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How steel service center inventories
affect steel prices
As inventory builds up, steel mills may have a hard time pushing price increases
By John Packard
In mid-August U.S. steel mills advised their flat- rolled and steel plate customers that they would be increasing spot prices on hot-rolled, cold-rolled, galvanized, and Galvalume® steels, as well
as plate. The flat-rolled mills announced $30/ton
base price transactional increases. For plate, Nu-cor boosted prices by $30/ton, and SSAB advised
its prices would rise by $40/ton.
Steel prices had been flat to trending lower leading up to these price increase announcements. The
mills used the increase in commodity prices, especially scrap which rose $10/ to $30/gross ton for August delivery, as the justification for higher prices.
The steel mills also pointed at low inventory levels at their flat-rolled customers—especially service
centers. The main distributor trade association is
the Metals Service Center Institute (MSCI), which has
been reporting low inventories for many months.
MSCI estimates carbon flat-rolled service centers
were carrying 2. 3 months of supply as of the end of
July. In May and June, MSCI was reporting distributor stocks at just 1.9 months of inventory on hand.
Steel Market Update (SMU) uses a proprietary
model to analyze the MSCI numbers and identify
whether distributors are overinventoried (excess)
or underinventoried (deficit). For May and June, our
model told us service centers were 800,000 tons and
525,000 tons short, respectively, of being in a balanced inventory situation.
One of the services that SMU offers its clients is
to forecast where we see shipments and inventories and how that will affect the balance at the end
of each month. Our forecast is based on historical
rates of change from month to month.
SMU’s Service Center Inventories Apparent Ex-cess/Deficit forecast in early July predicted the
deficit in inventories held by flat-rolled distributors
would decline significantly by the end of July. We
have worked with the MSCI carbon flat-rolled shipment and inventory data just released for July, and
our model indicates the deficit did indeed shrink and
is very close to our original forecast of -232,000 tons.
MSCI reported carbon flat-rolled shipments of
1,991,000 tons. This is 20,000 tons more than our
early July forecast of 1,971,000 tons.
Inventories at U.S. flat-rolled service centers ended the month of July at 4,646,000 tons, which was
slightly higher than our forecast of 4,589,000 tons.
Using our model, we show the distributors reducing the inventory deficit from -525,000 tons to
August Distributor Shipments/
SMU forecasts flat-rolled shipments out of U.S. service centers for August will be 2,352,000 tons. Our
forecast is based on the average monthly change
for August over the past four years. In this case, the
average change was + 2. 7 percent. We also forecast
that flat-rolled steel distributors will hold 4,862,000
tons of inventory at the end of the month.
If the shipment and inventory forecasts are correct, service centers will have eliminated their inventory deficit for the first time in this calendar year and
will be in a “balanced” position with + 50,000 tons.
As we take our forecast out into the future using
the same formula, we expect September through
January to see a jump in inventories. As a result, the
amount of excess steel on the distributors’ floors
should increase every month through January.
If MSCI data is correct and our model is accurate,
inventories at steel distributors will rise through
the end of the year. As the inventories grow, the
pressure will grow for steel prices to weaken (see
Figure 1). As inventories decline, steel prices
trend higher. When the green bars are indicating
an excess (bars are above the zero line), prices
tend to drop.
This graphic shows the link between inventory increases and subsequent drops in steel prices.
A majority of steel service centers indicate that they have enough material inventory or that they have too much.