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Why Service Center Activity Is Crucial for Steel Companies

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Service center activity

Metals service centers acquire primary metals such as steel, aluminum, brass, and alloy steel from metals producers (AKS). These service centers act as bridges between metals producers and end consumers.

According to estimates, service centers supply more than a quarter of total steel in the United States, making them important distribution channels for steel companies such as ArcelorMittal (MT), U.S. Steel Corporation (X), and Steel Dynamics (STLD).

Service center steel shipments rose 9.7% year-over-year in March 2017. Higher shipments suggest strong underlying domestic demand.

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Inventory continues to fall

Meanwhile, while service center shipments rose, inventory levels fell in March. According to the Metals Service Center Institute, at current shipping rates, the service center steel inventory represents two months’ worth of supply. Sheet product inventories are even lower.

Speaking of low inventory levels, Nucor’s (NUE) CEO, John Ferriola, said during the company’s 1Q17 earnings call, “Frankly, I can’t remember the last time they were that low.”

Destocking

Low supply chain inventories bode well for US steel companies, who are expecting a restocking this year after two consecutive years of inventory destocking. However, with US steel prices at a substantial premium to international steel prices and expectations of a downward correction in steel prices in 2H17, service centers don’t seem to be in a hurry to replenish their stocks. Meanwhile, service centers could also look at foreign steel companies to take advantage of widening price spreads.

Over the last few quarters, scrap pricing has impacted service centers’ buying behaviors. In the next article, we’ll look at the recent trend in scrap pricing and how it could impact US steel prices.

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