Final Thoughts

Written by John Packard

A lot has happened in the world since my last article. Please bear with me as there is much to talk about.

First, my thoughts and prayers go out to the people of Ukraine, and for that matter the innocent people in Russia who want nothing to do with Putin’s war. The world order is changing, and ultimately I believe it will be for the better. The western world is galvanizing their support for Ukraine and condemning Putin and the oligarchs who keep him in power.

There is a cost to war. This war will affect the steel business around the world as both Russia and Ukraine have significant steel industries. They are the largest suppliers of pig iron and, along with Brazil, the largest suppliers of slabs for rerolling around the world. This includes slabs that were being sent to NLMK here in the United States. Last year, the U.S. received 1.42 million net tons of slabs from Russia (none from Ukraine).

I have spoken to several of my steel trading contacts in Europe, Turkey and the Middle East to get their insights into how the war is affecting business for them, and eventually what we can expect to see here in the United States.

One of the traders told me the price for hot rolled coming out of Turkey for July shipment is $65.00/cwt to $66.00/cwt CIF, USA Port in Gulf or East Coast. This is quite a bit higher than the $900 per ton we referenced as the low end of the HRC SMU price range earlier this week. The lead times out of Turkey jumped from April shipment to July just in the past five days.

Jose Gasca of Metrading mentioned last week at the Tampa Steel Conference of scrap prices into Turkey being $510 per metric ton. The most recent buy was just done within the past couple of days at $585 per metric ton, up $75 from last week. However, probably more important is U.S. scrap companies are holding back scrap as they know it will be even higher in the coming weeks.

One of my sources, who asked to only be identified as a long-term executive with global steel experience, provided the following insights about the impact this war is having on the steel industry:

“Here are my views on what we are witnessing and what may come in the near future. First of all, the steel industry is largely a flow business; in this case of Russia and Ukraine, they have hit a BRICK WALL at high speed. In contrast, the steel industry is running very well in Europe, Far East, South Asia, North America and South America. So, the 30,000-foot question is HOW WILL THE BRICK WALL HIT AFFECT THE ROW [rest of world]?

“From the north Black Sea ports (Russian and Ukrainian), the usual flow is 3 million MT per month. Some Russian ports might be ‘operable’ but maritime insurance is not available, so vessels entering and leaving are at their own peril. (And if financed by banks, forbidden). What was purchased in December and January is now “ready for shipment.” Ukrainian ports are closed by government order.

“The Russian major Black Sea port Novorossiysk is open; however, it is full of steel cargos awaiting shipment. It is usual that rail cars come in daily, and vessels are loading daily, [however] this is not occurring.

“Vessels booked have been cancelled. Today, even if financing, payment, and shipment were possible (which I believe not), any buyer would risk reputational damage by paying money to Russian producers.

“In summary, Europe/Turkey and the USA will be short of vital material and will not be able to produce what is already in the pipeline. Despite higher prices, there will be less made. Supply will be un-elastic and prices will be elastic!

“The financial markets drove share prices up on Nucor and SDI, who are dependent on imported virgin iron [pig iron or DRI], but the share price in Cliffs is only marginally up and they are 100% domestic. Maybe the market should re-think. Scrap will be on its way up to become a precious metal, especially prime scrap.

“We are possibly entering a new era of North American competitiveness due to energy prices and lack thereof in Europe. It looks very much as if the USA steel industry will have another golden year. I believe that Cliffs could export slabs and Nucor could export billets now and be competitive on the world stage!

“Prompt steel for rolling (comcast slabs and billets) are the hot products as Black Sea was the ‘go to place’ till the brick wall was hit.

“Ukraine exported in 2021 to the EU 27 a total of 6.1 million MT.

“Russia exported in 2022 to the EU 27 a total of 8.6 million MT.

“That is more than 1.2 million tons per month!  And does not include iron ore, BF/DR pellets, HBI and pig iron.

“You asked me, ‘how bad it could get?’ The steel industry will do quite well; the questions will be around increased inflation and possibly lower growth = Stagflation.”

This source then went on to say, “I started to write with lots of numbers and percentages, but this war is not about numbers and percentages. We will all have to work and think very carefully going forward. Old assumptions are OLD.  No one can really tally the effects. It will be supply chain disruption x 10 of what semiconductors have taught us.

“Steel is a flow business; it is not meant to stop flowing until it becomes FIXED, and then it will stay there for decades.

“The EU will have to cancel their safeguards in my opinion, and that will keep imports down to the USA as they will focus on Europe….”

So, no imports from the Ukraine or Russia for the foreseeable future. Europe (and probably the Middle East) will focus on Europe and will limit exports to the United States. The U.S. is quickly becoming the low-cost producer in the world. The U.S. could become an exporter to Europe if they choose to do so (and one mill told me this will indeed happen and soon).

Prices for scrap and pig iron will go much higher. This will drive prices higher from the EAF mills that tend to focus on the non-automotive commodity markets.

The war in Ukraine should be considered a Black Swan event, and steel buyers need to pay attention to world events now more than ever. There is a chance steel could become tight (again) despite SDI Sinton coming online. I would anticipate more price increase announcements in the coming days and well into the next couple of months as the impact of higher scrap, pig iron and slab prices comes into focus.

The price offer from Turkey for July shipment and August/September delivery may well be a good deal depending on what happens to prices here in the U.S.

Steel Market Update Events

We have two workshops coming up in April. One will be in person and the second will be virtual. They both will be held on the same days (April 19 & 20).

We will host our first “in-person” Steel 101: Introduction to Steel Making & Market Fundamentals Workshop on April 19 & 20. There will be a tour of the Nucor Arkansas flat rolled steel mill as part of this workshop. The location of the class will be in Memphis, Tenn. You can learn more about the workshop and costs to attend by clicking here.

On April 26 & 27, Steel Market Update will be hosting one of our virtual Introduction to Steel Hedging Workshops (used to be called Steel Hedging 101). The workshop is conveniently conducted over two half days, which allows you to perform your normal duties while at the same time learning more about how to use the futures markets to protect inventory costs, work on long-term pricing, and to hedge against risks (like a war in Ukraine or COVID) which impact steel prices. You can learn more about the agenda, our instructors, costs to attend, and how to register by clicking here.

As always, your business is truly appreciated by all of us associated with Steel Market Update

John Packard, Founder

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