Matenaer Interview with Steel Market Update’s John Packard
May 25, 2016
These are challenging times in the steel industry for manufacturers, OEMs and distributors trying to service their customers. Prices and lead times have spiked considerably, and it’s tough to predicct when things might stabilize. Best practices suggest looking at your critical components and making sure your material replenishment systems have the correct lead times loaded. Expedites have increased, and raw material lead times are about two to three times what they were in January.
To get more information on the steel situation, Matenaer Corporation’s Sourcing Manager, Ben Richardson, reached out to John Packard, Owner and Publisher of Steel Market Update (SMU), late last week for some insight on the recent fluctuations in the market. John has more than 31 years of experience in the steel industry, and in August 2008, he combined the steel industry newsletter with Steel Market Update's website to help those in the North American flat rolled steel industry and related markets.
Matenaer Corporation: Since the steel market’s low point in December, we have seen hot rolled steel costs increase by 42%, with lead times doubling and, in some cases, tripling. Can you tell us about the market conditions that contributed to this run on pricing?
John Packard: There are four main drivers from my perspective:
1) The antidumping and countervailing trade suits against multiple countries back in the late spring and early summer 2015 began to take hold. By December we had preliminary determinations which showed there would be an impact against certain countries (especially China) which dampened future exports of hot rolled, cold rolled and coated products.
2) Service center inventories had been in an over-supply situation for an extended period of time. This began to change in late 4Q 2015 with inventories dropping dramatically through the most recent release of data earlier this week.
3) Steel mills have taken supply out of the market. This includes shutting down the blast furnace at USS Fairfield, idling two furnaces at USS Granite City and the only furnace at AK Steel Ashland.
4) Lead times have extended due to constricted supply and a need for inventory as demand has remained constant.
MC: On the recent trade cases won by the mills, would you agree that not only steel, but also steel components made from that same steel in China, should have remained in the language of the case?
Packard: That is a question for the lawyers involved on both sides (mill versus end user).
MC: Can you speculate as to why Chinese slabs that are used by the domestic mills to process coils were not included in the trade case and if the domestic mills are still using slabs purchased from China today?
Packard: China does not export any slabs to the United States.
MC: Are the domestic mills totally self sufficient in this regard, or are slabs still being imported from countries other than China?
Packard: The domestic mills import slabs. In fact, the domestic mills are some of the largest importers of foreign steel (in the form of slabs and hot bands). The main countries are Brazil, Russia and Mexico.
MC: Do you believe that we will see a reinvigorated effort by OEMs to offshore steel components in light of these increases?
Packard: There is always a risk for the domestic steel industry to expand the spread between domestic and foreign steel prices in other markets. As the spread expands there will be U.S. companies that prefer to offshore parts or entire manufacturing facilities.
MC: What would be the long-term effects on the industry as a whole if that were to happen?
Packard: This has been happening for many years and most likely will continue, with the net result being a loss of jobs and manufacturing facilities here in the United States. It will also shrink the need for steel production in the United States.
MC: While I agree that the integrated mills needed to increase margins to become profitable again, I am not sure that I agree with the magnitude of the increases. What are your thoughts?
Packard: I tend to look at things in a longer-term perspective. The price of hot rolled coil dropped to the low $300’s – I believe below the lows of 2009 at the bottom of the Great Recession. Manufacturing should have taken advantage of a historical gift and locked in long-term pricing at that point in time. I am on an airplane as I respond to your questions so I don’t have all the data in front of me, but my gut tells me the long-term average price for hot rolled is probably around $570 per ton (on Tuesday [May 17] the SMU index on HRC was $620 per ton). The mills needed to 1) become profitable and 2) then improve margins to reasonable levels. The question in my mind is, will the mills push the envelope and try to get to $700 per ton which, in my mind, would be excessive.
MC: With manufacturing demand relatively stagnant and the ever-increasing pressures to compete on a global level, do the mills have indicators that the market will bear these increases?
Packard: That is a question you need to ask the steel mills directly. I have indicators of my own which show support for spot price increases at service centers, and I have a Steel Buyers' Sentiment Index which measures how buyers and sellers of steel feel about their company’s ability to be successful in the current market environment as well as 3-6 months into the future. These two indicators have proven to be helpful when measuring support for price changes both at the domestic mills as well as through the distributors.
MC: As we have already seen with real estate, gold, oil, and other raw materials, the spike is usually followed by the crater. Do you think we will see something similar with steel?
Packard: The steel industry has been a volatile one going back to the 1990’s. We have had sharp price spikes, and the greater the move in one direction, the larger the reaction in the other. We saw the market overreact to the downside during 2015, and it appears poised to overreact to the upside right now. If history repeats itself, then there will be a strong downside move when the cycle breaks. The only reason why prices would “crater” would be if demand dropped dramatically (which is not being predicted at this point in time) or if distributors built too much inventory (which is difficult to do when on allocation).
MC: Can you explain allocation for us?
Packard: Allocation is when the mills limit the amount of steel that a company can buy during a particular month. Normally, the mills will use some sort of average from previous months’ purchases to determine what the tonnage allocation might be. It is a way of making sure no one company tries to build inventory at the expense of others.
MC: Do you believe that there are any other influences on the current market such as speculators, traders or government policy?
Packard: The trade laws passed last summer will most likely have an impact. Both candidates for President are talking about supporting steel and being anti-trade. Speculators I can’t speak to.
MC: The big question now is if this trend can continue, and if so, for how long?
Packard: For the moment, the key seems to be supply. As long as supply is constrained and lead times are extended, there will be upward pressure on pricing.
MC: Do you feel that with slack demand, some of the issues we are seeing right now on the supply side are due to panic buys to ensure supply chain continuity? At some point is it possible inventories will become so bloated that demand will diminish, causing prices and lead times to fall just as quickly as they increased?
Packard: I have not seen any evidence of panic buys to date. You also have to consider how quickly the price of steel has risen, which actually is preventing companies from taking risks by building inventories. Then there is the subject of allocation, which also limits the ability of over-building inventories.
By the way, my personal opinion is that demand is not “slack” but doing quite well in a number of steel intensive industries: automotive and construction, in particular. There are pockets of weakness in energy and the agricultural markets, but most of the companies with whom I speak on a daily basis are reporting “decent” demand and our Sentiment Index is close to its all-time high, and our Demand index is mildly positive and not negative.
MC: We would like to discuss mill capacity. Can you tell us what that number currently is?
Packard: I defer to the AISI for total capacity as I don’t follow the long products markets.
MC: Do you feel that there are any discussions happening now to restart the idled furnaces at US Steel’s Granite City and AK Steel’s Ashland works in light of the current supply disruptions?
Packard: I expect that internally it is always a topic of discussion. However, customers are telling me that neither mill has made any indication that they are moving toward bringing capacity back online. In the US Steel situation they have such a large exposure to the energy markets, I would think that oil would need to be close to $60 to give them the confidence that their OCTG and line pipe markets would rebound. As an FYI – Steel Market Update will have Roger Newport, CEO of AK Steel, at our Steel Summit Conference at the end of August. We will also have the CEO of Cliffs Natural Resources, who would be one of the first to know when either of these mills were about to restart furnaces.
MC: Can you tell us when North Star BlueScope will be operational again after the furnace explosion two weeks ago?
Packard: I was just with the top executives of NS BlueScope. The furnace is back up and running.
MC: Will that help alleviate the current issues we are seeing as far as lead time?
Packard: No. NS BlueScope has been sold out to capacity for a number of years. It will ease the pain for their customers, but the 35,000 tons lost was either absorbed by other mills (minimal) or came out of inventories (probable), which means there will be more stress on lead times, not less.
MC: Finally, what advice would you give our customers in today’s market?
Packard: Not knowing exactly who your customers are, I can’t respond.
MC: Our customer base is very diverse, with the only common thread being that they are steel-intensive industries. I guess what I was really looking for was if people should settle in with the understanding that this is the new normal as it relates to cost and lead time, or is it more akin to the weather we have up here in Wisconsin, when, if you don’t like it, just wait for an hour?
Packard: Having lived in Minnesota for 10 years, I understand. I do not believe we will head back to hot rolled prices in the $300’s per ton range. There will be volatility, but the lows will be higher than this last cycle. My opinion is this cycle will last for a number of months before reversing course.
MC: Would you recommend placing blanket orders for components, locking in pricing now at the current market price, or would you remain on the spot market waiting for the pricing to cool?
Packard: I was bullish on the market from September through December 2015. That was the time for “deals of a lifetime.” Those times are now gone. I do not know how long the current cycle will remain in place, but my opinion is it will be at least through the summer months. There are some signs out of China (billet sales to Turkey) that will have an impact on costs here in the United States (scrap prices dropping). So I caution people to be aware of what is happening in the world around them.
MC: John, thank you for your insights on the steel markets. We appreciate your cooperation. We also wanted to note that Steel Market Update is hosting their sixth Steel Summit Conference August 29-31 in Atlanta later this year. For more details, go to https://www.steelmarketupdate.com/news/8986-smu-steel-summit-conference-did-you-hear-the-news.
Again, these are challenging times in the steel industry for manufacturers, OEMs and distributors trying to service their customers. Prices and lead times have increased, and when they’ll come back down is uncertain. We strongly recommend looking at your critical components and making sure you have the correct lead times loaded in your purchasing systems. Order expedites have also increased. As noted earlier, lead times are double and triple what they were at the beginning of 2016, and prices are being impacted. For more information, go to www.Matenaer.com or contact your Matenaer account manager.
About Steel Market Update
Steel Market Update is the industry’s "only independent and impartial voice for the buyers and sellers of flat rolled steel products,” providing the “what, why and how” regarding steel prices, trends and industry news for the North American market. Steel Market Update and its weekly newsletters are available at www.steelmarketupdate.com via subscription. They also have a free blog on their website for all visitors. You can follow John Packard and Steel Market Update on Twitter (@SMUSteel), its LinkedIn group (https://www.linkedin.com/groups/4302739) and John’s personal LinkedIn site.
About Matenaer Corporation
Since 1972, Matenaer has been a leader in the special washer and flat stamping industry. As our customers’ needs have evolved over the years, so have our capabilities, capacities, equipment and efficiencies. Today, in addition to custom stamping, Matenaer manufactures a wide variety of metal parts using CNC machining, fabricating, laser and plasma cutters and robotic welding. Matenaer recently added a coating department to provide GEOMET® and DACROMET® coating services. To further support Matenaer’s full-service philosophy, all custom dies are made in-house at our complete tool and die shop. Matenaer is an ISO9001 certified manufacturer located in West Bend, Wisconsin. You can connect with us at www.Matenaer.com, on Twitter @MatenaerCorp, Facebook and LinkedIn.