The Week That Was: Prices Moderate, Mills Invest Their Windfall

Written by Tim Triplett

At the top of the news this week, Steel Market Update sources reported that steel supplies are loosening as lead times from the domestic mills shorten and surging imports start to make it into service center inventories. It’s no surprise, then, that steel prices are beginning to moderate.

Hot rolled steel prices rose virtually every week for more than a year – that is until this month. SMU’s polls of the market the past two weeks showed small dips in the benchmark HR price. That’s most notable – not for the $10 decline – but for the signal it sends about changing market conditions.

It’s still too soon to declare that steel prices have peaked. Prices of cold rolled and coated products continue to rise. Nucor announced another big increase in plate prices this week, which other mills are likely to follow. But SMU survey data shows some clear signs that change is afoot.

Nearly 80% of respondents to SMU’s latest questionnaire believe hot rolled steel prices have or will peak sometime this year within $50 of the current level. The majority report more availability from domestic suppliers and, with their inventories balanced, are no longer scrambling to find needed tons. Lead times are clearly shortening as the majority of service centers now consider them just slightly longer than normal. Most in the majority have ordered foreign steel, calculating that the potential savings of $500 per ton or more is worth the risk of long lead times and supply chain delays. Demand for steel is still very strong, but not improving at the same rate as earlier in the year. More service centers report they are having difficulty passing along increases to their customers and are now starting to keep prices the same.

Sky-high domestic steel prices have attracted a flood of imports. With domestic hot rolled averaging around $1,945 per ton this week, foreign prices are theoretically $330 to $830 per ton cheaper, even after taking freight costs, trader margins and tariffs into consideration. Competition from imports is at least one of the reasons behind the leveling of domestic steel prices.

Steel demand will ultimately determine how soon, and how sharply, steel prices correct from the current unsustainable highs. Many buyers believe the market is near an inflection point and no longer feel the same urgency to buy tons at any cost. The two biggest steel markets – construction and automotive – are both facing challenges, but have strong upside potential next year, say the experts.

In the construction sector, record-high prices for lumber and other materials, along with a severe shortage of skilled labor, have been a drag on building activity in 2021, especially in single-family residential homebuilding. The American Institute of Architects’ Architecture Billings Index has improved for seven months in a row, however, indicating strong demand for design services that could translate into more construction and steel consumption next year.

Automakers continue to struggle with the global shortage of microchips that is limiting how many vehicles they can complete. Auto assembly lines across the U.S. have been idled on and off as the carmakers improvise to get what few chips they’ve been able to source into their most popular and profitable models – generally the larger pickup trucks and SUVs. This was the first week in a while that automakers in North America announced little additional downtime, perhaps indicating the chip shortfall is improving. But production of some seven million vehicles has been disrupted this year, which has cut heavily into consumption of high-end steels. On the bright side, the chip crisis no doubt promises some pent-up demand for automotive sales in the next few years. 

Mill Investments

Record-high steel prices have led to record-high profits for steelmakers this year. Many are planning to use the windfall for upgrades to their facilities.

Nucor announced this week its plans to build a new, $2.7 billion electric arc furnace (EAF) sheet mill with annual capacity of three million tons per year in either Ohio, Pennsylvania or West Virginia. Politicians in all three are scrambling to woo the new mill and its associated jobs to their state. Nucor also said it plans to build a new, $100 million melt shop at one of its bar mills in the western United States.

U.S. Steel has not made public the sites it is considering for its new EAF mill, announced this week. But the $3 billion project will add a third EAF to the integrated steelmaker’s portfolio, which already includes minimills at Big River Steel in Arkansas and Fairfield Works in Alabama. Climbing aboard the EAF bandwagon and the environmental benefits of scrap-based steel production, USS is now touting a “best for all” and not just a “best of both” strategy.

All told, North American mills have recently spent or will spend more than $14 billion to add more than 23 million tons of new sheet and plate capacity to the market. Steelmakers counter fears that the market will be oversupplied by noting that approximately 23.1 million tons of North American steelmaking capacity were hot idled in 2019-20 and another 11 million tons were cold idled between 2013 and 2020.

Cleveland-Cliffs has stated that it plans to buy into the scrap market, joining the likes of Nucor (which owns David J. Joseph Co.) and SDI (which owns OmniSource), that already have captive sources of scrap supply to feed their EAFs. There’s been much speculation on which scrap processor Cliffs may acquire, but so far no word from the company.

Section 232 is like COVID – it doesn’t seem to want to go away. In the headlines this month was a lawsuit filed by NLMK USA accusing the Commerce Department of violating the Russia-based steelmaker’s due process. NLMK hopes to recover $130 million in tariffs it believes were “wrongfully extracted” by the government.

The Section 232 tariffs – imposed by the Trump administration in 2018 on national security grounds – are also a point of contention in trade negotiations now under way between the U.S. and European Union. The two sides are widely expected to reach agreement by a Nov. 1 deadline on replacing Section 232 with a tariff rate quota system.

Nearly all the steel buyers contacted by SMU in recent weeks believe prices are on the cusp of a gradual correction, not the sharp and disastrous plunge forecast by some analysts. Time will tell if that’s wishful thinking.

By Tim Triplett,

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