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Michelle Galanter Applebaum
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Michelle Galanter Applebaum is a long-time independent steel industry analyst with nearly 30 years of experience following the sector as well as an adjunct professor at Lake Forest College in Chicago. Ms. Applebaum spent over 20 years at Salomon Brothers in New York and Chicago. During her years... More
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  • July Steel Distributor Inventories Jump but Shipments Better Than Expected

    Steel Market Intelligence©

    July Steel Distributor Inventories Jump but Shipments Better than Expected

    ·         Steel Inventories Jump in July.  July MSCI carbon steel inventory tonnage rose a surprising 6.2% in the month driven by sharp increases for both flat-rolled (up 8.9%) and plate (up 7.7%).  While overall adjusted months’ supply (NYSE:MOS) came in at 2.4, up 0.2 from June’s 2.2 and exactly in line with the seasonal trend, we were nevertheless surprised at the flat-rolled jump given the fairly continuous 20% slide in prices in the past few months. While we have seen commentary attributing this to “buy-ahead” by service centers (on the theory some were anticipating the August 10 $60/ton price increase), we strongly disagree and suspect that the increase was due to imported deliveries and mills catching up on delivery from material ordered in March/April when prices were moving higher fast – or a statistical error caused by timing in reporting.


    An inventory build ahead of a price increase of any real magnitude is historically unprecedented; in the last eight pricing cycles since 2001, flat-rolled inventories have only risen twice at the bottom, and these two upticks were 1.2% in July 2003 and 0.8% in November 2009, so nothing even close to a 9% jump; in fact the average decline in the month preceding a flat-rolled price increase historically is actually 5.5%.  So we would argue that not only is the July increase unusual, and in our view unintentional, but the sheer magnitude of the uptick is even more abnormal as it suggests that inventory building was widespread, which we find even less likely. If buyers were thinking there was a price increase coming, they were awfully quiet about it.

    ·         Carbon Steel Shipments Stronger than Normal.  Average daily shipments showed particular strength given seasonality, down some 4.1% versus the normal seasonal drop of 5.2%.  Bucking the overall trend, beam shipments actually rose some 10.9% in the month - versus a normal drop of 0.3% - but we assume the July strength in shipments was due to deferred purchases as a result of pricing confusion in June, so we do not expect that strength to be durable.  There was relative seasonal strength in shipments for pipe (down only 1.0% versus the normal 4.3% drop), bar (down 2.9% compared to the typical 4.6% decline) and plate (down 1.8% versus the normal drop of 3.2%), while the 6.3% decline in flat-rolled shipments was in-line with the typical seasonal drop.  

    ·         All Products Post Year-Over-Year Shipping Gains; Growth Rate Accelerates from June.  All carbon steel products recorded year-over-year shipments gains, with overall carbon shipments rising 14.3% versus year ago levels, a much sharper uptick than June’s 10.9% increase.  The year-over-year increase was mainly driven by stronger flat-rolled and plate shipments – up 16.7% and 16.6%, respectively – while pipe shipments were up 9.5%, and beam and bar shipments increased 7.7% and 5.5%.

    ·         Months’ Supply Sees Normal Seasonal Increase.  The combination of increased inventories and lower average daily shipments resulted in adjusted months’ supply rising to 2.4 from 2.2, in line with the normal seasonal jump – it’s notable that we have only a single time  over the last 33 years seen July MOS ever post a sequential decline.  MOS for flat-rolled and plate saw the largest increases, gaining 0.4 and 0.3 to 2.4 and 2.8 months in July, while bar rose 0.1 to 2.6.  MOS for pipe remained steady at 2.6 months, while MOS of beams declined 0.3 to 2.3 due to the sharp uptick in shipments and lower tonnage.

    ·         Outlook.  Average daily shipments typically rise 4.4% for total carbon steel shipments and an even greater 6.1% for flat-rolled in August, and we expect whatever the reason for the inventory build in July to flip into a meaningful liquidation in August. The flat-rolled price hike announced mid-month has been met with widespread skepticism, so that we believe buyers will continue to live hand-to-mouth in coming weeks, and suspect that the broad-based global strength we have seen in the face of macroeconomic jitters will drift to the US – in fact – the last time US sheet prices traded at a discount to Japan, Europe and China was in November 2010, when prices bottomed and subsequently skyrocketed by over $300/ton before peaking in the March/April timeframe.


    Aug 20 11:01 PM | Link | Comment!
  • Steel Market Intelligence - June Chinese Net Exports Remain High


    Chinese Steel Balance of Trade Moderates in June, But Net Exports are Up 18% for the 1H 2011. According to just-released data, net Chinese steel exports were down 1% in June, to 3.19 million tonnes (mt), down from May’s level of 3.48mt. We are surprised that exports are reported down for the month, particularly given Friday’s release by the China Iron and Steel Association (CISA) for late June production, which posted an estimated 2.018mt/day, a new record and the first time Chinese steel production has ever breached the 2mtpd mark. Year-to-date, net exports remain up some 18% over 2010.



    China Continues to “Turn Gold into Straw,” Beijing Stepping In? Given the current near-peak levels of iron ore and met coal prices, we believe that most Chinese steelmakers have tipped into the loss-producing column, and while there is talk of production cuts, we are seeing the opposite in the marketplace, despite declining prices in the region and stable raw material costs.


    Chinese Imports into the US at 2-Year Highs. While net Chinese exports remain at post-recession record levels, we are also seeing a meaningful pickup in Chinese steel coming into the United States. For June, Chinese steel imports into the United States rose 26.1% increase in June, to the highest level in over two years; Chinese steel imports into the US have risen now for four straight months.


    Outlook.  With slowing of the Chinese economy hitting the consumer goods sector more than the construction sector, we continue to see further weakness for flat products in China. With improving inventories of longs and better demand, we hope that we are past the worse of the pricing decline for construction steels. Even so, it’s fairly clear that Chinese export pricing has continued to deteriorate, and we hope to hear more and more anecdotal support that Chinese steel mills are choosing to cut production rather than continue to drop prices in the export market.



    Jul 10 12:39 AM | Link | Comment!
  • Resource Hoarding – WTO Rules Against China in Reverse Protectionism Case

    ·        WTO Confirms Chinese Protectionism. According to the office of the US Trade Representative (USTR), the World Trade Organization (WTO) confirmed the US claim finding that China’s use of raw materials export restraints are in violation of China’s WTO obligations – primarily via quotas and taxes on exports of a variety of steelmaking and other raw materials.  China now has the right to appeal the decision to the WTO’s Appellate Body.

    ·        Raw Material Hoarding a Global Problem. Export restraints – what we’ve called raw materials hoarding – create significant global pricing miscues, as certain regions – not only the Chinese – restrict the export of raw materials essentially subsidizing the downstream users of these products.  The ruling is important as China’s export restraints artificially reduce the cost of raw materials in China and increase global prices of these products giving Chinese manufacturers a subsidy. There are other implications of these subsidies; Chinese steelmakers overuse coke in their steelmaking – as an advantage – versus other regions, because coke is a cheap reductant in China – because the government makes it so.

    ·        Reverse Protectionism Favors Higher Cost Producers. While the first-order effects of this resource-hoarding impacts these particular raw material costs, the second order impacts are far more profound. By subsidizing lower-than-market raw materials for the high-cost steel, aluminum and chemical processing industries, the Chinese are also effectively inflating the cost of non-controlled raw materials that impact the rest of the globe. Lower-than-market coke prices, for instance, allow high cost Chinese mills, who must reach to the open market to buy iron ore, to allocate greater resources to purchases of other raw materials. So the price-distorting impact of these subsidies reaches well beyond the particular commodities involved.     


    Disclosure: I am long RS, NUE, CLF.
    Tags: AKS, BHP, RIO, ZEUS, NUE, STLD, X, RS, CLF, steel, iron ore, coal
    Jul 05 5:34 PM | Link | Comment!
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