Steel Products Prices North America

Are Steel Prices Sustainable? Buyers Eye Price Risks, Wildcards

Written by John Packard

How sustainable are the high steel prices in the United States? Steel Market Update sources point to a number of risk factors that buyers should consider.

One service center general manager told us flat rolled and plate prices could only be threatened by an increase in imports. “Sharp price declines are caused by sharp increases in supply, where supply exceeds demand by a healthy margin. A sharp increase in supply in the U.S. could only be caused by a significant surge in imports, given that we are a net-short country in the steel trade.”

Many buyers report that foreign supply appears to be constrained, especially on hot rolled and plate products. “At this moment, there’s no evidence of an import surge developing, which tells me U.S. pricing is likely to be mostly stable through September/October. We’re mostly seeing offers for CR and galvanized, and prices are attractive in the timeframe for placement and arrival. The number of HR and plate import offers remains low, which is where we need to see more help to balance supplies of the same here.”

Some steel buyers look at the substantial spread between foreign and domestic prices and feel it’s a no-brainer to place foreign orders. Others, especially those located away from ocean ports, are wary of buying foreign tons. The spread between foreign and domestic, especially with the tariff, is not attractive enough to take the risk, they say. “In no way do I agree that [buying foreign steel] a no-brainer,” said one steel buyer. “The absolute best CR price option I have seen in the past three weeks is approximately $45/cwt Chicago if you can wait for January delivery up river. Best price I’ve seen for last laker [ship through the Great Lakes] is $46.50. Now consider that HR futures are trading around $825 November, which roughly backs into $925 for CR considering the recent $100/ton HR-CR spread. That is not close to enough cushion for me to consider a ‘speculative’ CR buy. And good luck getting a manufacturer to go back to back with you on an order for delivery in November or January. With that said, I still don’t believe our domestic prices are going to slide any significant amount, but I don’t see upside to prices, either.” 

Steel buyers point to another risk when buying foreign steel. What happens should domestic steel prices slide as we move into fourth-quarter 2018? One steel buyer in the Midwest told us, “I have seen offers at $820-830/NT Gulf Coast, Up River Midwest $840-ish for October delivery [hot rolled]. Not a lot and not many tons. Until recently, domestic pricing was $870-880, not enough difference. Now domestic is over $900, which has really slowed our business down. Customers are only buying what they need. I view foreign as a risk because I think we could have a Q4 adjustment back to the $850 range.”

There is a camp of buyers out there who believe the spread between domestic and foreign steel prices is not sustainable and will come back into balance within the next few months. On our HARDI steel conference call this morning, one of the steel buyers was convinced the U.S. base price offers would come down by September or October (November and December 2018 lead times). He believes Mexico and Canada will get tariff exclusions before the end of the year, which will be enough to drive down prices.

This leads to one of the biggest risks for flat rolled steel buyers in the United States: What happens if NAFTA renegotiations are completed by Labor Day as Commerce Secretary Wilbur Ross predicted today? Do the steel tariffs against Canada and Mexico just dissolve? Do they go away once the new agreement is approved or would they have to wait until the new deal takes effect?

One large steel buyer is worried about Mexico, Canada and the EU. “On the surface it may appear to be a no-brainer, but not so fast. There was a rumor going around last week that the tariffs on Mexico and Canada, and only these two countries, would be lifted soon. This is just a rumor, but a worrisome thought. We are dealing with a situation with one person and only one person [President Trump] in control…not a stable environment. What happens if the EU, Mexico and/or Canada get exempted? If Canada gets exempted, I think the impact would be on HRC, which is the strongest product in the market right now. If the EU and/or Mexico get exempted, it would have an effect on CR and light gauge galvanized/Galvalume.”

The “unknowns” associated with President Trump and the Commerce Department call for caution, another source told SMU. “I am not sure if it is a no brainer to purchase foreign steel given that the president has the option to change the tariffs. However, given the DOC’s inability to process exemption requests in a timely and transparent manner, it may make sense to purchase imports in the near term for orders [that need to be covered]. It is probably not advisable to purchase for stock.  Prices appear to be at the peak of this cycle. Recently, the domestic steel mills started to negotiate prices. It is too early to attribute this to the normal summer doldrums or a sign that the order books have holes to fill. Steel prices could conceivably be down $200/ton if the trade wars escalate on a global scale.”

Another buyer told us, “Our website has the HRC conversion cost for a mini at $589 – MW [Midwest] price at $915. This is a big gap. Not a sustainable gap without government intervention.”

The U.S. government is the true wildcard right now. One steel buyer perhaps said it best when he warned, “I am not sure the global market has completely adjusted from a movement of material standpoint to what is happening in the U.S. That will get figured out. There are too many risks out there to take on additional inventory. BE CONSERVATIVE.”

Not everybody feels this way. In a separate article in this evening’s issue, we are publishing other responses from our inquiries on the subject of steel imports and the risks involved with buying foreign steel.

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