Steel Market: Worrisome Trend Develops

Driven by flat-rolled, June inventories jump 6%, to the highest tonnage level since March 2009.
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MSCI just-released monthly steel inventory/shipment data showed a worrisome 5.9% increase in monthly inventory tonnage and a jump to 2.5 months' supply (adjusted), the highest tonnage level since March 2009. The increase was almost entirely driven off of the flat-rolled market, where inventories rose 9.2% to the highest level since January 2009.

Average daily shipments in June rose 0.5% overall, bucking the normal seasonal trend of a decline averaging around 2%. Other products that showed far healthier inventory behavior were plate, where inventories were up a modest 1.6%, bar, up 2.8% and beams, which declined 0.8% in the month.


Metals Service Center Inventories data was just released and while shipments, on an average daily basis (adjusted for two more days in June than May) increased 0.3%, inventories, on a tonnage basis, jumped 5.9% to 7.378mt, the highest level since March 2009, and the steepest increase of the cycle thus far.

The jump in inventories is consistent with recent increases in "apparent consumption" in the March-May time frame, which bumped up close to the 8mt/month level, or pre-recessionary levels. This trend is not good because "apparent consumption" actually includes steel put into inventories, so "real" consumption is lower and we see a period of destocking for flat-rolled in the coming months. That meas "apparent consumption" will drop more meaningfully because of the need to cut inventories.

It's also disconcerting that flat-rolled inventories continued to rise despite declines in flat-rolled prices; in recent years the market has been far more responsive to quick price changes like this.

The inventory bump is also masked by the extra days in June. With two more days, the reported months' supply of 2.3 would be adjusted up to 2.5 months' supply -- the highest level since fourth-quarter 2009.

The bulk of the inventory bump was unsurprisingly in the flat-rolled sector, where inventories saw a 9.2% pickup to the highest level since January 2009, while shipments rose a modest 0.5% from May. Inventories also rose 1.6% for plate where shipments rose 1.4%, and 2.8% for bar, where shipments rose 0.8%. Inventories saw a decline of 0.5% for pipe & tube and a 1% decline in shipments; likewise, beam inventories dropped 0.8% and shipments dropped 5%.

Michelle Galanter Applebaum spent more than 20 years as a managing director at Salomon Brothers in New York and was the No. 1-rated steel analyst from 1988-2003, according to Institutional Investor magazine. In 2003, Ms. Applebaum formed Steel Market Intelligence, a 5-person Chicago-based equity research boutique providing advisory services to institutional investors. In addition to publishing 10-15 reports/week, Ms. Applebaum sponsors numerous CEO-level meetings for her investor clients during the year. She is regularly quoted on Bloomberg, Dow Jones, The New York Times and makes frequent appearances on CNBC and other news programs. Ms. Applebaum lives near Chicago with her husband, visiting children and 2 dogs.