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Man of Steel is the nom de plume of an experienced steel trader, who will be writing a column for Metal Bulletin on a regular basis. Do you agree with him? Email editorial@metalbulletin.com
Trading company ceos around the world are worried as they consider their activities and the outlook as they prepare their second-quarter (or second-half) results.
Activities and profits are under pressure in stagnant steel markets, which are dogged by weak industrial figures, little or no credit from banks and a lack of confidence among industrial buyers, who baulk at any suggestion of putting material on the floor.
The encroaching holiday season, when furnaces are relined and deliveries pushed back, will not bring much relief.
Why?
Because the last four months of the year look far worse.
There are only orders in the mills’ production schedules for half (if that) of the steel due to be produced from September until December.
Some long product mills have already closed and there’s been pressure on flat rolled prices for some months.
Steel prices may have doubled since the lows of the 2008 financial crisis, but they rose not because of growing demand for material but as a result of increased raw material costs and higher freight charges.
There is only one path for traders tired of the limited returns to be had from going back to back for a $10 margin.
They are going to short the European and some other steel markets.
Right now, traders are making low-profile approaches to key buyers, inspiring the belief that material from country of origin X (always imported material – never domestic) can be very confidentially sold at levels up to $100 per tonne below the prevailing so-called market list prices and that the deal can be kept completely under wraps.
This sequence is followed with other buyers in other areas, but with changes to the country of origin. Similar tonnages are sold.
The trader then tots up the tonnages and knows he has deals in five or more markets, let’s say the UK, Benelux, Germany, France, Spain and some billets/bars to the Middle East.
And he also knows that a German mill, under pressure to fill its order book, is likely to happily send tonnage to France, while a French mill will have no qualms about sending tonnage to the UK.
The trader has now struck deals across borders with some serious buyers. He is short in substantial volumes: he has sales but no material booked yet to cover the commitments.
What gives him the edge is that he also knows that as the summer ends – barring any miraculous new growth in the market – mills will be frantically calculating what tonnage they need to sell to their own domestic markets and to their immediate neighbours.
The mills will be very concerned when they find interest in their product seems minimal. Surely the market can’t be that bad, they will be telling themselves.
In fact, the tonnages they were expecting to sell have been wrapped up by traders, leaving few direct orders for the mills.
The sales executives and marketing people at the mills will be hearing loud and clear warnings from plant managers that they need big orders to keep the mills rolling.
At this point, the trader starts to put out firm bids at 3-4 day intervals, valid for 24 hours, for thousands of tonnes, but at prices $50-100 below the previous list – and decreasing.
The trader has assessed the mills’ reactions to his initial bids, and opts for the weakest or most anxious of them for the larger tonnages. Four or five bids could be out at any given time during this period.
These bids are not despised as attempts to take advantage, but, at that moment, are seen by the mills as the least worst option open to them.
It keeps them running.
The early footwork on such transactions is now going on.
My many years in the steel business tell me there is only one result.
Mills will have no option but to follow the traders’ bids to maintain production.
My call is that prices are being offered or will be offered at ever decreasing levels to induce takers, and that these levels will be reflected in the last four months of the year.
By October, hot rolled coil will hit $600 per tonne and cold rolled coil $750. By December, HRC will be $500 and CRC $650.
Billet and rebar will show a slightly different pattern, depending on certain locations but the tendency will be for shorting.
By October, billet will drop to $450 and rebar to $500. By December, billet will be $350 and rebar will be $400.
One indication of this pricing trend is that there are currently offers of Chinese origin for commercial HRC at $720 cfr Antwerp for August shipment.
This is not just about an aggressive and profitable move, though.
It is inducing the actual market force – demand, and at a price where the buyer feels at least a little more comfortable and, more importantly, at less risk.
Large steel buyers today agree that a 30% reduction in prices will create a greater sense of safety – or at least less speculation – and could even tempt them to carry more material in stock after the turn of the year.
And that would be a great start for 2012, with prices more aligned to fundamental market needs.
This is, ultimately, in the mills’ and the industry’s best interests. They want a gradually improving movement in tonnages, with production capacity then being geared to demand at prices that reflect value for money for the consumer.