Final Thoughts

Written by Michael Cowden

Hot-rolled coil prices fell again this week and now have a tenuous grip on $900 per ton ($45 per cwt).

We remain at the lowest price levels since mid-December 2020 – more than 18 months ago. What’s going on?

For starters, we know that the low end of our range might come as surprise to some of you. Keep in mind that these are deals or offers for big orders. Think thousands of tons.

We included these figures because it’s not a low price coming from just one mill. These prices are available for “big tons” from a range of mills in the Great Lakes and the Midwest.

We’ve also heard similar numbers available from Mexico. Keep in mind that our methodology means that we do not include pricing out of Mexico – although those numbers do ultimately impact domestic prices.

And with prime scrap down as much as $150 per gross ton, it seems reasonable to expect that prices will fall into the $800s per ton. Costs are lower, mills are still profitable at current prices, so there is still (for now) little incentive to idle capacity.

There has been some speculation that mills will “draw a line in the sand” at $800 per ton. That could mean idling capacity, scaling back output, or taking extended maintenance outages. These are typical levers to pull to try to buy time. And they can help to reduce supply.

The problem is demand. We’re told lead times are approximately 3-4 weeks for hot-rolled coil. Buyers are buying only as needed, and some tell us they don’t need anything until late August – beyond current lead times.

“I don’t see how it goes up when nobody wants to buy,” one a Midwest service center executive said. “The mills are all desperate.”

That sentiment was echoed by other sources, some of whom reported receiving unsolicited calls from mills. The prices those mills were offering might seem attractive, but they weren’t enough to get most buyers off the sidelines.

Which gets us back to that “line in the sand”. Why should prices stop at $800 per ton? Why couldn’t they go down to $750 per ton? I’m not suggesting that they will. I just question this notion that US mills can simply insist that prices won’t go below a certain threshold – especially in the absence of better demand.

If there is reason for hope, it’s that the pace of HR declines is moderating. We’re down $190 per ton from mid-June to mid-July. That’s 28% less than the $265-per-ton drop we saw from mid-May to mid-June.

And there are expectations that prime scrap prices – down hard this month – could firm up on decreased supplies next month. Recall that automakers typically take summer shutdowns around this time of year, which should limit prime scrap generation. And so maybe we’ve seen the last of the big prime scrap drops?

I hope so. That said, it’s hard to square the idea of a durable near-term bottom in sheet prices with the reality not only of increased North American supply but also with some less-than-encouraging macro-economic data. (Construction spending, for example, slipped slightly for the first time since September 2021.)

We’ve also seen a significant uptick in the number of respondents to our surveys reporting declining demand. It was 40% in our last full survey, the highest reading since the early days of the pandemic.

Most of you know by now that lead times are a good leading indicator of steel prices. We’ve crunched some numbers, and we think there is a chance that responses to our surveys about demand might lead lead times. Stayed tuned for more on that in future issues.

In the meantime, thanks to all of you from all of us at SMU for your business.

By Michael Cowden,

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