Steel Price Drop – Blame it on Distributors

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That’s an accusation the steel distributors would probably be glad to accept, if it were true. First the drop in demand was blamed on the construction industry. Then it was the auto industry. Lately it has been the drop in white goods orders and just this week I heard it was a general paralysis gripping the whole North American manufacturing sector during the last quarter. But earlier this week I read in the New York Times that Nucor boss Dan DiMicco is blaming distributors for hoarding cash and selling inventory rather than keeping the orders on mills flowing as normal. To be fair he also plastered some of the blame on the nation’s lenders, by which we assume he means banks, for collecting billions in government bailout money and then, in his view, refusing to lend it to the service centers on reasonable terms. Credit completely dried up, he said. That last part may well be true. Service centers, like most distributors, rely heavily on lending facilities to fund their stock and with bank rates rising and facilities shrinking this has squeezed the distributor’s ability to fund stock.

However, in our experience, profitable and well established metal stockholders have continued to be supported by the banks. Premiums have been pushed up a little and facilities have in some cases been reduced but so has the price of metal, to the point where new lower facility levels still allow the same number of pounds of metal to be held today as 3-4 months ago.

No, what has stopped distributors buying and driven the liquidation in stock is the realization that stock ordered today will be below market price by the time it comes into the warehouse in two months time. So not unreasonably, faced with falling demand by consumers, distributors have literally stopped buying anything they cannot get immediate sales cover on from clients, off take orders, fixed price consignment stocks, kan-ban support, etc. In the face of this massive drop in demand (production has dropped from 2m tons/week in August to 1.2m tons per week in December) the mills have chased the market down and prices have almost halved over the same time frame.

Have we hit bottom? The steel industry is hoping we have and that President elect Obama’s infrastructure package will stimulate a massive upswing in demand and prices will recover. Somehow we don’t see it anytime soon. Not that the stimulus package will not be implemented but rather that it will take time. However if the slide in prices slows and a little confidence comes back into the market then at least those fickle distributors may be encouraged to start buying again and do their bit to dig the producers out of the hole they are in.

–Stuart Burns

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