'We Would Be Adding To Short Positions In US Steel, Cliffs,' Axiom's Johnson Says

Johnson cited the fact that the market has past peak U.S. HRC (hot rolled coil) prices and offered the following points:

1. Lead times to receive steel is now less than two weeks at some domestic mills versus over eight weeks just two months ago.
2. U.S. service centers shipped less than 2 million tons of carbon flat-rolled steel last month, marking a 10.4 percent decrease year-over-year.
3. Inventory of carbon flat-rolled steel is up 4.6 percent month-over-month at 4.97 million tons.
4. U.S. HRC spot prices are sitting at a premium of $279/s.ton versus a historical premium average of $127/s.ton dating back to 2008.
5. U.S. HRC spot prices are sitting at a $234/s.ton premium to Chinese prices versus a historical average of $109/s.ton also dating back to 2008.
6. U.S. HRC spot prices are sitting at a $183/s.ton premium to North Europe prices versus a premium average of $53/s.ton since 2008.
7. Based on the analyst's own proprietary analysis of spot price premiums, the weakest seasonal months are still ahead.

Related Link: Commercial Metals Steel Business Strong, But Other Divisions Holding Growth Back Says Citi

The analyst suggested that the current steel market is similar to what was seen in 2014 where:

• Step 1: Prices slowly drop.
• Step 2: Imports slowly increase.
• Step 3: Market participants are saying "don't worry."
• Step 4: Prices start to drop at a faster rate.
• Step 5: Imports increase in volume.
• Step 6: Prices begin to collapse.

Johnson stated they are now "well into step 4," and this is best emphasized by a quote from a service center issued to American Metal Market over the weekend, "There was a meteoric rise in prices, which means there is an adjustment coming. We're hoping it's not a meteoric collapse."

Bottom line, Johnson sees downside to steel prices below the $450/s.ton level before "demand catches supply."

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