Distribution Outlook
Monday | 08 April, 2019 | 11:29 am

Reading the market

Written by By Corinna Petry

Gross domestic product growth in the U.S. is expected to slow to about 2 percent this year and next, according to an IHS Markit economist.

Manufacturing, energy, construction activity continue to spur steel demand, while pricing stabilizes after turbulent year

April 2019 - An industrial outlook report from consultancy Deloitte indicated that finding balance this year and next may be delicate. “On one hand, manufacturing is firing on all cylinders: output is humming, capacity utilization is up and many manufacturers are performing solidly. On the other hand, trade tensions lurk in the background and supply chains are straining to keep up with demand, while skilled talent is in short supply and threatening to derail industry’s momentum.”

Manufacturers surveyed by the Federal Reserve in January indicated that activity had expanded but that growth had slowed, particularly in the automotive and energy sectors. The majority of respondents reported moderate increases in prices, especially on raw materials and freight, and several cited ongoing tariffs as a factor.

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Demand has not fallen off, some service center owners say, when discounting seasonal factors.

The Institute for Supply Management’s manufacturing Purchasing Managers Index remained in positive territory for the 30th straight month in February.

U.S. economic growth, as measured by gross domestic product, “is forecast to slow to roughly 2 percent over 2019 and 2020, as the boost from fiscal stimulus first peaks and then fades,” IHS Markit Chief U.S. Economist Joel Prakken said March 7.

The last quarterly survey of Original Equipment Suppliers Association members, an automotive industry group, had a negative reading of 39 on an index where 50 is neutral.

“Concerns remain over supply chain risks, higher commodity prices, the impact of Section 232 and Section 301 tariffs, as well as policy and implementation uncertainty surrounding the new USMCA accord,” Mike Jackson, OESA’s executive director for strategy and research, said of the finding.

Service centers are not seeing a lot of negativity expressed by customers but there are issues they’ve got to work on through 2019.

“I think a lot of us are facing a hangover from the bubble,” says Jeremy Flack, CEO of Flack Global Metals, Chicago. “There is still a lot of high-priced inventory out there,” purchased at the peak of 2018. “We still have some and are working to reduce it. Unless people are managing with voodoo accounting, I would guess that many are facing pretty significant write-downs.”

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First-quarter flat-rolled imports, he says, are “down by big staggering numbers,” meaning that tariffs are having an impact. “Take the world export price for coil. With the tariff, freight and insurance, the pricing is about the same as domestic coil, so there is little incentive to buy foreign coil.”

That, says Flack, gives domestic mills traction and success with raising prices this quarter. “Demand has not fallen off. Everything is growing except automotive. Oil country is good; the construction market is decent.”

Erosion stopped

At Chicago Tube and Iron, Romeoville, Illinois, President and CEO Don McNeeley says domestic hot-rolled coil prices rose by about $11 during the first week of March. “Sitting at $690 a ton, that’s probably a good number for the foreseeable future.” He cites rising iron ore and scrap costs as creating an underpinning for higher steel pricing. Mill price increase announcements “retard erosion,” he adds. On the demand side, “we are finding confidence among our customer base.” Although he sees good levels of capital investment there, “we haven’t gotten the infrastructure spend yet.”

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Keith Sabel, president and CEO of Sabel Steel, Montgomery, Alabama, says poor weather has slowed deliveries to scrapyards and shredders have been too frozen to operate. Tons sitting at ports have been pre-sold, so they won’t be coming inland. “People I talk to in the Midwest—forget it, they don’t have the material.” He believes a $20 increase will stick in the short term and will be adjusted again when the weather breaks. He notes that steel operating rates are high, seasonally, which creates the demand for scrap.

Prices on beams, sheet, tubing, merchant flat bar and rebar are all up $20 since February, says Sabel. “Plate is still not priced where it ought to be. Of all of our inventory items, plate is the slowest to move out.”

Of demand, he says, “Our customers’ factories are still running very well. Our weak spot is the fabricators for commercial and government construction. Some fabricators are busy while others are sleeping. It’s sort of hot and cold.

“Service center inventories are still only at two months,” Sabel says, so purchasing has been kept tightly in line with incoming orders. “There is not much visibility” past first quarter in terms of volume requirements so mill buys will likely remain conservative.

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Mill price increase announcements tend to stop erosion of existing spot pricing.

“Business is very good. January and February were good months for us. The second quarter should be big,” says Pat Notestine Sr., president and co-owner of Custom Steel Processing, Madison, Illinois, adjacent to the Mississippi River. “We aren’t getting any imports for the last six or seven months. In this town [the greater St. Louis area], we are not seeing it.”

Domestic supply is robust, however. “We get a lot of barges from Nucor [Blytheville, Arkansas] and Big River [Osceola, Arkansas] and folks like that. [Steel] traffic on the river has been excellent. With just those two mills, they are barge after barge after barge. And it’s a lot cheaper than buying from landlocked mills in Gary and Burns Harbor,” Notestine says.

Not everyone experienced higher orders in the first two months of the year. “In January and February, we were on the slower side,” says Bill Feniger, president of Universal Metals LLC, Toledo, Ohio. He points to “some disgruntlement, based on confusion about where we stand. Demand is still there but people are buying less inventory.

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Seeking confidence

“We are waiting for positive things to get back where we were in 2017 and 2018. I am convinced that as things settle out in trade, with Canada, Mexico and China, buyers will get their confidence back.”

Regarding tags, Feniger says, “The price increases announced by the mills stopped any slide. We need to keep prices at the 33, 34- and 35-cent range [$700 per ton] for hot-rolled. That succeeded. The question is, where do we go from here?”

For service centers, he says, “It is hard to get margins with extra steel laying around.”

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At Liberty Steel Products, North Jackson, Ohio, “As far as we are seeing and customers are telling us, demand still relatively stable and up a little bit this year from last year,” says Joe Wilson, vice president of sales–building products.

“Over the last six months, pricing was sliding downward. We are at the point of matching this point last year. But now that will start to pick up. The spread between domestic and imports is not very large, so we expect fewer imports coming in through second quarter.” And as domestic capacity utilization “ramps up to 81 percent,” he expects an uptick in spot market prices.

“The economy and demand are strong,” Liberty Steel President Jim Grasso adds. “There are a lot of drivers to provide consistent demand.” MM

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