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US Service Center Steel Buying Continues to Sag

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Nov. 30 2015, Updated 1:06 p.m. ET

Service centers

Metal service centers acquire primary metals such as carbon steel, aluminum, stainless steel, brass, copper, titanium, and alloy steel from metals producers. Metal producers process the metals to customer specifications. Service centers act as a bridge between metal producers and end consumers.

According to estimates, service centers supply more than a quarter of the total steel consumption in the United States. This makes them an important distribution channel for steel companies such as U.S. Steel (X) and AK Steel (AKS). Together, AK Steel and Carpenter Technology (CRS) form ~9% of the SPDR S&P Metals and Mining ETF (XME).

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Reliance Steel & Aluminum

In Reliance Steel & Aluminum’s (RS) 3Q15 earnings conference call, Gregg Mollins, COO (chief operating officer), said, “During 2015, we have made a concerted effort to lower inventory levels, and I am pleased to report that year-to-date we have decreased our FIFO inventory by $239.8 million including a $120.5 million during the third quarter.” FIFO is defined as first in first out.

However, steel producers have been negatively impacted by the service center inventory destocking activity. Let’s see how.

Destocking activity

According to data compiled by the Metals Service Center Institute, metals service centers had ~8.9 million tons of steel inventory as of October 31, 2015, the lowest since July 2014. Steel companies were banking on a possible restocking activity in 2H15. However, the opposite seems to be happening, and service centers are cutting inventory levels more.

Lower steel demand from service centers is negatively impacting steel companies’ shipments. Almost all steel companies expressed concern over the lower service center buying activity during their respective 3Q15 earnings call. Less steel buying by service centers has only added to the already negative sentiments in the steel industry.

In the next part, we’ll look at the recent trend in spot steel prices in the United States.

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