Final Thoughts

Written by Michael Cowden

Time for a contrarian, optimistic thought experiment.

First the bad news: Sentiment is increasingly bearish on months of falling steel and scrap prices, nearly all respondents to our latest survey report that mills are willing to negotiate lower still, and flattish lead times provide paltry evidence for a rebound.

A quick check of the headlines offers little respite. Interest rates are up, which will dent housing demand – nonresidential activity too, probably, albeit on a lag. US Steel has been idling everything from blast furnaces to the tin mill at Gary Works. The waters on the Mississippi and Ohio Rivers are getting dangerously low. And the possibility of a crippling rail strike is back.

But let’s take a step back and look at some of the broader trends, many of which are outlined in our latest issue or on our website.

Imports are down, and apparent steel supply is at its lowest since February 2020. Also, prices for imported hot-rolled coil – once you account for freight, trader profit margins, etc. – are modestly higher than domestic HRC prices.

Sheet inventories have been steady at ~55 days of supply since May. They are also on par with where they were in September 2021. Recall that it was only later in 2021 that supply caught up with demand (and then some). We’re nowhere near the nearly 65 days of supply we saw in December of last year, which is what helped send sheet prices tumbling into February.

My point is this. People are buying only as needed, assuming that whatever price they get this week, next week will be lower. And I’m not denying the short-term logic of that. But what if something unexpected happens – a strike, a major unplanned outage, or another black swan? What if buyers, on the sidelines now, jump back into the market all at once?

I’m not predicting that the market will catch fire. It’s possible prices keep sliding into 2023. But it’s also worth considering whether the forest is dryer now than it’s been in a while.

Absent a spark, the market typically slows down as we get closer to Thanksgiving in the US (a belated Happy Thanksgiving to our Canadian friends) and Christmas. Things probably are headed downward for now. Cold-rolled and coated prices still have some catching up to on the downside with hot-rolled coil. Plate even more so.

Maybe the spark will be as simple as lead times getting closer to Q1, when prices typically (but not always) ramp back up again along with industrial activity. Keep in mind that next year should see at least some boost from infrastructure spending, even if that’s mostly a rebar story.

In the meantime, think of this as a gentle reminder to check your recency bias, the tendency to think that whatever is happening now will continue to happen indefinitely into the future.

A classic example of that was (virtual) Steel Summit in August 2020. Hot-rolled coil prices hit a post-pandemic low of $440 per ton that month. Fifty-two percent of respondents to a snap poll said HRC prices would be below $400 per ton in August 2021. What happened? The talk of Steel Summit in August 2021 was whether prices would hit $2,000 per ton – so most predictions in 2020 were off by a mere $1,000-1,500/ton.

My point is, it’s dangerous to assume that things will continue as they have over the last few weeks. Or to assume that the steel industry has miraculously become a less volatile place.

Does anyone agree with me on this potential for a big upward move? No, for the most part. Here are a few snippets from recent conversations with service center executives, traders and steel processors:

Everyone is hungry for business right now. Some are talking $600 (per ton) by year end. … There is a lot of availability out there, and these mills have no discipline.”

The mills need tons, and we’re also hearing of cheap hot rolled deals below $700 (per ton). We’re not quite there yet, but it seems like we’re getting closer.”

There is too much capacity – even USS with their furnaces down and no labor agreement doesn’t seem to be helping.”

If (an integrated mill) doesn’t cut production, minis with their lower scrap price will continue to try to keep their share of orders – pricing is obviously going to fall some more until some common sense prevails or until inventories right themselves.”

We are holding off ordering in part because the market is drifting downward. I would love it to stay where it’s at or go up slightly. … There are so many things that could drive this number right back up, just one little spark.”

Stay frosty, dear readers, and thanks from all of us at SMU for your continued business.

PS – This is your last chances to register for our Steel 101 training workshop next week in Corpus Christi, Texas. We’ll also be touring Steel Dynamics Inc.’s new EAF sheet mill in nearby Sinton. Don’t miss out! Register here.

By Michael Cowden,

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