Any discussion of steel markets must include imports. Domestic demand has slowly increased in most market segments, but competition from low-cost countries continues to put downward pressure on domestic market prices.
(Everything you really need to know about metal market pricing in four minutes or less)
Thought for the Quarter: Imports could present increased risk to asset-based lenders
Any discussion of steel markets must include imports. Domestic demand has slowly increased in most market segments, but competition from low-cost countries continues to put downward pressure on domestic market prices. In addition to lower labor cost, and direct and indirect subsidies, the rising value of the U.S. dollar compared to most currencies provides a cost advantage to foreign producers.
Imports of steel products totaled $31.4 billion in the 10 months ended October 2014, representing an increase of approximately 29% compared to the $24.4 billion of imports in the 10 months ended October 2013. The largest exporters of steel goods into the U.S. include Korea, Brazil, Russia, and China. Trade cases seem to be ongoing ceaselessly against oil country tubular goods (OCTG) last-year bars, hot-rolled coils, and cold-rolled coils; yet, the tide of imports never seems to slow. High value-added products provide greater opportunities for a low-cost country to produce and export into the U.S. market. For example, there is a greater advantage for OCTG pipe produced from hot-rolled coil, rather than it would be for the coils themselves. Likewise, Chinese producers have better advantage shipping light-gauge, galvanized cold-rolled coils into U.S. markets than they would exporting hot- or cold-rolled coils.
The U.S. importers of these products hope to increase profits or expand sales by undercutting competitors using domestically produced goods. These same importers face increased risks. Lead times for imported goods could be twice that of domestic producers; actual delivery dates are historically unpredictable. As such, importers need to carry domestic inventories as safety stock in case imported goods arrive late. The result can be a “boa constrictor effect,” which is to say a massive meal of inventory when the imported products finally arrive, swallowed all at once, and slowly consumed over time. On such occasions, importers may see increased inventory resulting in slower turnover.
Long lead times also steer toward price and demand risks. By the time the steel arrives, domestic market prices might have decreased, reducing the anticipated cost advantage and negatively affecting margins and recovery rates in the event of a liquidation. Long lead times also decrease an importer’s ability to react to changes in consumption rates. More than one importer has seen low-cost goods arrive after market demand has peaked.
If your clients are importers of steel, stainless steel, aluminum, or other goods, special attention might be needed to weather the rough seas imports could face. Hilco can help navigate through these sometimes treacherous waters.
Metals Products Summary and Expected Changes to Gross Orderly Liquidation Values (GOLVs)
(the One-Minute Metal for the really busy)
| Metals Products Summary and Expected Changes to GOLVs |
| Product Type | Market Price Outlook | Market Drivers | Expected effect on GOLVs |
| Steel Coils and Sheets | Decreasing | Prices in the fourth quarter of 2014 were at their lowest levels of the year due to high inventories, decreasing mill lead times, high import levels, and decreasing raw material prices. | Decreased values |
| Pipe and Tube | Increasing | Prices peaked in the October/November 2014 period, and then trended downward; inventories remain high, drilling activity and permits are decreasing, and imports are decreasing slightly, but remain high. Declining coil prices contribute to decreasing pipe prices. | Decreased values |
| Steel long products (Beams, Bars, and Structural) | Flat to slightly increasing in certain products | Prices stayed relatively flat throughout 2014 as the economy slowly strengthened, but decreasing raw material prices and low-cost imports continue to supply downward pricing pressure. | Slightly decreased values |
| Aluminum Plate, Sheet, Bars, and Extrusions | Increasing | London Metals Exchange (LME) Aluminum values and the Midwest Premium have both trended upward throughout 2014. After an extended period of increases, LME warehouse stocks peaked in July 2013 and have since trended downward. | Increasing values |
| Copper Products (all) | Decreasing | Copper averaged $3.34 per pound in January 2014 and $2.90 per pound in December 2014, representing a decrease of approximately 13%, with prices continuing to trend downward. | Decreasing |
Steel Products
In all categories (sheet, pipe, plate, and long products), foreign imports remain at high levels; these include Chinese cold-rolled and galvanized coils into the West Coast, Korean pipe into the Gulf Coast, and plate and long products from a variety of sources across the country. Recent U.S. trade cases placed tariffs on certain goods, but failed to stop the flood.
For More information contact:
Michael Sullivan
Senior Appraiser
Hilco Valuation Services
msullivan@hilcoglobal.com