U.S. Flat-rolled steel prices have dropped $20-40/ton
so far in August, bringing hot-rolled coil down to $580-600/ton ex-works
Midwest.
There are two schools of thought. First, the current
dip reflects a typical holiday slowdown and prices will hold or come back in
September. In that scenario, buyers need to secure Q4 requirements and will
return to ordering in September. On the supply side, mills are taking downtime
in October and Q4 for maintenance, there is still some idled capacity (U.S. Steeland AK Steel) while higher-than-expected final HRC
duties and tariffs will keep out imports. The steel market will, therefore,
tighten and prices will hold at the current high levels.
Steel-Insight could not disagree more. While we don’t
expect freefall just yet, we do expect HRC prices to be back in the high
$300s/ton at some point next year.
The problem is primarily on the supply side. For
demand, the July Metals Service
Center Institute number
indicated that flat-rolled shipments out of distributors were down 10%
year-on-year, but fundamentally automotive shipments are pretty good, while
white goods and construction are supportive. Oil and gas and capital equipment
aren’t that great, but overall demand should be higher this year.
Don’t believe the American Iron
and Steel Institute utilization
figure. At 75%, it would suggest operations are well below maximum capacity,
yet flat-rolled shipments are back to peak levels (see above).
On the import side, volumes are already creeping back
up and we would expect that to accelerate into Q4. The arbitrage between U.S.
and international prices only really widened in Q2 and it takes some time for
the imports to arrive.
Meanwhile, our analysis suggests that the
anti-dumping action will not be as watertight as some suggest. First, some
material — for example, Taiwanese hot-dipped galvanized — was excluded. Second,
some material — Turkish HRC — will have a duty of less than 10% and can
continue to access the market.
Third and finally, even some suppliers with high
tariffs such as POSCO in HRC may not have to pay it as it is
supplied to its UPI subsidiary and could therefore be
excluded. Finally, alternative suppliers such as Vietnam in HDG have already
appeared and are now well-established.
Finally, the July MSCI numbers highlighted that
inventories are already turning up and destocking is now over.
So, while demand is flat, supply is on the increase.
The high prices mean strong profitability and therefore domestic mills will
maximize output. Meanwhile, the arbitrage is strong enough to justify shipping
to the U.S. and there are enough holes in the anti-dumping duties to allow
material in.
The result will be that inventories will continue to
accumulate and, at some point, distributors and customers will stop buying and
prices will collapse back down below $400/ton. The market (thanks to the
shutdowns and some Q4 buying) may see only limited downside in the short term,
but will drop significantly in 2017.
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.
Surce:metalminer