US industrial output has been falling on a month-on-month basis since August and the manufacturing PMI fell below 50 in late 2015. Even with the bounce in January PMI data to 52.7, the manufacturing outlook remains uncertain after an extended period of weakness and continued currency strength.
Yet, we suggest that US mills are (right now) in a sweet spot in terms of pricing. Are we crazy?
After a dismal 2015, steel mills are finally in a position to drive prices higher. It may not be for long, but any buyers that are short of flat steel in the short term will have to pay substantially higher prices in the next few months. We suggest that prices could rally $100-150 a ton between December 2015 and April/May 2016.
Supply Finally Constrained
Import and domestic supply is curtailed. US mills operated at 60-65% capacity in December.
With continued uncertainty regarding anti-dumping actions, finished steel imports are slowing. Importers cannot start selling again until final determinations are in, meaning that June arrivals are probably the earliest.
US HR, CR & HDG Imports (000 metric tons)
Source: US Department of Enforcement & Compliance
Mills will take advantage of the reduced supply and drive prices higher. Lead times out of mills are already stretching out. A $40 per ton increase that was announced in December has already been accepted and mills have another $30 per ton on the table. We think that they will go for another one in February.
Service Center Inventory
Yet, buyers were sanguine and pointed to the elevated level of inventories seen in Metal Service Center Institute (MSCI) data through much of the second half of 2015. We think that these will be run down quickly. For now, service centers are somewhat happy to support mill hikes because it boosts the value of their own holdings and with mill supply tight, many buyers have to source from service centers.
US Steel Mill Utilization Rate (%)
Source: American Iron & Steel Institute
Moreover, we believe that “shadow” inventories i.e. those held by consumers and at ports or by non-registered MSCI members, have already been run down during Q4 2015. During that period, apparent consumption was down more than 15% year-on-year, but visible inventories hardly moved. While demand was weaker, we think that a good chunk of inventory was chewed up.
Whether the price gains are sustainable beyond Q2 will depend on the outcome of the anti-dumping (AD) findings. So far, results have been mixed. While China is likely to be out of the galvanized coil market, other suppliers typically had preliminary findings of less than 10% with Taiwan getting zero. If this is confirmed, then these guys will be back in the market. For hot-rolled flat products, the preliminary countervailing duty was less than 10% for Brazil and zero for Taiwan and Turkey. We await the hot-rolled coil anti-dumping and the cold-rolled coil countervailing duty and anti-dumping results.
Our best guess is that the attempt at blanket protection will fail with only egregious dumpers such as the Chinese in cold-rolled coil and hot-dipped galvanized excluded. Others will face a 0-10% tariff and will continue to supply the market.
Our view on global prices and demand is pretty terrible. As such, we think that US mills will drive prices higher in the first half and bring back domestic supply. Higher prices will pull in imports in the second half resulting in excess supply and prices will fall back to earth. US mills could avoid the volatility if they didn’t boost prices so aggressively in the near-term, but they are not known for their long-term outlook in terms of spot market pricing strategy.
Steel-Insight is a steel industry price-forecasting publishing company, based in Toronto. James May, the firm’s managing director, has been a steel industry analyst for 15 years and advises some of the major global steel trading companies, steel producers and steel consumers on the outlook for steel pricing and industry trends. For more information, visit www.steel-insight.com.