Final Thoughts

Written by Michael Cowden

You don’t need SMU pontificating about how the Russia-Ukraine conflict marks the end of the post-WWII order. Suffice it to say the world we woke up to today is vastly different from the one we reported on in our last edition.

We’re also getting used to thinking about things we haven’t had to think about for a while – and their impact on business models and supply chains – at an alarming rate.

2020 brought us a pandemic, 2021 gave us the highest steel prices ever, along with labor shortages and supply-chain snarls. This year brings deepening concerns about inflation, an even more tangled supply chain … and a land war in Europe.

I’m not sure I want a crystal ball to see what comes next.

But let’s bring it back to steel.

The concern of the day is pig iron. U.S. mills, especially EAF sheet mills, are dependent on pig iron from Russia and Ukraine. There are limited options besides Brazil. None are cheap

A recent cargo from Russia was priced at $610 per metric tonne cfr. Some perspective: A key raw material for making hot-rolled coil now costs more than the average selling price of coil itself in prior years.

Sure, some boats are probably already on the water, and that will buy a little time. But it’s not clear whether the cargo mentioned above will ship. And it’s hard to see much leaving Ukraine – especially with reports that a vessel chartered by Cargill was shelled.

The question then becomes whether mills can raise prices quickly enough to keep up with higher costs. That’s a novel concept in a U.S. market that has grown used to nothing but week-over-week steel price declines since last fall.

These problems are not new. Stelco warned about margins being squeezed when it released earnings on Wednesday after the close of markets. And that was before Russia attacked Ukraine.

Long story short, domestic mills now have one less lever to pull to keep a lid on prime scrap prices – which were already expected to rise as more new EAF sheet capacity comes online.

Oh, and did I mention that Russia is the sixth largest exporter of steel to the U.S., most of it slab. We’ve heard that Nucor is increasing domestic slab consumption at California Steel Industries (CSI). Nucor did not respond to a request for comment on that particular issue. But, if true, that might give some wiggle room for other domestic re-rollers to source more slab from Brazil. Even so, Brazil is subject under Section 232 – so there is literally a limit in how much Brazil can ship. And slabs – whether from Brazil or Russia – are not cheap.

Similar situations are playing out all along the metals supply chain. Russia is also a huge aluminum producer and exporter. The invasion of Ukraine by Russia sent aluminum prices to $3,449 per tonne, exceeding the prior record – set in September 2008 – of $3,380.15 per ton, according to research from CRU (SMU’s parent company).

What does that mean for steel? We’ve heard that Galvalume coating extras might go higher. We hadn’t seen any announcements when this article was published. But I wouldn’t be surprised if we do in the days ahead should aluminum prices continue to soar. (Recall that Galvalume is an aluminum-zinc coating.)

You could say that no one saw this coming. But that’s not really true. Russian President Vladimir Putin has been massing troops in plain sight for months. He has made his grievances with the West known for more than a decade. And Ukraine’s industrial heartland had been the center of a more localized conflict since 2014.

Speaking of that year, I remember interviewing former Nucor CEO John Ferriola at Great Designs in Steel (GDIS) – a great automotive conference for steel geeks like me – back in May 2014. He said at the time that Nucor’s DRI plant in Louisiana would prove to be a good investment because of the potential for political instability in Ukraine and Russia in particular.

Nucor had received a lot of criticism about the cost of the project, delays and outages – planned and otherwise. But that stuff was all temproary. Ferriola was right in the long run.

I wouldn’t be surprised if we see more domestic mills follow and invest in pig iron, DRI and HBI capacity.

By Michael Cowden,

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