Final Thoughts

Written by Michael Cowden

First the takeaway: Don’t overthink it on the way down.

Prices are falling, like it or not. The good thing, demand is still good – so don’t let falling prices ruin your holidays.

Now, let’s overthink it a little.

We’ve seen some chunky declines in recent weeks: SMU’s hot-rolled coil price fell $70 per ton ($3.50 per cwt) this week to an even $1,600 per ton. And prices are down $355 per ton from a 2021 peak $1,955 per in early September.

We know that some of you think an average of $1,600 per ton is too high. Others will say that a low point of $1,500 is too low – and still others will say the $200-per-ton spread between our high ($1,700 per ton) and our low is too wide to be useful.

But remember that spreads tend to balloon out when the market inflects. And there is no question which way this one is inflecting – especially when we hear chatter of deals in the $1,300-1,400 per ton range.

How can you take such chatter seriously? Well, we know there are import numbers roughly in that range. And do new mills in the U.S. and in Mexico really want to be uncompetitive with imports when they’ve advertised new capacity as being a tool to compete with foreign steel? 

In other words, if you’re looking for the floor of the current market, import prices are a good place to start.

Also, keep a close eye on the outliers. Mill offer prices tend to become widely known and widely publicized. So do smaller spot transactions. That tends to set the higher end of our ranges. Less publicized are the big, low-priced deals – maybe because they are too large to be repeatable, are on pseudo-contract terms, or are officially transacted as excess prime or secondary. Such deals might not be reported by the various pricing indices or might be discarded as outliers. But such transactions still exert a strong gravitational pull on the rest of the market.

It’s a similar story when it comes to galvanized product. There are still mills offering $2,000 per ton or more for galvanized base. We know certain EAF mills are in the mid/low $1,800s. And we also know that some larger transactions are happening in the $1,500-1,600 per ton range, even if – for some of the reasons mentioned above – we do not note those lower prices in our ranges.

How do you make sense of a galvanized spread that is theoretically as wide as $1,500-2,000 per ton? A smaller spot order for a niche on a short lead time item might cost ~$2,000 per ton. But let’s say you’re buying thousands of tons and you can leverage an import offer for galvanized product from East or Southeast Asia for late Q1/early Q2 delivery. Then your galvanized base price might be closer to today’s hot-rolled coil number.

Again, the market needs to find a floor. And right now, that floor – as best as we can tell – is being set by imports.

And keep in mind some of the things we’re hearing anecdotally. Port congestion remains a huge problem on the East Coast and on the West Coast. And finding indoor storage space is also a big problem – especially for cold-rolled and galvanized product. We wouldn’t be surprised if there is a lot of excess prime or secondary galvanized sitting outside around ports in the months ahead.

Will imports continue to set the floor? Probably. But I’d also note that the U.S. price tends to overshoot the rest of the world on the way up and on the way down.

We hit nearly $2,000 per ton in the summer of 2021. But just a year earlier, the U.S. HRC price was below Chinese prices. That didn’t make sense – it was unsustainably low – and so U.S. prices snapped back up. But it’s worth remembering that the U.S. price can, for short periods of time, be the lowest in the world.

Also, a word on forecasts: while generally correct on trend, they are sometimes too conservative both on the way up and the way down. After all, who wants to risk being off by too much? That’s a prudent approach. But when markets are moving as fast as steel tends to, caution can be reckless.

So if you see a price that seems too low, don’t immediately write it off. It might provide a better gauge of where things are headed than various forecasts and published indices. As I’ve written before, today’s outlier is often tomorrow’s price.

That’s one rule of thumb. Another is this: The most dangerous words in steel – or other commodities or investing in general – is “this time is different.” And we’ve been hearing that a lot lately.

The latest example: prime scrap prices will inexorably move higher because there will be more demand from new electric arc furnace (EAF) sheet mills at home and abroad.

That makes intuitive sense. But I think it also gives human innovation short shrift. If prime scrap prices become an obstacle to profits, mills will find a way around them – whether that be alternative metallics like pig iron or direct-reduced iron or making a rough substitute for prime scrap from shredded material. Heck, Nucor has already said it was exploring just that when it outlined the scrap sourcing strategy for its new sheet mill. (Location still TBD.)

All of which is to say that if U.S. prices crash below import prices, I wouldn’t put all my chips on prime scrap prices providing a higher floor than in past cycles.

The smart money, and the smart analysis, is there. But my inner cynic – informed by nearly 15 years covering steel and aluminum – says that it would be unwise to write off the possibility of $400-600 per ton HRC coming back into the picture.

I remember covering HRC prices in late 2014 and early 2015 for another publication. Coil prices were clearly coming down with oil prices. But a consensus that prices were in for a big correction didn’t come together until scrap prices fell sharply in February 2015.

I also remember covering steel prices back in 2008 and reading various forecasts saying that automotive didn’t really move the needle, nor did energy… I was wondering whether anything moved the needle or whether the needle might be broken.

The needle always moves, eventually. But saying exactly when is a very difficult task.

By Michael Cowden,

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