Final Thoughts

Written by Michael Cowden

I hope the balance of the year turns out to be as good as steel mill and service center executives say it will be.

I’ve covered a lot earnings reports and spent a lot of time on earnings calls over the last month. (It sometimes feels like the sun never sets on earnings season.) And a few common themes have emerged.

Companies posted record or near-record first quarter earnings, they expect the good times to roll into the second quarter, and they expect prices – even if they “moderate” in the weeks ahead – to remain well above historic levels.

It’s also a little astonishing how a silver lining can be found in even the bleakest of events – the war in Ukraine and Covid lockdowns in China, for example. They’re apparently a good thing for domestic steel markets and domestic manufacturing because supply chains will move closer to home, and high prices for raw material like pig iron will result in generally higher prices for ferrous scrap and finished steel.

Parts and labor shortages? It seems everyone is dealing with the same issues, and apparently everyone has learned to manage through it.

What concerns me is that company after company seemed not to acknowledge something basic: That shipments are down, in some cases by a lot, and that what saved the day for Q1 (and probably will for Q2 too) was higher prices.

I’ve written a lot here about prices and whether they will revert to their pre-war trajectory – namely, falling sharply. But lower prices are not so bad if demand remains intact. You could make a case that lower steel prices are, broadly speaking, good for North American manufacturing. Because lower prices for steel here would make the products we make here more competitive globally.

So back to shipments. Why are they off? And why should we expect them to improve in Q2 or 2H?

Maybe I’m missing something. But we learned from earnings calls that the chip shortage isn’t expected to be resolved this year. That infrastructure spending won’t really kick in until next year. And that people stocked up after the war, and maybe overshot the mark a little. How do any of these factors result in higher shipments in Q2 or 2H?

I keep hearing from certain corners of the market that this time is different. Those are maybe the most dangerous words in steel (or in any other industry for that matter). The logic is that steel is more consolidated now, that the major producers are more focused on profitability than on chasing tons, and that they have more leverage to negotiate with big end users such as automotive.

That might be true. The thing is, all those things were true at the beginning of this year too. And that didn’t stop prices from falling from roughly $1,600 per ton ($80 per cwt) to less than $1,000 per ton in less than two months.

Also, and maybe I’m being too cynical now, I remember hearing more or less the same arguments when I started writing about the steel industry back in 2007.

This time was different, the consensus went, because ArcelorMittal had consolidated the steel industry to a degree never seen before. No longer would mills, dependent on just a furnace or two, keep running no matter how bad demand might be.

There was logic to that position. But it was not enough to stop prices from crashing when the music stopped on demand in 2008.

I want to believe that this time is different. I really do. I’m having a hard time convincing myself that it is. The good thing is, the music has not stopped on demand. But the music is not as loud as it was. And I think that deserves more attention than it’s getting.

By Michael Cowden,

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