The Hilco Global Four-Minute Metal

(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.

Supply and demand factors, market segment strength, import volume, and other factors affect the market price of steel products, with scrap prices representing one of the major drivers. Short-term variations in scrap are absorbed into the cost of finished goods, but long-term changes in scrap pricing typically result in corresponding changes in the prices of finished products, such as sheets, coils, plate, and long products (beams, bars, and structural). Scrap prices trended downward for most of 2014. Shredded automotive scrap, one of the highest volume scrap categories, averaged $359 per ton in December 2013 and $283 per ton in December 2014. Recent market prices for scrap and scrap substitutes are shown in the chart below.

Prices for Various Steelmaking Raw Materials and Steel Scrap in the U.S. Market   (USD per ton)

Market prices for most steel products trended downward in the first quarter of 2014, trended upward in the second quarter, and trended downward again in the fourth quarter, which is a traditional period of reduced demand. As imports continued to surge, inventories increased, and raw material prices decreased. Recent market prices for steel products are shown in the chart below.

American Metal Market Prices for Various  Steel Products in the U.S. Market

Service center inventories are a barometer of the market as a whole, rising in periods of weak demand and falling in periods of increased demand. Inventories trended upward for most of 2014 and at an increasing rate in the fourth quarter. While demand remains moderately strong in most market sectors, inventories increased more rapidly than usage, resulting in an upward trend in the month of on-hand supply.

Service center inventories totaled 8.4 million tons in December 2013, representing 2.3 months of supply, and increased to 9.2 million tons in December 2014, representing 2.6 months of supply. Demand dropped significantly in November 2014, as service centers, distributors, and fabricators reduced purchases in anticipation of lower market prices in the first quarter. Recent inventory trends are shown in the chart below.

U.S. Service Center Months of On-Hand Inventory for all Carbon Steel Products, Based on Month-Ending Inventories and Same-Month Shipments

Stainless Steel

Unlike steel products, which have one price, stainless cost typically comprises a base price that changes slowly over time and alloy surcharges that are published monthly by the major stainless producers, and change monthly. Alloy surcharges are dominated by the cost of the three key alloys used in stainless: nickel, chrome, and molybdenum. Major producers of stainless steel, such as OutoKumpu and North American Stainless, publish surcharge tables monthly.

Like carbon steel, the recovery values for stainless products are based in part on replacement cost (“What would I pay for similar goods from the producing mills?”). Subsequently, replacement cost is based in large part on changes in the alloy surcharges. Market prices for both nickel and molybdenum increased mid-year and then decreased in the third and fourth quarters, driven by concerns in supply levels earlier in the year. LME nickel prices averaged $6.31 per pound in December 2013, peaked at $8.82 per pound in May 2014, and averaged $7.54 per pound in December 2014. Likewise, molybdenum prices averaged $9.75 per pound in December 2013, peaked at $14.73 per pound in June 2014, and averaged $9.69 per pound in December 2014. The values typically would signal a decrease in the cost of new stainless products and a loss in value of existing stainless inventories. The reverse would be true in a period of rising nickel values. The tables below show recent changes in surcharge prices and recent market prices for common stainless products. The upward trend in surcharges was driven primarily by increases in nickel prices.

U.S. Stainless Surcharges (USD per pound)

U.S. Stainless Market Prices including Surcharges (USD per pound)

Aluminum Market

Aluminum product prices in North America typically are based on the cost of pure aluminum as reported on the LME and the Midwest Premium, which accounts for transportation, warehousing and financing, and fabrication costs to convert aluminum ingots into semi-finished products (e.g., coils, sheets, and bars). Fabrication costs for common products, including sheets, coils, and extrusions, vary from $0.40 to $0.70 per pound. Certain highly processed goods, such as machined plate, are significantly more expensive than sheets and coils due to higher fabrication cost. Fabrication cost changes slowly over time, reflecting changes in supply and demand – increasing in periods of high demand and decreasing in periods of low demand. LME and Midwest Premium prices change daily, and the sum of the two numbers is referred to as the Midwest Transaction Price.

Increased demand and production curtailments in high-cost facilities contributed to improved supply/demand balance in the North American market. The transition to aluminum auto bodies on the Ford F-150 and other vehicles represents a significant opportunity going forward and might bring significant increases in demand for sheet products.

After trending downward for much of 2013, LME Aluminum prices trended upward in 2014, increasing from $0.79 per pound in December 2013 to $0.87 per pound in June 2014. In the same period, the quantity of aluminum in LME warehouses decreased from 5.4 million tons in December 2013 to 4.3 million tons in December 2014. The chart on the following page shows recent changes in aluminum pricing and a long-term increase in the quantity of aluminum in LME warehouses. Decreasing LME inventories could indicate a tightening physical market, but LME Aluminum values and LME inventory levels are both significantly influenced by financial hedging and speculation.

LME Aluminium Average Monthly Cash Price in USD per Pound and LME Inventory Levels in Metric Tonnes

In January 2014, the Midwest Premium jumped to all-time highs and has remained at or near those levels in the first half of 2014. Although historically in the $0.04 to $0.08 per pound range, the Midwest Premium averaged $0.10 per pound in 2012 and $0.11 per pound in 2013, before increasing to $0.18 per pound in January 2014 and further to $0.24 per pound in December 2014. The improvement in the LME Aluminum value, coupled with the increased Midwest Premium, resulted in a total increase in aluminum transaction prices of approximately $0.20 per pound, or $400 per ton, in the 12 months ended December 2014. Recent changes in the Midwest Transaction Price are shown below.

LME Aluminium Average Monthly Cash Price  plus Midwest Premium (USD per pound)

Copper

Similar to aluminum products, the market price of copper products in North America typically is based on the cost of pure copper, as reported on the COMEX exchange, and fabrication costs to convert copper cathodes into semi-finished products (e.g., coils, sheets, and bars). LME copper prices are driven in part by global demand and primarily by demand in China. Reduced Chinese demand has contributed to decreasing copper prices throughout 2014. COMEX spot copper prices decreased from $3.34 per pound in December 2013 to $2.90 per pound in December 2014, and decreased to $2.62 per pound by mid-January 2015 as shown in the chart below.

COMEX Copper Average Monthly Cash Price and LME Warehouse Inventory Levels in Metric Tons

For More information contact:
Michael Sullivan
Senior Appraiser
Hilco Valuation Services
msullivan@hilcoglobal.com