Final Thoughts

Written by Michael Cowden

I don’t want to lead prices down, but I don’t think it’s any secret at this point that sheet prices are falling fast.

“The prophecies have been borne out,” is how one mill executive put it.

What does that look like in practical terms? Some mills are offering hot-rolled coil at about $1,200 per ton ($60 per cwt). And you don’t have to be a huge buyer to get that price.

To put that in perspective, I had some contacts saying that the price SMU published on Tuesday evening was too low and that anything below $1,350 per ton was not representative of the broader market.

Today, I have contacts – including mill sources – saying that prevailing prices are in the low $1,200s per ton. And some buyers are pretty sure they could get a price in the high $1,100s per ton if they pushed for it.

The debate now is whether prices in the mid/low $1,100s per ton are representative of the broader market. Is that “whisper price” available only to very large buyers or is it a number only available from mills north or south of the U.S. border?

It almost doesn’t matter. This week’s rumored price is often next week or next month’s actual price – especially when the market is moving up or down fast.

Why are things moving so fast?

“It’s crickets. No one is calling for a spot price because they have their contract to fulfill, and they are nervous about committing tons against a contract with a falling CRU price,” another mill exec said.

In other words, customers are placing only the minimum amount of tonnage required under the terms of min-max contracts linked to CRU’s HRC index. (Full disclosure: CRU is our parent company. But SMU and CRU have different pricing methods and conduct our pricing separately.)

I talked to a service center facing just that predicament. His company has to buy a certain amount of spot steel to operate. But it is also facing the reality that material bought just last week is worth nearly $150 per ton less today. And so he is trying to buy as little spot tonnage as possible, instead chewing through inventory or buying from other service centers. “They (mills) had so much discipline going up. But when it turned down, they all scattered,” he said.

To be fair, It’s hard to see why mills wouldn’t break ranks with lead times short and orders taken at current numbers still wildly profitable compared to any year but 2021. Why leave money and market share on the table? So the question of short-term direction, the next couple of months, isn’t that much in doubt.

The harder question is where things will be by the end of the first quarter. Recall that this time last year, people were saying that prices above $1,000 per ton weren’t sustainable. But then a cold snap in Texas and northern Mexico led to widespread outages and sent prices soaring upward again. By the end of June, SMU’s price was at nearly $1,800 per ton and on its way to nearly $2,000 per ton.

We all know the downside risks in the current market. Imports are high, inventories are high, and new capacity – despite protracted delays – is coming online.

But you can take it to the bank that imports will be lower in future months. The tonnage coming in now was bought last year when U.S. steel prices were still at or near their highest point ever. Every import ton bought was a winner.

That’s not the case more recently. Mills will charge the highest price they can for spot orders on prevailing lead times. But I know of cases where a mill will agree to a lower price at a future date if that price would convince a buyer not to buy imports. Is that a spot order? Not necessarily. But it is a real price.

And so I assume that imports will be a lot lower in July than they will be in February and March. But that doesn’t save us from a potentially messy first quarter.

“There is this transitionary period that will keep inventories at a higher level than current demand can support, so prices will keep going down until we reach that balanced point,” the first mill executive said.

In other words, U.S. prices will normalize with those in the rest of the world. And domestic prices could well move lower than prices abroad given new capacity and our tendency to overshoot global prices on the way up and on the way down. (Recall that in August 2020, U.S. prices were below those in China.)

But let’s not become so obsessed with the week-over-week declines that we lose sight of reasons why steel prices might not fall as far as they have in the past.

Yes, our average HR lead time is below four weeks. (And I’ve had sources tell me lately that they can get hot band at a lead time slightly less than two weeks.) The last time our average lead time fell below four weeks was August 2020, when prices hit what turned out to be a low for the year at $440 per ton. That’s not possible today with prime scrap now worth more than coil was then. In short, raw material costs – despite prime scrap falling $60 per gross ton in January – remain higher than they were.

Also, keep in mind that December is when service center inventories tend to peak. Then they’re typically drawn down significantly, by about 10 days, in January. And that’s true, it turns out, even in a pandemic year. We went from 63 days in December 2019 to 53 days in January 2020. And we went from 51 days in December 2020 to 40 days in January 2021. Will we drop from nearly 64 days in December 2021 into the mid-50s in January 2022, or will inventories continue to stack up? If the latter is the case, then I’d start to worry.

But demand should be OK. Both Nucor Corp. and Steel Dynamics Inc. (SDI) reported that nonresidential construction demand remains firm. Oil prices are nearing $90 per barrel, and the rig count is up. Meanwhile, with coil prices falling, some companies are shifting away from seamless oil country tubular goods (OCTG) and back toward welded product – a trend that should bolster coil demand. (Product substitution might not be a friend for plate prices. But more on that on another day.) And I know you’re tired of hearing about it, because the mills have been saying it for a year now, but what if automakers finally get the chip situation under control and pull more steel?

Finally, what about increasing tensions between the U.S. and Russia over Ukraine? We’re not going to hazard a guess where that one is going – because I’m not sure that anyone outside the White House and the Kremlin really knows. But I think it’s fair to say that a conflict would drive energy prices higher, might make getting slabs from Russia more complicated for re-rollers, and could also reduce pig iron supplies – which would drive up prices for prime scrap.

You get the picture. I’m not saying that’s going to happen. The point is, prices won’t go down forever. Just when everyone throws is the towel on steel prices is usually when they come roaring back.

By Michael Cowden,

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