have backed off of our buying and will only purchase what we are selling.  No need to fuel the fire and then be stuck with high priced inventory.  While we cannot sell from an empty shelf, we cannot afford another collapse as we saw in 2008 – 2009.
As the song says “turn, turn, turn”.  Inventories will have to turn a lot faster at these numbers.”

Certain products are more difficult to find than others (although we were told a number of times today that if you are “willing to pay the price” you can find steel). A cold rolled service center told us, “Cold rolled is very tight currently with many mills unwilling to quote at all. Base pricing where available is $40.00/cwt minimum.  I had a $44.00/cwt quote this morning.”

China’s Impact on U.S. Market

SMU spoke with a couple members of the financial community who have been fretting about the drop in iron ore prices in China. Steel prices in China have slipped slightly and are expected to slip further as they restart too much capacity in response to the higher prices of a couple of weeks ago.

We are now hearing that billet prices from China are being lowered to Turkey. This in turn will impact the ferrous scrap export markets here in the U.S. which has helped fuel the current spike in steel prices. Watch 80/20 export prices to Turkey off the east coast. Prior to China adjusting billet scrap exports had reached $330-$335 per metric ton.

Even with a collapse of the Chinese market buyers here need to be aware that the U.S. is at this moment a protected market due to the antidumping and countervailing duty trade suits. Unless there is a major surprise when the final determinations are given by the US Department of Commerce and then the International Trade Commission we expect imports to continue to shrink and China will be unable to ship cold rolled and coated products (they are already blocked regarding hot rolled) into the United States.

The first Final Determination by the US Department of Commerce will be announced next week on corrosion resistant products. The announcement should be made public sometime on Tuesday, May 17th.

Other Foreign Countries Impact on US Market

We are learning that a number of foreign countries who normally import products to the U.S. are not offering at this time. We learned today that Ternium has no allocation on any flat rolled products for the United States at the moment. We are hearing similar stories out of Turkey and elsewhere. Many countries are either not quoting or are well aware of the numbers being offered here and have increased their prices accordingly.

So, buyers have to think about not only where do they get their steel and how much do they pay for it, they also have to forecast at what point does foreign supply (or more domestic supply) come back into the U.S. market to such a level that it disrupts the current shortage of supply…?

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