Four Steel News Items On Demand and Steel Price Direction

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Here are four steel news items I have collected in my “steel blog fodder file. Individually, they don’t seem to say much, but altogether, the data appears quite interesting. Here are the news items:

  1. China’s largest steel producer, Baosteel will, “likely cut production in the third quarter because of “weak demand from the auto and appliance markets, according to Baosteel Group Chairman Xu Lejiang at a Bloomberg Businessweek Green Business Summit in early June. Industry analyst Michelle Applebaum expressed similar sentiment on June 8 in a research report, “Chinese production cuts will accelerate quickly. But the proof will be in the pudding, as they say.
  2. Though our earlier steel vs. copper post today commented on a Credit-Suisse report earlier suggesting, “On the cost side, steel-making costs are in part driven by the location of the mill, so developed-world steel makers will naturally have a higher fixed cost base relative to developing world peers. As such the cost curve is in favor of developing world producers, we’d take argument with that conclusion for a whole host of reasons.  Chinese integrated steel production is likely more costly than some Western producers for reasons relating to availability of supply of key raw material inputs (e.g. coking coal and iron ore) which adds greater price volatility. In addition, freight can make a huge difference in a producer’s cost structure. According to one domestic EAF producer, “…freight in and out is ultimately borne by the consumer. Within the last 2 years, trans-oceanic freight haulage costs reached a peak of $80+/ton and with current costs of ~$35/ton. China, a developing economy imports huge volumes of raw materials from Australia and Brazil. Brazilian producers have raw materials in their back yard. Developing world producers are likely to be less efficient and see higher costs on other aspects like energy, transportation and such. There are too many variables involved to make a broad statement such as “the cost curve is in favor of developing world producers.” We would concur. In addition, domestic mills, particularly several of the mini-mills, are often strategically located to both raw material sources of supply (and customers) that result in lower delivered costs to the consumer. Here at MetalMiner we advocate total landed cost and total cost of ownership, not lowest steel price per ton!
  3. According to a presentation from Steel Market Update two nuggets of data caught our eye. The first centers around this question:
    1. “Is your company building, reducing or maintaining its flat rolled steel inventory? As part of a regular survey conducted by Steel Market Update, only 3% of service centers are building inventories whereas 0% of manufacturers are building inventories. The number of service centers reducing inventory has grown from 20% a month ago to 45% in June and the number of manufacturers reducing inventory has grown from 13% in May to 30% in June. The second data nugget involves number of months of supply
    2. Fully 83% of survey respondents are now holding less than 3 months inventory. Both nuggets of data suggest that steel demand has stymied somewhat (also reflected in significant steel price drops for HRC -4%, CRC -5%, standard plate -1% with only rebar holding steady Source: Steelbenchmarker) These “signals suggest the shift in mindset from building inventory to reducing inventory will put further downward price pressure on steel.
  4. The trend line for forward contract price curves for iron ore appeared in a downward slope though prices have ticked back up this past week according to the Iron Ore and Steel Derivatives Association (see graph below):

Graph Courtesy of: IOSDA (Iron Ore and Steel Derivatives Association)

Buying organizations should pay very close attention to demand signals, particularly the trend lines in terms of whether or not service centers and manufacturers are shedding inventory vs. building inventory. Forward price curves provide additional cues. In falling markets, for any purchases not under long-term contract, buyers may wish to consider making last-minute buying decisions to capture additional savings.

–Lisa Reisman

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Comments (3)

  1. Bmckeen says:

    Commenting on the portion of the article that deals with reduction in materials inventories: There is certainly a noticeable change in the amount reserves being kept in inventory throughout the industry. This reduction in inventory is a hedge bet against a slow economy and an understandable attempt to keep the bottom line in the black. Companies are willing to reduce their reserves and hope that they can buy materials as needed until the economy picks up. However, with billions of dollars in approved funds for infrastructure improvement looming in the background and elections just around the corner, many may find that demand soon outstrips supply. The upcoming elections may well serve as a trigger for massive federal spending to answer the question many voters ask: “What have you done for me lately?” We must remember that the funds for these infrastructure projects have already been approved by the president and Congress and can be spent at virtually any time of their choosing.

    If this scenario comes to fruition many producers and manufacturers may find that they are unable to keep up with demand due to lack of raw materials or are competing to buy raw materials in a dramatically escalating market.

  2. admin says:

    You raise a great point…some of this stimulus money may actually flow through and cause some shortages. The flip side is that the first time home buyer credit has now expired which will likely cause additional drops in near-term housing demand (and starts). So we have stimulus, commercial construction (still dropping), auto (holding fairly steady and growing compared to last year) and other white goods/consumer demand (which we still see in recession). Very important to watch the demand drivers closely! Thanks for your feedback. LAR

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