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Why Could Metal Service Center Buying Activity Pick Up?

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Service center buying

Lower steel buying activity by metal service centers, like Reliance Steel & Aluminum (RS), negatively impacted steel companies’ shipments in the past few months. However, we might see a short-term increase in service center steel buying.

Together, Reliance Steel and Commercial Metals Company (CMC) form ~9% of the SPDR S&P Metals and Mining ETF (XME).

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Falling steel shipments

The service center steel inventory is at the lowest levels in the past 19 months. This could lead to inventory restocking activity. As we discussed in Part 2 of this series, US steel imports fell steeply in November. Since imports came down, service centers would have to turn to domestic steel producers for their purchases. However, most US steel companies including Steel Dynamics (STLD) and AK Steel (AKS) are cutting their spot sales to service centers. They’re citing depressed steel prices.

The above chart shows the falling trend in spot hot rolled coil prices. In the US, the prices fell to $360 per short ton, according to the Metal Bulletin. Not many US steel mills can make profits selling steel at such depressed prices.

Price hikes

Several domestic US steel producers hiked their base selling prices over the past two weeks. Although spot steel prices might not rise sharply anytime soon, even a small uptick in steel prices could impact steel buyers. They have been waiting on the sidelines to order more steel. This could lead to higher steel shipments for US steel companies in the coming months.

It’s important to note that the key assumption behind this premise is that steel imports don’t rise significantly from the November levels. Another factor that could determine service center buying activity would be the underlying steel demand. Next, we’ll look at the recent US steel demand indicators.

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