Notes From New York City Steel Meetings

Last night, Steel Market Update participated in the annual Bank of America Merrill Lynch dinner hosted by metals and mining analyst Timna Tanners. We also spoke at the CRU Steel Briefing a little earlier in the day. Here are some of the key takeaways from those meetings.

Mill Lead Times Short

Flat rolled steel mill lead times are even shorter than what is being reported. We were told by multiple steel buyers that various mills are producing hot rolled coils in one week. A number of steel buyers reported actual HRC lead times as being 5-10 days. They also told the dinner group that lead times on HRC need to get to four weeks in order to move prices higher.

We were advised galvanized orders were as short as three weeks.

With three-week lead times on coated and one- to two-week lead times on hot rolled, coupled with flat rolled inventories at 2.5 months of supply (where SMU data put service center inventories as of the end of May), there is no need to build inventories. If there is no need to build inventories, then there will continue to be pressure on pricing.

Foreign Steel – Trading Company Comments

Three trading companies made comments about their businesses and their ability to be competitive against current domestic mill pricing.

The traders told the dinner group that domestic pricing would need to rise by a minimum of $100 per ton before foreign steel, at least from their sources, would be able to obtain large orders to be imported into the United States. Right now, the traders reported a basic standstill to foreign orders and that the results of the lack of foreign steel would be felt in August, September and October of this year.

As a side note, one of the manufacturing company executives, who has purchased the majority of his steel from foreign sources in the past, reported that his company is now sourcing 80 percent of its flat rolled steel needs from domestic sources. He told the group that last week he inquired on an upcoming need for steel and the purchase ended up going to all domestic sources as foreign steel was not at all price competitive.

The traders were split on how much longer we would see declining prices in the U.S. One trader thought it would be 4-6 months of lower pricing. A second trader thought we were already at the bottom and it was a matter of days or weeks before prices would move higher.

Manufacturing Company Perspective

The aforementioned manufacturing company (which buys 70,000 tons of flat rolled annually) reported demand as being up 20 percent in their business. They are involved in the construction segment of the economy, which they said was firing on all cylinders right now. “Business will be good through calendar year 2019,” he told the dinner group.

He added that he believed steel prices would continue to go down, “…but not too much further [from here].”

He laid out the following scenario: The 2018 Section 232 “bender” caused a hangover that is beginning to catch up with the steel mills. “The mills will be at marginal cost and will begin to lose money,” he said. He pointed to the added capacity as being a major issue – JSW Ohio, USS Granite City two blast furnaces being brought back online, steel mills adding turns. Now, his expectation is for the capacity utilization rates to go down.

“The mills are where they have to move pricing to keep their mills full. That’s the environment we are in now,” the manufacturing CEO said. “There is pent-up demand. If the mills were smart, they would publically announce they are taking capacity off-line.”

Service Centers Talk About Margin Compression

One common theme coming out of the service centers speaking to the evening dinner group was that manufacturing companies were bringing in large inquiries and then only placing a fraction of the tonnage. They all agreed there is pent-up demand sitting on the sidelines. As one executive put it, “No one [steel buyer] wants to place the order that next week could have been bought cheaper.”

All of the service centers reported “margin compression” as moving off higher priced inventory (even at a loss) is more important than sitting on inventory that is losing value every week.

They reported the mills as being “as hungry as me” when it comes to negotiating prices. “If you have tons, mills are willing to deal.”

The service centers had mixed opinions on whether the market is close to a price bottom on benchmark hot rolled coil. One felt there would be a “false bottom,” which is being created by pent-up demand at end users and service centers who have taken (or are taking) inventories lower. By false bottom, this head of purchasing for a large flat rolled service center told the group he expected there to be a bump in pricing (dead cat bounce) only to drop off once again as demand is not strong enough to support the tonnage needed to take lead times out and keep them there.

A second service center purchasing manager was more optimistic, but didn’t know what “Black Swan event” would be the catalyst to move prices higher.

Scrapmageddon

Two scrap company executives and one analyst for a steel publication reported that scrap prices have been dropping due to high inventories at the steel mills, which didn’t seem to make sense to one scrap CEO. He asked rhetorically, how can the steel mills’ capacity utilization rates be above 80 percent and they have little need for scrap? “There is tepid demand from steel mills. They are not consuming what they are buying.”

One scrap exec said, “We are living in bizzaro world. We are in Scrapmageddon (a play on Timna Tanners’ Steelmageddon forecast).” He went on to say ferrous scrap input values “are upside down.”

Right now, the consensus is for continued pressure on scrap for July. The steel mills refused to buy more scrap in June, even with prices down $30, meaning their offers for July are expected to begin blow the June levels. However, the expectation is the bottom is near, even as the execs asked, “Where is demand?”

One of two things are needed for scrap prices to stabilize and rebound, said one executive: “Steel demand has to pick up or scrap flows have to slow down.”

Right now, U.S. scrap prices viewed from a global perspective “are one heck of a bargain.”