Final Thoughts

Written by Michael Cowden

I decided to take a break from prices and survey data today to check in with a few trusted mill and service center executives.

Each had their own take on the market. But there were a couple of common threads. First, the war in Ukraine is still driving the steel and metals markets – even if we’ve all gotten used to that reality by now.

Second, this remains the craziest market anyone can remember, even compared to the drastic moves following the initial outbreak of the Covid-19 pandemic.

“The drop at the beginning of the year was crazy, just how fast it was,” one service center executive said. “Then you have a war break out and it immediately flips – and now it’s going up faster than it did on the way down.”

There was a prevailing assumption that HRC was going dive into the $800s per ton ($40s per cwt). Few people expected to get there in February. But it would have if not for Russia’s invasion of Ukraine, he said.

And it’s not just steel that went nuts. The LME halted nickel trading. Equity markets soar and commodity prices crash one day on news that Russia and Ukraine might be making progress in negotiations. And then the script flips the next day when fighting resumes.

On top of it all are the supply chain issues that have been weighing down markets for the last two years – chip shortages, labor shortages, exploding freight rates.

All of it has overshadowed what ordinarily might still have been the talk of the industry: Cleveland-Cliffs transforming from an iron ore miner to the largest sheet supplier in the US – and one buying up captive scrap assets too. “That was a monumental, generational shift. And it has been totally overshadowed and underappreciated,” the service center source said.

If there is a silver lining from the last two years, it’s that most businesses and most businesses leaders have become more nimble and more adaptable. “We’ve all learned to hit curve balls. If you don’t, you’re going to strike out every time,” he said.

A mill executive questioned whether the better analogy might be hitting a 100-mph fast ball. Because there is nothing curvy about the way steel prices are going in the short term in his opinion – straight up.

Futures markets might have taken a pause. He doesn’t see why they should. “The pig iron supply from Ukraine and Russia is not going to magically come back,” he said. “And the mills aren’t going to give up on these higher prices when they are paying $800-900 per (gross) ton for scrap.”

And scrap is unlikely to lose much ground much in Q2 with automakers again struggling with chip shortages, something that will slow both vehicle production and prime scrap generation, the mill source said.

Also, producers are seeing little resistance from buyers to higher prices. “We’re seeing stable demand and increased buying,” he said. “They are not buying because inventories are low or demand is fantastic but because they are confident that prices are going to continue to go up. … And a deal now is better than one a week or a month from now.”

A second mill exec, whose company sells a lot into building products, said demand was a lot better than stable and has been “stratospheric” in his company’s recent experience. Yes, that’s partly because construction season is in full swing, he acknowledged. Are there warning signals? Yes.

But he brushed some of those aside. Case in point: The severe Covid outbreak in China could dent demand there now. Beijing, however, has a history of providing aggressive stimulus to offset the economic impact of Covid lockdowns – which should bolster demand later. Could inflation cause a recession in the US? Perhaps. But the reality on the ground feels different.

“There is a lot of caution – I see the warning signals, people tell me about warning signals – but day-to-day activity, even going forward 3-6 months, I don’t see any problems here,” the second mill source said.

A third mill executive wasn’t so sure. Prices in the US continue to rise and are now in the same ballpark as European tags. But the situation in Europe is not as clearcut as the one in the US. Some EU mills are cranking up production, but others are holding back, he said.

The war in Ukraine is also very real in Europe, not just a matter of rising pig iron costs. He noted that he’d received emails from colleagues in Ukraine who were leaving their jobs to fight. And that’s happening not only at steel mills but at parts manufacturers as well. (Good luck finding wire harnesses.)

Such issues will only cause more problems for supply chains already stretched to their breaking point. The war in Ukraine could be especially problematic for automakers in Western Europe, which rely on suppliers in Eastern Europe much as vehicle producers in the U.S. rely heavily on suppliers in Mexico, the third mill exec said.

He predicted that the situation might come to a head within in the next six weeks, perhaps as soon as late April. “All those orders that were placed (by automakers) for steel might not be needed,” he said.

The EU TRQ was barely used in Q1. And it’s unlikely that it will be fully used in Q2 either. What about Q3? In the meantime, some mills are learning to run their casters full to make their own slabs as they learn, day by day, to get by without Russian supplies, he said.

By Michael Cowden,

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