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Why Service Center Activity Points to Bullish Steel Markets

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Service center activity

Metal service centers acquire primary metals such as aluminum, brass, and steel from metal producers and sell them to smaller end users. Service centers are estimated to supply more than a quarter of total steel in the United States, making them important distribution channels for steel companies like Nucor (NUE) and U.S. Steel Corporation (X). Reliance Steel & Aluminum (RS) is the largest service center in North America.

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Shipments rise

According to the MSCI (Metal Service Center Institute), service center steel shipments rose 4.3% year-over-year in January 2018. Higher shipments suggest strong underlying domestic demand. Another encouraging sign is a 6.0% yearly increase in steel inventories.

On the company’s 4Q17 earnings call, Jim Hoffman, Reliance Steel’s COO, expressed optimism about US steel demand. He said, “We are experiencing continued strength in our tolling business, servicing the automotive industry and we are pleased to see steady increases and demand for energy, nonresidential construction and heavy industry markets.”

Imports

Service centers also order steel from overseas steel companies along with US steel mills. It should be interesting to see how service centers look at their import orders after President Trump’s tariffs. Spreads between US and international steel prices have been the key driver of US steel imports. As President Trump looks set to impose a 25% tariff on all steel imports, service centers might be more inclined to order steel from domestic steel mills (AKS)(STLD).

So far in this series, we’ve looked at US steel demand indicators. In the next and final part, we’ll look at some indicators for Chinese steel demand.

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