Volatility challenges small US steel distributors

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Small and regional steel service centers are worried about surplus capacity, fierce competition and price volatility, according to a wide-ranging AMM survey of service center sentiment. National distributor chains are somewhat less anxious, although they do acknowledge a slight slowing in activity. “Business has truly slowed down. If not for automotive, it would be really bad,” said the owner of a midsize chain of flat-rolled warehouses. “Inventories are building and prices are collapsing like a deck of cards, with mills fighting like crazy (for orders).”

Although numerous buyers have decried additional output since last year from RG Steel LLC in Sparrows Point, Md., the distributor said that the many flat-rolled producers who operate at 80-percent capacity share the blame. “The big guys have to take out capacity but won’t do it for fear of losing market share,’ he said. “There are holes in the order books for June and July. Even if the price falls, will service centers really buy?”

The president of a Midwest regional chain agreed. His company created pricing models back to 1980 and found that today’s pricing cycles are three times more volatile than in the past.

“We have a customer base that has yet to recognize the increased volatility and the risk we take,” he said, adding that producers have failed to protect distribution—which is up to 40 percent of mills’ customer base—from such gyrations. “In the next 30, 60 or 90 days, (the volatility) will be no different than before—we lost $90 a ton in two months. The industry needs to … recognize how significant it is.”

A trio of national service center executives said they noticed activity slow from a very strong first quarter. “I don’t think the market is completely bad,” said a chief executive officer based in the Southeast. “Service center shipments are a proxy for activity at the end-user level. (End-users) are producing, but they are not replenishing (steel) as quickly, which means service centers suffer. The bright side is that activity at end users is very attractive.”

A national long products distribution executive said that second-quarter orders are below expectations, resulting in “inventories being pretty robust,” although he projects a pickup this month before the typical summer slowdown.