Final Thoughts

Written by Michael Cowden

Is this the week that prices bottomed, or do we still have room to fall?

If you think ~$600 per ton ($30 cwt) is the bottom, you might point to some positive big-picture developments: strong energy prices, moves by China to prop up its property sector, or the weakening of the US dollar.

You might also note seasonal factors. Scrap prices typically improve over the winter months, lead times are getting ever closer to 2023 – and so once we cross into January, there will be more spot activity.

Some in the bullish camp note that activity has improved noticeably in the last week or two and that some customers who had been biding on the sidelines are coming back into the market to sign contracts or to inquire about spot tons.

That bullish camp thinks the conditions are ripe for a price increase, and some predict price hikes could come as soon as next week. This could in theory create a virtuous cycle of more buying, longer lead times, and higher prices heading into the first quarter.

Frankly, I’m always suspicious of price hike rumors. They’re sometimes true. They can also be used try to get buyers off the sidelines.

If price hikes are announced, then it becomes a question of whether the fundamentals (and/or market psychology) support them. Or whether it’s just an attempt to slow the price slide. You know, the old, “Let’s see if this sticks.”

Let’s consider the bear case now. Folks in the bear camp will probably note that some mills have lead times as short as three weeks. You’re not in a good position to enforce a price hike if you’re chasing tons. They think it’s premature to talk about price hikes.

They might also note that demand in their sectors – perhaps ones more exposed to construction or consumer end markets – is uneven at best. Their fear is that things could get worse should the economy tip into recession.

The bear camp might agree that this is the time of year is when you tend to see the market rebound. But they might also point out that increased activity is usually accompanied by a flurry of inquiries. And their phones and inboxes are suspiciously quiet at the moment.

What I find interesting is that both sides are quasi-obsessed over whether HRC prices will or won’t fall below $600 per ton.

On the one hand, I find these sorts of discussions to be at best a distraction. You had some big mills and buyers earlier this year saying that HRC prices would never fall below $800 per ton again. I also recall people telling me in January 2021 that HRC prices could never hold above $1,000 per ton.

On the other hand, the debate around whether prices will fall into the $500s per ton is more serious. I can see why most people will tell you that prices will never fall below $600 per ton.

Let’s say you’re a really, really big buyer. You might have bought tens of thousands of tons in August/September in the $600s per tons. It might not be welcome news that someone buying far less can now secure a similar price. And for some mills, is it possible we’re getting close to breakeven?

To some extent, we already know the answer to the $600-ton question. Contract prices are often done at a discount to prevailing spot indices. Let’s say spot prices minus $40 per ton for the sake of argument. We’re at $630 per ton on average. Which means that even if spot prices are at a bottom, contract prices could easily dip into the high $500s per ton.

I’ve been asking around lately about what breakeven on HRC is for US sheet mills. I’ve got numbers ranging from ~$520 per ton to as high as $590 per ton. The range is probably to wide to be useful. And to be fair, it’s not really a fair question to ask. The US steel industry in general might be ~70% EAF based. But when it comes to sheet, integrated mills have a much larger presence. And so breakeven from mill to mill can vary widely.

Keep in mind to, too, that some EAF producers probably have raw materials that were purchased at the height of the market frenzy following the war in Ukraine. If that’s the case, current scrap prices might not reflect their costs.

That said, an old rule of thumb used to be that prime scrap plus $150 per ton was breakeven for EAF sheet mills. That rule might no longer hold. But it’s interesting to consider. Because it would imply an even lower breakeven price than the numbers I’ve heard.

Long story short, if there is a price increase next week, it might be because the conditions are right. It might also be because some mills are close to needing it.

By Michael Cowden,

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