Steel Prices: What Goes Up, Must Come Down...

Optimistically, nearly all the service center and OEM execs responding to SMU’s poll this week predicted steel prices will experience a gradual decline sometime later this year. Here are some of their (lightly edited) comments:

“We see a gradual decline sometime in Q4 as SDI Sinton and the new EAF at Nucor Gallatin are in full operation.”

“We think prices will moderate gradually downward. The main reason is the very low inventory levels out there.”  

“For sure, it’ll start to soften heading into the fall, but there is no reason to expect a sharp correction. Demand is too strong, and supply remains right enough (even with additional capacity and more imports in the second half). And that doesn’t even factor in infrastructure.”

“I expect a gradual decline (barring another black swan event) because mill consolidation in the U.S. will allow domestic mills to control output much easier. While imports may be higher this year, the Section 232 tariffs make it unlikely we will see runaway levels like we saw in past cycles. A surge in supply is what usually causes sharp corrections, and it’s difficult to see that scenario occurring in this cycle.”

“We expect some flattening and a mild downturn in the third quarter as availability increases and mills become more reliable. Lead times will compress somewhat. We are already seeing evidence that some mills have better order book control and are performing better against acknowledged ship dates. However, demand at 4%+ GDP remains robust, so we see no evidence of a dramatic drop in price. If we experience that compression, it will be in Q4.”

“We expect a gradual decline. Prices always rise faster than they fall. Just look at other commodities—gas/oil, rubber, plastics, lumber.”

Now, let’s examine some of those observations. It’s true that inventories are extremely lean. Service centers were operating with flat rolled stocks at just 1.8 months of supply at the end of March, according to SMU’s proprietary inventory data. At that level, many don’t have enough material to meet their customers’ basic needs. Service centers would happily buy more if the material were available. But the mills are now focused on supplying their larger contract customers, leaving very limited tons on the spot market. Eventually, new capacity and imports will loosen supplies in the U.S. Consumption by end-users will be supplemented for some time by distributors who are replenishing depleted inventories, making a sharp drop in demand and steel prices appear less likely.

There is more steel on the way. Ternium’s new hot rolling mill in Mexico and Steel Dynamics’ new EAF mill in Texas are expected to add about 7.8 million short tons of new domestic sheet production to the market. Combined with the wave of steel imports to begin arriving in the third quarter, the pressure on supplies should ease considerably.

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Steelmakers have a lot more to say about steel prices today because of all the consolidation the industry has seen in the past few years. There are only two integrated mills left in the United States: Cleveland-Cliffs, which now owns AK Steel and ArcelorMittal USA, and U.S. Steel, which also owns EAF producer Big River Steel. (Canada has three more integrated producers: Algoma, Stelco and ArcelorMittal Dofasco). Cliffs’ and U.S. Steel’s decisions on which furnaces to run and which to idle—for maintenance or permanently—have a big influence on steel supplies, and thus prices. So, it is in their own self-interest to make decisions that will lead to a soft landing when the market corrects.

Nevertheless (here comes the metaphorical apple to clunk us in the head), the experts at SMU’s parent company CRU don’t see it playing out that way. They predict August could be an inflection point for steel lead times. CRU Principal Analyst Josh Spoores offers the following sobering forecast:

“We have advised our Outlook clients that sheet prices today are priced via a supply deficit versus their historical cost-plus model. Since 2004, the average monthly HRC price is ~$628 /st, and CR is $754 /st.

“The price peak will come, mainly due to increased supply, even as end demand rises. As the availability of supply increases from restarted and new production, imports, slower inventory building, and weaker sales to automotive, we expect prices to shift back to a cost-plus relationship. Yet there is no easy way for this shift to happen and we expect a violent correction to ensue.

“Service centers and mills could hope for a slower decline as it keeps everyone happy, but hope is not a strategy as market forces simply will not allow that to happen. We expect that as more buyers see evidence of increased supply, the market will become floorless.  

“We will continue to have upside and downside price risks. Upside risk is if further unknown production issues emerge or something else that keeps supply tighter than expected. Downside risk is if demand is weaker than expected, such as if or when mill shipments to automotive slow as inventory there is rebuilt,” he concluded.

It’s easy to look at an economy that’s booming, with trillions more in government infrastructure spending on the way, and believe that demand will be sufficient to support higher-than-usual steel prices for years to come. Newton had an “aha moment” when snoozing under an apple tree. Let this be your wakeup call that nothing is assured when it comes to future steel prices.

SMU Events

Hedging steel price risk may take on greater urgency in the months to come. The next Steel Hedging 101 Workshop will be held on June 2-3. You can learn more about this workshop and our other managing price risk workshops by clicking here.

Chris Shipp, Vice President of Supply Chain at Priefert Manufacturing/Priefert Steel, will be the featured speaker for the next SMU Community Chat on Wednesday, April 28, at 11 a.m. ET. Chris purchases more than 150,000 tons of steel each year for his operation based in Mt. Pleasant, Texas, serving the agriculture and ranching industries. Join us for this 45-minute webinar, which is free and open to all. Click here to register.

It’s not too early to make your plans to attend the next SMU Steel Summit Conference going live on Aug. 23-25. You can learn more about our agenda, speakers, costs to attend and how to register by clicking here.

 As always, your business is truly appreciated by all of us here at Steel Market Update.

Tim Triplett, Executive Editor