Metals Service Center Inventories (MSCI) data was just released and while shipments, on an average daily basis (adjusted for 2 fewer days in May than April) showed a nice 6.7% increase (vs. a normal 2% increase from April to May), inventory tons showed a commensurate jump, up some 3.6% in the month.
While months' supply seemingly increased from 2.2 in April to 2.4 in May, the increase was entirely driven off of two fewer days in the month of May, so that months' on hand, which adjusts to a flat performance, when accounting for the 2 fewer shipping days.
Flat-rolled and plate products showed the healthiest trends in the month, with shipments up 8.0% and 10.1% respectively (against an average increase of 2.7% and 3.7% respectively) and inventory in tons up 3.4% and 4.3%. It's interesting to note that both flat-rolled and plate displayed surprising weakness last month, and May data seems to have made up that problem; we wonder to what extent there might have been some spill-over in either the data or actual shipments between April and May. Beams showed the weakest trend in the month, with shipments actually declining 2.0% (with a normal trend being flat) while inventories rose some 2.6% in the month.
We think that steel prices are pausing here for a while as a result of speculative-driven weakening coming out of China and now spreading into the rest of Asia -- this coupled with all-time peak production in China and an acceleration of Chinese exports (April exports were nearly triple year-ago and first four months are double 2009 levels) could continue to pressure global steel markets and prices.
However, we believe that any weakness will be short-lived and expect to see steel prices strengthening again within the next month or two in response to the reality of far higher costs for raw materials, particularly in China. The rationale for higher pricing is profound; because China is now 60% of the global steel market, and is the region most hurt by global raw material price increases, China has created a "cost umbrella" for the rest of the world. China is able to pass through these cost increases to their highly protected market in the form of higher prices; and Chinese prices, the most-quoted in the world, have become "global reference."
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.