Final Thoughts

Written by Michael Cowden

What’s perhaps most shocking about Cleveland-Cliffs starting the week up $100 per ton ($5 per cwt) on sheet and targeting $1,200 per ton for hot-rolled coil (HRC) is that many of you didn’t find it shocking.

In early February, we got used to prices going up by $50 per ton from one week to the next. Now, it seems, we’ve gotten used to prices going up $100 per ton on a weekly basis.

I recall one executive at an overseas mill telling me that humans can get used to just about anything in a month or two. He was speaking about operating steel mills in a warzone. But apparently it’s true when it comes to prices as well.

Our hot-rolled coil price now stands at $1,115 per ton on average, up $290 per ton from mid-February and up $380 per ton from mid-January. Many market participants think there are few impediments to mills reaching target prices of $1,200 per ton or more.

It’s not just prices that have changed quickly. So, too, have expectations. In mid/late January, no one responding to our surveys thought HRC prices would rise above $900 per ton. In early February, only 5% thought they would. By early March, 55% thought $1,000+ was in the cards. I’ll be curious to see where people think HRC prices will go when we release our next market survey results on Friday. 

No doubt this won’t last forever. Spring maintenance outages will be completed. Imports will eventually be a bigger factor in the market, although exactly when is hard to say. My point is this: Prices have gone up mostly on a supply squeeze. And assuming demand remains steady and supply increases, prices will come down.

But it’s hard to see that happening in the short-term for the factors that I’ve written about here and that many of you are all too familiar with: production problems at AHMSA, new capacity being slow to ramp up, congestion related to the Phoenix Services bankruptcy, sharply higher scrap prices, etc., etc.

When do prices come down and back to normal levels: Is that Q2 or Q3? And what is normal (i.e., cost plus) given elevated scrap prices?

It’s also worth noting here that mill capacity utilization has been low. It’s been hovering around 75% for most of this year, according to figures from the American Iron and Steel Institute (AISI). It’s been that way even as HRC prices have soared into four-digit territory. That’s a departure from past upcycles.

Capacity utilization was at 81.9% last April as HRC prices approached $1,500 per ton in the panic following Russia’s invasion of Ukraine. It was at nearly 85% in August 2021, when market participants were speculating that HRC might hit $2,000 per ton in the snapback in demand following the initial outbreak of the Covid-19 pandemic. Will capacity utilization continue to move higher? And if it doesn’t, why not?

There is some integrated capacity that could in theory be restarted. With prices this high, why hasn’t it been restarted? Is it because restarting an idled furnace takes time and costs millions, and mills don’t see the current price spike lasting more than a few more months?

I know some of you think that the sheet industry is more consolidated and so is limiting production to increase profits. But the same consolidated sheet industry last fall chased HRC prices down nearly to breakeven.

Is it because EAF sheet mills are concerned that increasing production could increase demand for prime scrap – and that prime scrap, already expensive, could become prohibitively costly? Is it because the industry somehow doesn’t know how to ramp up new capacity anymore?

As for prime scrap, why is it so tight? Is it because automotive production has come down? Domestic auto production was 137,400 in January 2023, down nearly 15% from 160,800 vehicles in October 2022, according to figures compiled by the Federal Reserve Bank of St. Louis. (And automakers obviously aren’t going to make more passenger vehicles just because mills need more of their waste.)

Is it because of knock-on effects of the devastating earthquakes in Turkey and a sooner-than-expected resumption of production at Turkish mills? Or is it because of reduced production or availability of prime scrap alternatives such as DRI, HBI and pig iron?

I’d be curious to hear your thoughts. In the meantime, thanks to all of you from all of us at SMU for your continued business.

SMU Events

Consider registering for our Steel Hedging 101. We’ll be holding the event live in Chicago on April 26 and live in Pittsburgh on June 20. It’s a great overview of the hedging tools that can help you navigate today’s more volatile steel markets. You can learn more about Steel Hedging and register here.

Also, don’t forget to register for Steel Summit, our flagship event and the largest flat-rolled steel conference in North America. You can learn more and register here.

Steel Summit is Aug. 21-23 at the Georgia International Convention Center in Atlanta. We had nearly 1,300 people attend the event last year. We expect at least that many again this year.

Keynote speakers this year will include Cleveland-Cliffs chairman, president, and CEO Lourenco Goncalves; ITR economics president Alan Beaulieu; Gene Marks, president of The Marks Group PC; and Barry Zekelman, executive chairman and CEO of Zekelman Industries. We’ll be announcing additional speakers in the weeks ahead.

By Michael Cowden,

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